UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending September 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-18672
ZOOM TECHNOLOGIES, INC.
----------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 51-0448969
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
207 South Street, Boston, Massachusetts 02111
--------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 423-1072
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]
The number of shares outstanding of the registrant's Common Stock, $.01 Par
Value, as of November 4, 2003 was 7,909,266 shares.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
Part I. Financial Information Page
Item 1. Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002 (unaudited) 3
Consolidated Statements of Operations for the three and nine
Months Ending September 30, 2003 and 2002
(unaudited) 4
Consolidated Statements of Cash Flows for the nine
Months Ending September 30, 2003 and 2002
(unaudited) 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-22
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 22
Item 4. Controls and Procedures 22-23
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
PART I - FINANCIAL INFORMATION
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(unaudited)
September 30, 2003 December 31, 2002
------------------ -----------------
Assets
Current assets:
Cash and cash equivalents $ 8,760,836 $ 7,612,274
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of $2,764,324 at
September 30, 2003 and $2,646,408 at December 31, 2002 4,460,229 3,714,202
Inventories, net 3,799,116 6,782,550
Prepaid expenses and other current assets 613,615 1,037,733
---------- ----------
Total current assets 17,633,796 19,146,759
Property, plant and equipment, net 3,018,130 3,485,911
---------- ----------
Total assets $ 20,651,926 $ 22,632,670
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 221,691 $ 191,550
Accounts payable 1,988,504 2,406,843
Accrued expenses 1,047,734 1,207,724
---------- ----------
Total current liabilities 3,257,929 3,806,117
Long-term debt, less current portion 5,153,023 5,342,057
---------- ----------
Total liabilities 8,410,952 9,148,174
---------- ----------
Stockholders' equity:
Common stock, $0.01 par value. Authorized 25,000,000 shares;
issued 7,901,766 shares, outstanding 7,893,366 shares at
September 30, 2003 and issued 7,860,866 shares,
outstanding 7,858,266 at December 31,2002 79,018 78,609
Additional paid-in capital 28,241,914 28,166,606
Retained earnings (accumulated deficit) (16,194,918) (14,770,278)
Accumulated other comprehensive income (loss) 122,282 11,755
Treasury stock, at cost (7,322) (2,196)
---------- ----------
Total stockholders' equity 12,240,974 13,484,496
---------- ----------
Total liabilities and stockholders' equity $ 20,651,926 $ 22,632,670
========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ending Nine Months Ending
September 30, September 30,
----------------------------- ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 9,103,652 $ 10,878,334 $ 24,178,829 $ 29,059,126
Costs of goods sold 6,145,972 7,707,513 17,316,554 22,115,801
------------ ------------ ------------ ------------
Gross profit 2,957,680 3,170,821 6,862,275 6,943,325
Operating expenses:
Selling 1,376,364 1,423,216 3,965,098 4,487,702
General and administrative 611,753 824,863 2,412,588 2,587,701
Research and development 659,806 878,901 2,154,979 2,810,385
------------ ------------ ------------ ------------
Total operating expenses 2,647,923 3,126,980 8,532,665 9,885,788
------------ ------------ ------------ ------------
Operating income (loss) 309,757 43,841 (1,670,390) (2,942,463)
Other income (expense):
Interest income 17,017 23,091 61,601 88,603
Interest (expense) (52,672) (73,502) (147,936) (232,568)
Equity in losses of affiliate -- -- -- (56,666)
Other, net 131,941 99,012 332,085 294,120
------------ ------------ ------------ ------------
Total other income (expense), net 96,286 48,601 245,750 93,489
------------ ------------ ------------ ------------
Income (loss) before income tax
expense and extraordinary item 406,043 92,442 (1,424,640) (2,848,974)
Income tax expense (benefit) -- -- -- 2,012,844
------------ ------------ ------------ ------------
Income (loss) before extraordinary
item 406,043 92,442 (1,424,640) (4,861,818)
Extraordinary gain on elimination
of negative goodwill -- -- -- 255,287
Net income (loss) $ 406,043 $ 92,442 $ (1,424,640) $ (4,606,531)
============ ============ ============ ============
Earnings (loss) per common share before extraordinary item:
Basic $ .05 $ .01 $ (.18) $ (.62)
============ ============ ============ ============
Diluted $ .05 $ .01 $ (.18) $ (.62)
============ ============ ============ ============
Extraordinary gain on elimination of negative goodwill:
Basic and diluted $ -- $ -- $ -- $ .03
============ ============ ============ ============
Earnings (loss) per common share:
Basic $ .05 $ .01 $ (.18) $ (.59)
============ ============ ============ ============
Diluted $ .05 $ .01 $ (.18) $ (.59)
============ ============ ============ ============
Weighted average common and common equivalent shares:
Basic 7,857,117 7,860,866 7,854,315 7,860,866
============ ============ ============ ============
Diluted 8,081,312 7,862,235 7,854,315 7,860,866
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ending
September 30,
2003 2002
-------------- -------------
Cash flows from operating activities:
Net income (loss) $ (1,424,640) $ (4,606,531)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-operating gain on refund of deposit (40,237) -
Extraordinary gain on elimination of negative
goodwill - (255,287)
Depreciation and amortization 492,451 653,544
Write-off of net deferred tax assets _ 2,012,844
Equity in losses of affiliate _ 56,666
Changes in operating assets and liabilities:
Accounts receivable, net (636,410) 332,873
Inventories, net 2,983,434 3,996,801
Prepaid expenses and other assets 464,355 508,188
Accounts payable and accrued expenses (578,329) (49,177)
--------- ---------
Net cash provided by (used in) operating activities 1,260,624 2,649,921
--------- ---------
Cash flows from investing activities:
Investment in Affiliates - (482,700)
Additions to property, plant and equipment (24,670) (138,266)
--------- ---------
Net cash provided by (used in) investing activities (24,670) (620,966)
--------- ---------
Cash flows from financing activities:
Principal payments on long-term debt (158,893) (304,569)
Exercise of nonqualified stock options 75,717 -
Purchase of Treasury stock (5,126) -
--------- ---------
Net cash provided by (used in) financing activities (88,302) (304,569)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 910 13,800
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,148,562 1,738,186
Cash and cash equivalents - beginning of period 7,612,274 5,252,058
--------- ---------
Cash and cash equivalents - end of period $ 8,760,836 $ 6,990,244
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 163,978 $ 235,937
========= =========
Income taxes $ - $ -
========= =========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Zoom Technologies, Inc. (the
"Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do not
include all of the information and footnote disclosures required by accounting
principles generally accepted in the United States of America. These statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ending December 31, 2002 included in the
Company's 2002 Annual Report on Form 10-K.
The consolidated balance sheet as of September 30, 2003, the consolidated
statements of operations for the three and nine months ending September 30, 2003
and 2002, and the consolidated statements of cash flows for the nine months
ending September 30, 2003 and 2002 are unaudited, but, in the opinion of
management, include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results for these interim
periods.
The consolidated financial statements include the accounts and operations
of the Company's wholly-owned subsidiary, Zoom Telephonics, Inc., a Delaware
Corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the entire year ending December 31,
2003.
Certain amounts for prior periods have been reclassified to conform to
current year presentations.
(b) Stock-Based Compensation
The Company accounts for its stock option plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees, and Related Interpretations." No
stock-based compensation expense is reflected in net income (loss) for these
plans, as all options granted under these plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Financial
Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock Based
Compensation", to stock based compensation (in thousands, except per share
data):
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
---------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------ ------------- ------------
Net income (loss), as reported......... $ 406,043 $ 92,442 $(1,424,640) $(4,606,531)
Deduct: Total stock-based employee
Compensation expense determined under
fair value based method for all awards,
net of related tax effects............ (43,069) (279,353) (265,873) (829,650)
------------ ------------ ------------ ------------
Pro forma net income (loss)............ $ 362,974 $ (186,911) $(1,690,513) $(5,436,181)
============ ============ ============ ============
Income (loss) per share:
Basic and diluted - as reported........ $ 0.05 $ 0.01 $ (0.18) $ (0.59)
Basic - pro forma...................... $ 0.05 $ (0.02) $ (0.22) $ (0.69)
Diluted - pro forma.................... $ 0.04 $ (0.02) $ (0.22) $ (0.69)
(c) Recent Accounting Pronouncements
In January 2003 the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("VIEs"). This Interpretation addresses the
consolidation of variable interest entities in which the equity investors lack
one or more of the essential characteristics of a controlling financial interest
or where the equity investment at risk is not sufficient for the entity to
finance its activities without subordinated financial support from other
parties. The Interpretation applies to VIEs created after January 31, 2003 and
to VIEs in which an interest is acquired after that date. Effective July 1, 2003
it also applies to VIEs in which an interest is acquired before February 1,
2003. The Company may apply the Interpretation prospectively, with a cumulative
effect adjustment as of July 1, 2003 or by restating previously issued financial
statements with a cumulative effect adjustment as of the beginning of the first
year restated. The adoption of Interpretation No. 46 did not have any effect on
the Company's consolidated financial statements.
In May 2003 the FASB issued SFAS 150, "Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" which
establishes standards for how an issuer of financial instruments classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) if, at
inception, the monetary value of the obligation is based solely or predominantly
on a fixed monetary amount known at inception, variations in something other
than the fair value of the issuer's equity shares or variations inversely
related to changes in the fair value of the issuer's equity shares. SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003 and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have any impact
on the Company's financial position or results of operations.
In November 2002, the FASB's Emerging Issues Task Force finalized EITF
Issue No. 00-21 (EITF 00-21), "Revenue Arrangements with Multiple Deliverables."
EITF 00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. EITF 00-21 also
addresses how arrangement considerations should be measured and allocated to the
separate units of accounting in the arrangement. However, it does not address
when the criteria for revenue recognition are met or provide guidance on the
appropriate revenue recognition convention for a given unit of accounting. EITF
00-21 is effective for all revenue arrangements entered into in fiscal periods
beginning after June 15, 2003, and early application is permitted. Upon
adoption, entities may elect to either apply EITF 00-21 prospectively or report
the change in accounting as a cumulative-effect adjustment. The Company adopted
EITF 00-21 in the second quarter of 2003. The adoption of EITF 00-21 did not
have any impact on the Company's financial position or results of operations.
(2) Liquidity
On December 31, 2002 Zoom had cash of approximately $7.6 million. On
September 30, 2003 Zoom had cash of approximately $8.8 million. Currently, the
Company does not have a debt facility, and the Company does not expect to obtain
one on acceptable terms unless there is improvement in the Company's operating
performance.
To conserve cash and manage its liquidity, the Company implemented expense
reductions throughout 2002 and continued these reductions in the first nine
months of 2003. The employee headcount was 185 at December 31, 2002 and 165 at
September 30, 2003. The Company will continue to assess its cost structure as it
relates to its revenues and cash position in 2003, and may make further
reductions if these actions are deemed necessary.
During the past several years the Company has experienced declining demand
for its dial-up modem products. The bundling by PC manufacturers of dial-up
modems into computers and the increased popularity of broadband modems lower the
total available market through the Company's sales channels. Because of this,
the Company's dial-up modem sales are unlikely to grow unless the Company's
market share grows significantly, promotions by the Internet Service Providers
of V.92 grow the market, or the availability of new web acceleration techniques
grows the market. If the Company's dial-up modem sales do not grow, the
Company's future success will depend in large part on our ability to
successfully penetrate the broadband modem market.
Management believes it has sufficient resources to fund its planned
operations over the next 12 months. However if the Company is unable to increase
its revenues, reduce or otherwise adequately control its expenses, or raise
capital, the Company's longer-term ability to continue as a going concern and
achieve its intended business objectives could be adversely affected.
(3) Earnings Per Share
The reconciliation of the numerators and denominators of the basic and
diluted net earnings (loss) per share computations for the Company's reported
net income (loss) is as follows:
Three Months Ending Nine Months Ending
September 30, September 30,
---------------------------- --------------------------
2003 2002 2003 2002
------------ ------------- ---------- -----------
Basic:
Net income (loss) $ 406,043 $ 92,442 $(1,424,640) $(4,606,531)
Weighted average shares
outstanding 7,857,117 7,860,866 7,854,315 7,860,866
----------- ----------- ----------- -----------
Net income (loss) per share $ .05 $ .01 $ (.18) $ (.59)
=========== =========== =========== ===========
Diluted:
Net income (loss) $ 406,043 $ 92,442 $(1,424,640) $(4,606,531)
Weighted average shares
outstanding 7,857,117 7,860,866 7,854,315 7,860,866
Net effect of dilutive stock
options based on the
Treasury stock method using
average market price 224,195 1,369 -- --
Weighted average shares
outstanding 8,081,312 7,862,235 7,854,315 7,860,866
----------- ----------- ----------- -----------
Net income (loss) per share $ .05 $ .01 $ (.18) $ (.59)
=========== =========== =========== ===========
Potential common shares for which inclusion would have the effect of
increasing diluted earnings per share (i.e., antidilutive) are excluded from the
nine months ending September 30, 2003 computation. Options to purchase 35,511
and 14,167 shares of common stock at September 30, 2003 and 2002, respectively,
were outstanding but not included in the computation of diluted earnings per
share as their effect would be antidilutive.
(4) Inventories
Inventories consist of the following: September 30, 2003 December 31, 2002
------------------ -----------------
Raw materials $ 1,440,572 $ 2,808,421
Work in process 354,873 673,275
Finished goods 2,003,671 3,300,854
---------- ----------
$ 3,799,116 $ 6,782,550
========== ==========
During the three months ending September 30, 2003 and September 30, 2002
the Company recorded lower of cost or market write-downs of zero and $301,507,
respectively, related to broadband and wireless inventory. For the nine months
ending September 30, 2003 and September 30, 2002 the total lower of cost or
market write-downs recorded were $495,099 and $1,041,059, respectively related
to broadband and wireless inventory.
(5) Comprehensive Income (Loss)
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" establishes rules for the reporting and display of
comprehensive income (loss) and its components; however, it has no impact on the
Company's net income (loss). SFAS No. 130 requires all changes in equity from
non-owner sources to be included in the determination of comprehensive income
(loss).
The components of comprehensive income (loss), net of tax, are as follows:
Three Months Ending September 30, Nine Months Ending September 30,
--------------------------------- --------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss) $ 406,043 $ 92,442 $(1,424,640) $(4,606,531)
Foreign currency translation
adjustment 90,724 62,751 110,527 154,044
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 496,767 $ 155,193 $(1,314,113) $(4,452,487)
=========== =========== =========== ===========
(6) Long-Term Debt
On January 10, 2001 the Company obtained a mortgage loan for $6 million
secured by the real estate property located at 201 and 207 South Street, Boston,
Massachusetts. This is a 20-year direct reduction mortgage with a five-year
balloon due January 10, 2006. The interest rate is fixed for one year, based on
the one year Federal Home Loan Bank rate plus 2.5 % per annum. The rate is
adjusted on January 10th of each calendar year commencing on January 10, 2002.
The rate was adjusted to 3.81% on January 10, 2003.
(7) Commitments
During the nine month period ending September 30, 2003 there were no
material changes to the capital commitments and contractual obligations of the
Company from those disclosed in the Form 10-K for the year ending December 31,
2002.
In March 2002 following the termination of discussions pursuant to which
Zoom proposed to purchase a ground lease for a manufacturing facility located at
27 Drydock Avenue, Boston, Massachusetts (the "Drydock Building"), Zoom pursued
an arrangement to purchase the Drydock Building in partnership with the
following individuals: Frank B. Manning, President and a director of Zoom; Peter
R. Kramer, Executive Vice President and a director of Zoom; Bruce M. Kramer,
Peter Kramer's brother; and a third party. Under this arrangement these
individuals, either directly or through entities controlled by them, joined
together with the Company as of March 29, 2002 to form the Zoom Group LLC, a
Massachusetts limited liability company ("Zoom Group") to purchase the Drydock
Building. The Company and each of the investors owned a 20% interest in the Zoom
Group.
In August 2002 the Zoom Group purchased the Drydock Building for a purchase
price of $6.1 million. The Zoom Group obtained a mortgage of $4.2 million, less
closing costs and legal fees. Each member of the Zoom Group contributed $482,577
for their share of the investment plus initial working capital. These initial
capital contributions include each member's share of the deposit.
Under the Zoom Group Operating Agreement the Company had both the right to
sell its interest in the Zoom Group to the other members of the Zoom Group by
January 5, 2003 for the Company's original purchase price, and the right to
purchase the other members' entire interests in the Zoom Group through December
31, 2005 in accordance with a predetermined formula. In December 2002 a special
committee of Zoom's board of directors, appointed to review the Drydock
transactions, determined that is was advisable and in the best interest of the
Company to exercise its right to sell its interest in the Zoom Group to the
remaining Zoom Group LLC members. Accordingly effective January 5, 2003 the
Company exercised its right to sell and assign its interest in the Zoom Group to
the remaining members of the Zoom Group for approximately $482,000. In March
2003 Zoom received the proceeds from the sale of its interest from the remaining
members of the Zoom Group. This action was taken to improve the Company's
liquidity position and to reduce its exposure to the Boston real estate market.
(8) Segment and Geographic Information
The Company's operations are classified into one reportable segment. The
Company's United States and international net sales for the three and nine
months ending September 30, 2003 and 2002, respectively, were comprised as
follows:
Three Months Three Months Nine months Nine months
Ending % of Ending % of Ending % of Ending % of
Sept 30, 2003 Total Sept 30, 2002 Total Sept 30, 2003 Total Sept 30, 2002 Total
------------- ----- ------------- ----- ------------- ----- ------------- -----
United States $ 5,526,123 61% $ 6,907,214 64% $14,423,455 60% $17,775,614 61%
International-UK 2,805,007 31% 3,189,267 29% 7,415,266 30% 8,308,422 29%
International-All Other 772,522 8% 781,853 7% 2,340,108 10% 2,975,090 10%
----------- --- ----------- --- ----------- --- ----------- ---
Total $ 9,103,652 100% $10,878,334 100% $24,178,829 100% $29,059,126 100%
=========== === =========== === =========== === =========== ===
(9) Extraordinary Gain
In the quarter ending March 31, 2002 the Company recorded an extraordinary
gain of $255,287 upon the adoption of SFAS No. 142 "Goodwill and Other
Intangible Assets" (SFAS 142). The gain resulted from the elimination of the
remaining negative goodwill on the Company's consolidated balance sheet related
to a previous acquisition, and was recorded in accordance with the provisions of
SFAS 142.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the safe harbor statement and the risk factors contained herein and set forth in
our Annual Report on Form 10-K for the year ending December 31, 2002. Readers
should also be cautioned that results of any reported period are often not
indicative of results for any future period.
Critical Accounting Policies
The following is a discussion of what we view as our more significant
accounting policies. These policies are also described in the notes to our
consolidated audited financial statements included in our annual report on Form
10-K for the year ending December 31, 2002. As described below, management
judgments and estimates must be made and used in connection with the preparation
of our consolidated financial statements. Material differences could result in
the amount and timing of our revenue and expenses for any period if we made
different judgments or used different estimates.
Revenue Recognition. We sell hardware products to our customers. The
products include dial-up modems, embedded modems, cable modems, PC cameras, ISDN
and ADSL modems, telephone dialers, and wireless and wired networking equipment.
We generally do not sell software or services. We earn a small amount of royalty
revenue. We derive our revenue primarily from the sales of hardware products to
three types of customers:
o computer product retailers,
o computer product distributors, and
o original equipment manufacturers (OEMs).
We recognize revenue for all three types of customers at the point when the
customers take legal ownership of the delivered products. Legal ownership passes
from Zoom to the customer based on the contractual FOB point specified in signed
contracts and purchase orders, which are both used extensively. Many of our
customer contracts or purchase orders specify FOB destination. Since it would be
impractical to verify ownership change for each individual delivery to the FOB
destination point, we estimate the day the customer receives delivery based on
our ship date and the carrier's published delivery schedule specific to the
freight class and location.
Our revenues are reduced by certain events which are characteristic of
hardware sales to computer product retailers. These events are product returns,
price protection refunds, store rebates, and consumer mail-in rebates. Each of
these is accounted for as a reduction of revenue based on careful management
estimates which are reconciled to actual customer or end-consumer refunds and
credits on a monthly or quarterly basis. The estimates for product returns are
based on recent historical trends plus estimates for returns prompted by new
product introductions, announced stock rotations, announced customer store
closings, etc. Management analyzes historical returns, current economic trends,
and changes in customer demand and acceptance of our products when evaluating
the adequacy of sales return allowances. Our estimates for price protection
refunds require a detailed understanding and tracking by customer and by sales
program. Estimated price protection refunds are recorded in the same period as
the announcement of a pricing change. Information from customer
inventory-on-hand reports or from direct communications with the customers is
used to estimate the refund, which is recorded as a reserve against accounts
receivable and a reduction of current period revenue. Our estimates for consumer
mail-in rebates are comprised of actual rebate claims processed by the rebate
redemption centers plus an accrual for an estimated lag in processing. Our
estimates for store rebates are comprised of actual credit requests from the
eligible customers.
To ensure that the discounts and sales and marketing incentives are
recorded in the proper period we perform extensive tracking and documenting by
customer, by period, and by type of marketing event. This tracking includes
reconciliation to the accounts receivable records for deductions taken by our
customers for these discounts and incentives.
Accounts Receivable Valuation. We establish accounts receivable reserves
for product returns, store rebates, consumer mail-in rebates, price protection
refunds, and bad debt. These reserves are drawn down as actual credits are
issued to the customer's accounts. Our bad-debt write-offs have not been
significant in recent years.
Inventory Valuation and Cost of Goods Sold. Inventory is valued on a
standard cost basis where the material standards are periodically updated for
current material pricing. Reserves for obsolete inventory are established by
management based on usability reviews performed each quarter. Our reserves
against this inventory range from 0% to 100%, based on management's estimate of
the probability that the material will not be consumed. In the second half of
2000 when industry expectations were very high for expansion of the broadband
and wireless markets, we purchased parts to support our aggressive forecast for
a ramp-up of sales of cable modems, ADSL modems, and wireless networking
products. The subsequent slow-down in the industry resulted in a significant
excess inventory position of materials. During 2001 the market selling prices
for the broadband and wireless products declined significantly because of an
industry-wide oversupply. Starting in 2001 and to a lesser extent in 2002 and
2003, the sales prices for some of the products dropped below our cost and,
accordingly, we then valued our inventory on a "lower of cost or market" basis.
Our valuation process is to compare our cost to the selling prices each quarter,
and if the selling price of a product is less than the "if completed" cost of
our inventory, we write-down the inventory on a "lower of cost or market" basis
(See Note 4 to the Consolidated Financial Statements).
We have entered into supply arrangements with suppliers of some components
that include price and other concessions, including no-charge components, for
meeting certain purchase requirements or commitments. Under the most significant
arrangement we have agreed to purchase approximately $8.0 million of components
over a period of approximately 30-months that commenced on January 1, 2002,
provided that those components were offered at competitive terms and prices. We
are required to purchase a minimum percentage, as measured by unit purchases or
dollar amount of certain components, from the supplier over a two-year period
commencing on January 1, 2002, and we are currently exceeding that percentage.
In connection with one of these arrangements, we became entitled to receive at
least $3.0 million of no-charge components, based upon the supplier's market
price for the components in late 2001 and early 2002, and other pricing
concessions based on our purchase volumes. We received $1.2 million of these
no-charge components in the fourth quarter of 2001. We received the remainder of
the no-charge components in the first quarter of 2002. The favorable impact of
the free components is being recognized on a delayed basis as a purchase
discount over the total number of components acquired through the 30 month
supply agreement.
Valuation and Impairment of Intangible Assets. We assess the impairment of
our goodwill assets whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. In the quarter ending March 31, 2002
the Company recorded an extraordinary gain of $255,287, upon the adoption of
SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS 142). The gain
resulted from the elimination of the remaining negative goodwill on the
Company's consolidated balance sheet related to a previous acquisition, and was
recorded in accordance with the provisions of SFAS 142.
Valuation and Impairment of Deferred Tax Assets. As part of the process of
preparing our consolidated financial statements we are required to estimate our
income taxes. This process involves the estimation of our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included in our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision
for income taxes and any valuation allowance recorded against our net deferred
tax assets. In 2001 we recorded a $3.8 million income tax charge to reflect an
additional increase in our deferred tax asset valuation allowance. Management's
decision to record the valuation allowance was based on the uncertain
recoverability of our deferred tax asset balance. At December 31, 2001 a portion
of our net deferred tax asset was supported by our specific tax planning
strategy to sell our appreciated headquarters building in Boston. The amount of
the projected tax benefit from this sale was used to support the $2.0 million
deferred tax asset that remained on our balance sheet as of December 31, 2001.
In our first quarter ending March 31, 2002 we recorded an additional $2.0 income
tax charge and valuation reserve, which reduced our net deferred tax asset
balance to zero. This additional reserve reflected our decision to discontinue
our specific tax planning strategy to sell our headquarters building in Boston
in light of the less favorable market conditions for the sale of such building.
Due to our continued year-to-date operating losses and the continued uncertainty
regarding the recoverability of our deferred tax assets, no tax benefit has been
provided for in the financial statements for the nine months ending September
30, 2003. As such, as of September 30, 2003 our net deferred tax asset balance
is zero.
Results of Operations
Net sales were $9.1 million for our third quarter ending September 30,
2003, down 16.3% from $10.9 million in the third quarter of 2002. We had net
income of $0.4 million for the third quarter of 2003, compared to net income of
$0.1 million in the third quarter of 2002. Earnings per share was $0.05 per
diluted share for the third quarter of 2003 compared to earnings of $0.01 per
diluted share for the third quarter of 2002.
Our Q3 2003 net sales decrease of 16.3% from Q3 2002 was primarily due to
decreased dial-up modem sales. Dial-up modem sales declined primarily due to a
decrease of 21% in dial-up modem unit sales, a 3% decline in dial-up modem
average selling prices, and higher promotional consumer rebates. The decline in
dial-up modem sales was partially offset by a 63% increase in sales in our
broadband and other product categories, with our strongest quarterly sales to
date of ADSL modems.
Net sales were $24.2 million and our net loss was $1.4 million for the nine
months ending September 30, 2003 compared to net sales of $29.1 million and a
net loss of $4.6 million for the nine months ending September 30, 2002. Loss per
share was a loss of $.18 per diluted share for the nine months of 2003 compared
to a loss of $.59 per diluted share for the nine months of 2002. The $4.9
million net sales decline was primarily due to decreased dial-up modem sales.
Dial-up modem sales declined primarily due to a decrease in dial-up modem unit
sales, a decline in dial-up modem average selling prices, and higher promotional
consumer rebates. The decline in dial-up modem sales was partially offset by an
increase in sales in our broadband and other product categories.
Our gross profit decreased to $3.0 million in Q3 2003 from $3.2 million in
Q3 2002. Our gross profit as a percentage of net sales improved to 32.5% in Q3
2003 from 29.1% in Q3 2002. The improvement in gross profit percentage resulted
primarily from lower inventory charges for obsolescence and lower of cost or
market write-downs.
Our gross profit for the nine months ending September 30, 2003 and for the
same period in 2002 was $6.9 million, 28.4% and 23.9% of net sales respectively.
This improvement in gross profit percentage was primarily due to lower inventory
charges for obsolescence and lower of cost or market write-downs.
Our operating expenses decreased by $0.5 million to $2.6 million or 29.1%
of net sales in Q3 2003 from $3.1 million or 28.7% of net sales in Q3 2002. The
decrease of $0.5 million was comprised of lower selling expenses of $0.05
million, lower research and development expenses of $0.2 million, and lower
general and administrative expenses of $.2 million. We have reduced our
worldwide staff to 165 employees on September 30, 2003 from 190 employees on
September 30, 2002. We also continue to maintain a temporary wage freeze and
tight controls on discretionary spending.
Our operating expenses decreased by $1.4 million to $8.5 million or 35.3%
of net sales in the first nine months of 2003 from $9.9 million or 34.0% of net
sales in the first nine months of 2002. The decrease of $1.4 million was
comprised of lower selling expenses of $0.5 million, lower research and
development expenses of $0.7 million, and lower general and administrative
expense of $.2 million.
Selling expenses in Q3 2003 were relatively consistent at $1.4 million or
15.1% of net sales compared to $1.4 million or 13.1% of net sales in Q3 2002.
Selling expenses were slightly lower primarily because of lower personnel costs
resulting from employee headcount reductions, reduced commissions and related
sales expenses, and reduced marketing costs.
Selling expenses in the nine months ending September 30, 2003 decreased $.5
million to $4.0 million or 16.4% of net sales from $4.5 million or 15.4% of net
sales in the nine months ending September 30, 2002. Selling expenses were lower
primarily because of lower personnel costs resulting from employee headcount
reductions, reduced commissions and related sales expenses, and reduced
marketing costs.
General and administrative expenses decreased $.2 million to $0.6 million
or 6.7% of net sales in Q3 2003 from $0.8 million or 7.6% of net sales in Q3
2002. General and administrative expenses were lower primarily because of
reduced legal and audit fees, favorable bad debt recovery from an old customer
settlement, reduced personnel costs related to employee headcount reductions,
and reduced depreciation and amortization expenses.
General and administrative expenses decreased $.2 million to $2.4 million
or 10.0% of net sales in the first nine months of 2003 from $2.6 million or 8.9%
of net sales in the first nine months of 2002. General and administrative
expenses year-over-year for the first nine months were lower primarily because
of lower depreciation expense, reduced business insurance expense, and lower
legal fees, partially offset by increased employee-health expenses.
Research and development expenses decreased $.2 million to $0.7 million or
7.2% of net sales in Q3 2003 from $0.9 million or 8.1% of net sales in Q3 2002.
Research and development costs decreased primarily as a result of reduced
personnel costs. Development and support continues on all of our major product
lines.
Research and development expenses decreased $.6 million to $2.2 million or
8.9% of net sales in the first nine months of 2003 from $2.8 million or 9.7% of
net sales in the first nine months of 2002. Research and development costs
decreased primarily as a result of reduced personnel costs.
Other income (expense) net improved from income of $0.05 million in Q3 2002
to income of $0.1 million in Q3 2003. Included in other income (expense) are
interest income, interest expense, and other, net.
o Interest income. Interest income decreased to $0.017 million in Q3 2003
from $0.023 million in Q3 2002. The decrease was the result of our lower
earned interest rate partially offset by the interest earned on a higher
average invested cash balance during Q3 2003 compared to Q3 2002. The
average interest rate earned was approximately 62 basis points lower in Q3
2003 than in Q3 2002.
o Interest expense. Interest expense decreased to $0.05 million in Q3 2003
from $0.07 million in Q3 2002. The interest expense decrease is due to
lower interest expense on our $6.0 million mortgage taken out in January
2001 on our headquarters building. The interest rate and the outstanding
balance were both lower in Q3 2003 compared to Q3 2002. The mortgage
interest rate is adjusted annually in January of each year.
o Other, net. The total income increased to $0.13 million in Q3 2003 from
$0.10 million in Q3 2002 due primarily to the sale of an internet domain
name, partially offset by a foreign exchange loss.
Other income (expense) net improved from income of $0.09 million in the
first nine months of 2002 to income of $0.2 million in the first nine months of
2003. Included in other income (expense) are interest income, interest expense,
equity in losses of affiliate, and other, net.
o Interest income. Interest income decreased to $0.06 million in the first
nine months of 2003 from $0.09 million in the first nine months of 2002.
The decrease was the result of our lower earned interest rate partially
offset by the interest earned on a higher average invested cash balance
during the first nine months of 2003 compared to the first nine months of
2002. The average interest rate earned was approximately 56 basis points
lower in the first nine months of 2003 than in the first nine months of
2002.
o Interest expense. Interest expense decreased to $0.15 million in the first
nine months of 2003 from $0.23 million in the first nine months of 2002.
The interest expense decrease is due to lower interest expense on our $6.0
million mortgage taken out in January 2001 on our headquarters building.
The interest rate and the outstanding balance were both lower in the first
nine months of 2003 compared to the first nine months of 2002. The mortgage
interest rate is adjusted annually in January of each year.
o Equity in losses of affiliate. Our affiliate losses were zero in the first
nine months of 2003 and $.06 million in the first nine months of 2002, as
our carrying value of the investment, which was being accounted for under
the equity method of accounting, was reduced to zero during Q2 2002.
o Other, net. The total income increased to $0.33 million in the first nine
months of 2003 from $0.24 million in the first nine months of 2002,
primarily due to the sale of an internet domain name and higher rental
income from the rental of vacant space in our headquarters facility.
Income tax expense was zero for the three months and nine months ending
September 30, 2003 and the three months ending September 30, 2002. In the nine
months ending September 30, 2002 we recorded income tax expense in the first
quarter of 2002 of $2.0 million as a result of an increase to our valuation
reserve against our net deferred tax asset balance of $2.0 million. The net
deferred tax asset balance at September 30, 2003 is zero. This reserve is
discussed in further detail under the caption "Critical Accounting Policies" set
forth herein.
Liquidity and Capital Resources
On September 30, 2003 we had working capital of $14.4 million, including
$8.8 million in cash and cash equivalents.
In the first nine months of 2003 operating activities generated $1.3
million in cash. Our net loss in the first nine months of 2003 was $1.4 million.
Other uses of cash from operations included an increase of accounts receivable
of $0.6 million and a decrease of accounts payable and accrued expenses of $0.6
million. Sources of cash from operations included a reduction of inventory of
$3.0 million, depreciation of $0.5 million, and a decrease in prepaid expenses
of $0.5 million. The decrease in inventory was primarily the result of reduced
sales activity and improved inventory turnover. The reduction of prepaid
expenses resulted primarily from the receipt of a payment of $0.48 million for
the sale of our interest in the Zoom Group to the other members of the Zoom
Group with the termination of our participation in the ownership of the Drydock
building. The Drydock transaction is discussed in further detail under the
caption "Commitments and Related Party Transaction" below.
In the first nine months of 2003 our net cash used in investing activities
was $0.02 million. We anticipate that we will continue with modest investments
in equipment and in improvements to our facilities during the year.
In the first nine months of 2003 our net cash used in financing activities
was $.09 million, consisting primarily of principal payments of $0.16 million on
the mortgage on our headquarters facility, partially offset by the receipt of
$0.08 million of cash from the exercise of employee non-qualified stock options.
Our mortgage is a 5-year balloon mortgage that is amortized on a 20-year basis
and matures on January 10, 2006. The interest rate is adjusted annually in
January of each year based on the Federal Home Loan Bank rate plus 2.5% per
annum. In 2002 the interest rate was 4.97%. As of January 10, 2003 the rate of
interest was changed to 3.81%.
Currently we do not have a debt facility, and we do not expect to obtain
one on acceptable terms unless there is an improvement in our operating
performance. However, we believe we would be able to obtain funds, if and when
required, by factoring accounts receivable. We do not plan to put a factoring
arrangement in place until and unless it is necessary since there would be an
up-front cost to finalize the arrangement.
To conserve cash and manage our liquidity, we implemented expense
reductions throughout 2002 and in the first nine months of 2003. Our employee
headcount was 185 at December 31, 2002 which has been reduced to 165 at
September 30, 2003. We will continue to assess our cost structure as it relates
to our revenues and cash position in 2003, and we may make further reductions if
the actions are deemed necessary.
The bundling by PC manufacturers of dial-up modems into computers and the
increased popularity of broadband modems lower the total available market
through our sales channels. Because of this, our dial-up modem sales are
unlikely to grow unless our market share grows significantly, promotions by the
Internet Service Providers of V.92 grow the market, PC manufacturers engage in
less modem bundling with PCs, or the availability of new web acceleration
techniques grows the market. If our dial-up modem sales do not grow, our future
success will depend in large part on our ability to successfully penetrate the
broadband modem market.
Management believes we have sufficient resources to fund our planned
operations over the next 12 months. 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.
Commitments
During the three months and nine months ending September 30, 2003 there
were no material changes to our capital commitments and contractual obligations
from those disclosed in the Form 10-K for the year ending December 31, 2002.
On April 25, 2003 we agreed to purchase substantially all of the modem
assets of SONICblue Incorporated, including the trade names Diamond and Supra,
for approximately $495,000, subject to adjustment, and certain end-user
obligations, including customer support and firmware upgrades. SONICblue, a
consumer electronics manufacturer, was involved in voluntary bankruptcy
proceedings filed under Chapter 11 of the Bankruptcy Code. Our obligation to
purchase the assets was subject to approval of the bankruptcy court, higher bids
in the bankruptcy court, and customary closing conditions. On June 6, 2003 a
Chapter 11 bankruptcy auction was held, and we chose not to outbid a higher bid
from a modem competitor. In September 2003, we received the return of our
deposit of $.05 million and a break-up fee of $.03 million, as approved by the
bankruptcy court.
Related Party Transactions
In March 2002 following the termination of discussions pursuant to which
Zoom proposed to purchase a ground lease for a manufacturing facility located at
27 Drydock Avenue, Boston, Massachusetts (the "Drydock Building"), Zoom pursued
an arrangement to purchase the Drydock Building in partnership with the
following individuals: Frank B. Manning, President and a director of Zoom; Peter
R. Kramer, Executive Vice President and a director of Zoom; Bruce M. Kramer,
Peter Kramer's brother; and a third party. Under this arrangement, these
individuals, either directly or through entities controlled by them, joined
together with us as of March 29, 2002 to form the Zoom Group LLC, a
Massachusetts limited liability company ("Zoom Group") to purchase the Drydock
Building. Zoom and each of the investors owned a 20% interest in the Zoom Group.
The managers of the Zoom Group are Peter Kramer and the third party.
In August, 2002 the Zoom Group purchased the Drydock Building for a
purchase price of $6.1 million. The Zoom Group obtained a mortgage of $4.2
million, less closing costs and legal fees. Each member of the Zoom Group
contributed $482,577 for their share of the investment plus initial working
capital. These initial capital contributions include each member's share of the
deposit.
Under the Zoom Group Operating Agreement the Company had both the right to
sell its interest in the Zoom Group to the other members of the Zoom Group by
January 5, 2003 for the Company's original purchase price, and the right to
purchase the other members' entire interests in the Zoom Group through December
31, 2005 in accordance with a predetermined formula. Effective January 5, 2003
we exercised our right to sell our interest in the Zoom Group to the other
members of the Zoom Group. In March 2003 we received the proceeds from the sale
of our interest from the remaining members of the Zoom Group, LLC to the value
of $.48 million, which represents the Company's investment amount less the
non-refundable deposit and the negotiated share of losses in the Zoom Group,
plus interest earned on the Company's original deposit. This action was taken to
improve the Company's liquidity position and to reduce its exposure to the
Boston real estate market.
Recently Issued Accounting Standards
In January 2003 the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("VIEs"). This Interpretation addresses the
consolidation of variable interest entities in which the equity investors lack
one or more of the essential characteristics of a controlling financial interest
or where the equity investment at risk is not sufficient for the entity to
finance its activities without subordinated financial support from other
parties. The Interpretation applies to VIEs created after January 31, 2003 and
to VIEs in which an interest is acquired after that date. Effective July 1, 2003
it also applies to VIEs in which an interest is acquired before February 1,
2003. The Company may apply the Interpretation prospectively, with a cumulative
effect adjustment as of July 1, 2003 or by restating previously issued financial
statements with a cumulative effect adjustment as of the beginning of the first
year restated. The adoption of Interpretation No. 46 did not have any effect on
the Company's consolidated financial statements.
In May 2003 the FASB issued SFAS 150, "Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" which
establishes standards for how an issuer of financial instruments classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) if, at
inception, the monetary value of the obligation is based solely or predominantly
on a fixed monetary amount known at inception, variations in something other
than the fair value of the issuer's equity shares or variations inversely
related to changes in the fair value of the issuer's equity shares. SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003 and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have any impact
on our financial position or results of operations.
In November 2002, the FASB's Emerging Issues Task Force finalized EITF
Issue No. 00-21 (EITF 00-21), "Revenue Arrangements with Multiple Deliverables."
EITF 00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. EITF 00-21 also
addresses how arrangement considerations should be measured and allocated to the
separate units of accounting in the arrangement. However, it does not address
when the criteria for revenue recognition are met or provide guidance on the
appropriate revenue recognition convention for a given unit of accounting. EITF
00-21 is effective for all revenue arrangements entered into in fiscal periods
beginning after June 15, 2003, and early application is permitted. Upon
adoption, entities may elect to either apply EITF 00-21 prospectively or report
the change in accounting as a cumulative-effect adjustment. The Company adopted
EITF 00-21 in the second quarter of 2003. The adoption of EITF 00-21 did not
have any impact on the Company's financial position or results of operations.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995.
Some of the statements contained in this report are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements involve
known and unknown risks, uncertainties and other factors which may cause our or
our industry's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Forward-looking statements include,
but are not limited to statements regarding: Zoom's plans, expectations and
intentions, including statements relating to Zoom's prospects and plans relating
to sales of our dial-up, cable and ADSL modems, the anticipated benefits Zoom
will receive as a result of V.92 rollout and the consolidation in the dial-up
modem markets, the anticipated development of Zoom's markets and sales channels,
the level of demand for Zoom's products, the anticipated effect that the "no
charge" components will have on Zoom's liquidity, the anticipated impact of
Zoom's cost-cutting initiatives, and Zoom's financial condition or results of
operations.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Given these uncertainties you should not place undue
reliance on these forward-looking statements. Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this
report. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained in this
report to reflect any change in our expectations or any change in events,
conditions or circumstances on which any of our forward-looking statements are
based. Factors that could cause or contribute to differences in our future
financial results include those discussed in the risk factors set forth below as
well as those discussed elsewhere in this report and in our filings with the
Securities and Exchange Commission. We qualify all of our forward-looking
statements by these cautionary statements.
RISK FACTORS
This report contains forward-looking statements that involve risks and
uncertainties, such as statements of our objectives, expectations and
intentions. The cautionary statements made in this report should be read as
applicable to all forward-looking statements wherever they appear in this
report. Our actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this report.
Our revenues have declined and we have incurred significant losses over the last
three years.
We incurred a net loss of $1.4 million for the nine months ending September
30, 2003, $5.1 million in 2002, $18.3 million in 2001, and $3.1 million in 2000.
Our revenue has declined from $57.7 million in 2000 to $41.6 million in 2001,
and to $37.3 million in 2002. Our revenue was $24.2 million for the nine months
ending September 30, 2003.
We attribute the decline of our business primarily to a decline in the
retail dial-up modem market.
Although we have reduced our operating expense levels significantly, our
revenues must increase or we will probably continue to incur total year
operating losses. We cannot guarantee that our expenditure reductions will
continue or that we will be able to halt the decline in our revenues. Although
we believe that we have sufficient resources to fund our planned operations over
the next year, if we fail to increase our revenues, our longer-term ability to
stay in business and to achieve our intended business objectives could be
adversely effected. Our continuing losses and use of cash could also adversely
affect our ability to fund the growth of our business should our strategies
prove successful.
To stay in business we may require future additional funding which we may be
unable to obtain on favorable terms, if at all.
Over the next twelve months, we may require additional financing for our
operations either to fund losses beyond those we anticipate or to fund growth in
our inventory and accounts receivable should growth occur. We currently do not
have a debt facility from which we can borrow and we do not expect to obtain one
on acceptable terms unless our operating performance improves. Additional
financing may not be available to us on a timely basis if at all, or on terms
acceptable to us. If we fail to obtain acceptable additional financing when
needed, we may be required to further reduce planned expenditures or forego
business opportunities, which could reduce our revenues, increase our losses,
and harm our business. Moreover, additional equity financing could dilute the
per share value of our common stock held by current shareholders, while
additional debt financing could restrict our ability to make capital
expenditures or incur additional indebtedness, all of which would impede our
ability to succeed.
Our existing indebtedness could prevent us from obtaining additional financing
and harm our liquidity.
In January 2001 we obtained a $6 million, 20-year direct reduction mortgage
from a bank, secured by our owned real estate in Boston, Massachusetts. Our
outstanding indebtedness could adversely affect our ability to obtain additional
financing for working capital, acquisitions, or other purposes. Our existing
indebtedness could also make us more vulnerable to economic downturns and
competitive pressures, make it more difficult to obtain additional debt
financing, and adversely affect our liquidity. In the event of a cash shortfall,
we could be forced to reduce other expenditures to meet our requirements with
respect to our outstanding debt. Our ability to meet our obligations will be
dependent upon our future performance, which will be subject to financial,
business and other factors affecting our operations. Many of these factors are
beyond our control. If we are unable to generate sufficient cash flow from
operations in the future to service our debt, we may be required to refinance
all or a portion of these obligations or obtain additional financing in order to
stay in business.
Our revenues and operating results have been adversely affected because of a
decline in average selling prices for our dial-up modems and because of the
decline in the retail market for dial-up modems.
The dial-up modem industry has been characterized by declining average
selling prices and a declining retail market. The decline in average selling
prices is due to a number of factors, including technological change, lower
component costs, and competition. The decline in the size of the retail market
for dial-up modems is primarily due to the inclusion of dial-up modems as a
standard feature contained in new PCs, and the advent of broadband products. As
the market for cable and ADSL modems matures and competition between cable and
ADSL service providers intensifies, it is likely that there will be increased
retail distribution of cable and ADSL modems. While increased retail sale of
broadband modems could increase our sales of these products, it could further
reduce demand for our dial-up modems. Decreasing average selling prices and
reduced demand for our dial-up modems would result in decreased revenue for
dial-up modems, which has been our primary source of revenue.
We believe that our future success will depend in large part on our ability to
more successfully penetrate the broadband modem markets, which have been
challenging markets, with significant barriers to entry.
With the shrinking of the dial-up modem market we believe that our future
success will depend in large part on our ability to more successfully penetrate
the ADSL and cable broadband modem markets. These markets have been challenging
with significant barriers to entry, that have adversely affected our sales to
these markets. Although some cable and ADSL modems are sold at retail, the
highest volume purchasers of these modems are concentrated in a relatively few
large cable, telecommunications, and Internet service providers which offer
broadband modem services to their customers. These customers, particularly cable
services providers, also have extensive and varied approval processes for modems
to be approved for use on their network. These approvals are expensive, time
consuming, and continue to evolve. Successfully penetrating the broadband modem
market therefore presents a number of challenges including:
o the current limited retail market for broadband modems;
o the relatively small number of cable, telecommunications and Internet
service provider customers that make up a substantial part of the market
for broadband modems;
o the significant bargaining power of these large volume purchasers;
o the time consuming, expensive, uncertain and varied approval process of the
various cable service providers; and
o the strong relationships with cable service providers enjoyed by incumbents
cable equipment providers like Motorola and Scientific Atlanta.
Our initial sales of broadband products have been adversely affected by all
of these factors. We cannot assure that we will be able to successfully
penetrate these markets.
Our customer base is concentrated and the loss of one or more of our customers
could harm our business.
Relatively few customers have accounted for a significant portion of our
net sales. In 2002 43% of our net sales were attributable to three customers,
each of whom accounted for 10% or more of our net sales. In Q3 2003
approximately 41% of our net sales were attributable to three customers, each of
whom accounted for more than 10% of net sales. Because our customer base is
concentrated, a loss of one or more of these significant customers or a
reduction or delay in orders or a default in payment from any of our top
customers could significantly reduce our sales which would materially harm our
business, results of operations, and financial condition.
Our failure to meet changing customer requirements and emerging industry
standards would adversely impact our ability to sell our products.
The market for PC communications products and high-speed broadband access
products is characterized by aggressive pricing practices, continually changing
customer demand patterns, rapid technological advances, emerging industry
standards and short product life cycles. Some of our product developments and
enhancements have taken longer than planned and have delayed the availability of
our products, which adversely affected our sales and profitability in the past.
Any significant delays in the future may adversely impact our ability to sell
our products, and our results of operations and financial condition may be
adversely affected. Our future success will depend in large part upon our
ability to:
o identify and respond to emerging technological trends in the market;
o develop and maintain competitive products that meet changing customer
demands;
o enhance our products by adding innovative features that differentiate our
products from those of our competitors;
o bring products to market on a timely basis;
o introduce products that have competitive prices;
o manage our product transitions, inventory levels and manufacturing
processes efficiently; and
o respond effectively to new technological changes or new product
announcements by others.
Our product cycles tend to be short, and we may incur significant
non-recoverable expenses or devote significant resources to sales that do not
occur when anticipated. Therefore, the resources we devote to product
development, sales and marketing may not generate material revenues for us. In
addition short product cycles have resulted in and may in the future result in
excess and obsolete inventory, which has had and may in the future have an
adverse affect on our results of operations. In an effort to develop innovative
products and technology we have incurred and may in the future incur substantial
development, sales, marketing, and inventory costs. If we are unable to recover
these costs our financial condition and operating results could be adversely
affected. In addition if we sell our products at reduced prices in anticipation
of cost reductions and we still have higher cost products in inventory, our
business would be harmed and our results of operations and financial condition
would be adversely affected.
Our operating results have been adversely affected because of price protection
programs.
Our operating results have been adversely affected by reductions in average
selling prices because we gave credits to some of our customers as a result of
contractual price protection guarantees. Specifically when we reduce the price
for a product, the customer receives a credit for the difference between the
customer's most recent purchase price and our reduced price for the product for
all unsold product at the time of the price reduction. For the first nine months
of 2002 and the first nine months of 2003 we recorded a reduction of revenue of
$0.3 million and $0.2 million, respectively, for customer price protection. We
may be subject to product returns resulting from defects or from overstocking of
our products. Product returns could result in the failure to attain market
acceptance of our products, which would harm our business.
If our products contain undetected defects, errors, or failures, we could
face:
o delays in the development of our products;
o numerous product returns; and
o other losses to us or to our customers or end users.
Any of these occurrences could also result in the loss of or delay in
market acceptance of our products, either of which would reduce our sales and
harm our business. We are also exposed to the risk of product returns from our
customers as a result of contractual stock rotation privileges and our practice
of assisting some of our customers in balancing their inventories. Overstocking
has in the past led and may in the future lead to higher than normal returns.
Our failure to effectively manage our inventory levels could materially and
adversely affect our liquidity and harm our business.
During 2000 in anticipation of future sales of our broadband access
products, particularly cable modems, we significantly increased our inventory
for these products. We also built up this inventory in response to shortages of
components for these products earlier in that year. We have also had difficulty
in generating significant orders for some of our products, particularly
broadband products, and as a result, we experienced a significant increase in
our inventory, to $21.7 million on December 31, 2000. During 2001 we were able
to reduce our inventory levels to $11.1 million as a result of sales, raw
material returns to suppliers, and the write-down of value of some of our
inventory. At September 30, 2003 our inventory level was $3.8 million, a
reduction of $7.3 million from December 31, 2001 primarily attributable to
reduced inventory purchases attributable to the delivery of no-charge components
from our key component vendors, lower inventory levels to support the reduced
sales activity in 2002 and the first nine-months of 2003, improved inventory
turnover, inventory write-downs for lower of cost or market adjustments and
obsolescence, and sales of excess broadband and wireless inventory. Our failure
to effectively manage our inventory may adversely affect our liquidity and
increases the risk of inventory obsolescence, a decline in market value of the
inventory, or losses from theft, fire, or other casualty.
We may be unable to produce sufficient quantities of our products because we
depend on third party manufacturers. If these third party manufacturers fail to
produce quality products in a timely manner, our ability to fulfill our customer
orders would be adversely impacted.
We use contract manufacturers to partially manufacture our products. We use
these third party manufacturers to help ensure low costs, rapid market entry,
and reliability. Any manufacturing disruption could impair our ability to
fulfill orders, and failure to fulfill orders would adversely affect our sales.
Although we currently use six contract manufacturers for the bulk of our
purchases, in some cases a given product is provided by only one of these
companies. The loss of the services of any of our significant third party
manufacturers or a material adverse change in the business of or our
relationships with any of these manufacturers could harm our business. Since
third parties manufacture our products and we expect this to continue in the
future, our success will depend, in part, on the ability of third parties to
manufacture our products cost effectively and in sufficient quantities to meet
our customer demand.
We are subject to the following risks because of our reliance on third party
manufacturers:
o reduced management and control of component purchases;
o reduced control over delivery schedules;
o reduced control over quality assurance;
o reduced control over manufacturing yields;
o lack of adequate capacity during periods of excess demand;
o limited warranties on products supplied to us;
o potential increases in prices;
o interruption of supplies from assemblers as a result of a fire, natural
calamity, strike or other significant event; and
o misappropriation of our intellectual property or consigned inventory.
We may be unable to produce sufficient quantities of our products because we
obtain key components from, and depend on, sole or limited source suppliers.
We obtain certain key parts, components, and equipment from sole or limited
sources of supply. For example, we purchase dial-up and broadband modem chipsets
from Conexant Systems and Agere Systems. Integrated circuit product areas
covered by one or both companies include dial-up modems, ADSL modems, cable
modems, networking, routers, and gateways. In the past, we have experienced
delays in receiving shipments of modem chipsets from our sole source suppliers.
We may experience similar delays in the future. In addition, some products may
have other components that are available from only one source. If we are unable
to obtain a sufficient supply of components from our current sources, we could
experience difficulties in obtaining alternative sources or in altering product
designs to use alternative components. Resulting delays or reductions in product
shipments could damage relationships with our customers and our customers could
decide to purchase products from our competitors. Inability to meet our
customers' demand or a decision by one or more of our customers to purchase
products from our competitors could harm our operating results.
Our failure to satisfy minimum purchase requirements or commitments we have with
our sole source suppliers could have an adverse affect on our results of
operations.
We have entered into supply arrangements with suppliers of some components
that include price and other concessions, including no-charge components, for
meeting minimum purchase requirements or commitments. Our business and results
of operations could be harmed if we fail to satisfy the minimum purchase
requirements or commitments contained in our supply arrangements.
The market for high-speed communications products and services has many
competing technologies and, as a result, the demand for our products and
services is uncertain.
The market for high-speed communications products and services has a number
of competing technologies. For instance, Internet access can be achieved by:
o using a standard telephone line and appropriate service for dial-up modems,
ISDN modems, or ADSL modems, possibly in combination;
o using a cable modem with a cable TV line and cable modem service;
o using a router and some type of modem to service the computers connected to
a local area network; or
o other approaches, including wireless links to the Internet.
Although we currently sell products that include these technologies the
market for high-speed communication products and services is fragmented and
unstable, and in the cases of cable and ADSL modems, the market is dominated by
large cable and telephone service providers. The introduction of new products by
competitors, market acceptance of products based on new or alternative
technologies, or the emergence of new industry standards could render and have
in the past rendered our products less competitive or obsolete. If any of these
events occur we may be unable to sustain or grow our business. In addition if
any of one or more of the alternative technologies gain market share at the
expense of another technology, demand for our products may be reduced, and we
may be unable to sustain or grow our business.
We face significant competition which could result in decreased demand for our
products or services.
We may be unable to compete successfully. A number of companies have
developed, or are expected to develop, products that compete or will compete
with our products. Furthermore many of our current and potential competitors
have significantly greater resources than we do. Intense competition, rapid
technological change and evolving industry standards could decrease demand for
our products or make our products obsolete. Our competitors by product group
include the following:
o Dial-up modem competitors: Actiontec, Askey, Best Data, Creative Labs,
Liteon, Intel, Sitecom, and US Robotics.
o Cable modem competitors: Ambit, D-Link, Linksys, Motorola, Scientific
Atlanta, Terayon, Thomson, and Toshiba.
o ADSL modem competitors: Actiontec, Alcatel, Siemens (formerly Efficient
Networks), US Robotics, and Westell.
Changes in current or future laws or governmental regulations that negatively
impact our products and technologies could harm our business.
The jurisdiction of the Federal Communications Commission, or the FCC,
extends to the entire United States communications industry including our
customers and their products and services that incorporate our products. Our
products are also required to meet the regulatory requirements of other
countries throughout the world where our products are sold. Obtaining government
regulatory approvals is time-consuming and very costly. In the past we have
encountered delays in the introduction of our products, such as our cable
modems, as a result of government certifications. We may face further delays if
we are unable to comply with governmental regulations. Delays caused by the time
it takes to comply with regulatory requirements may result in cancellations or
postponements of product orders or purchases by our customers, which would harm
our business.
Our international operations are subject to a number of risks inherent in
international activities.
Our international sales accounted for approximately 30% in fiscal 2000, 38%
in fiscal 2001 and approximately 40% in 2002. In Q3 2003 our international sales
accounted for approximately 39% of our revenues. Currently our operations are
significantly dependent on our international operations, and may be materially
and adversely affected by many factors including:
o international regulatory and communications requirements and policy
changes;
o favoritism toward local suppliers;
o local language and technical support requirements;
o difficulties in inventory management, accounts receivable collection and
the management of distributors or representatives;
o difficulties in staffing and managing foreign operations;
o political and economic changes and disruptions;
o governmental currency controls;
o shipping costs;
o currency exchange rate fluctuations; and
o tariff regulations.
We anticipate that our international sales will continue to account for a
significant percentage of our revenues. If foreign markets for our current and
future products develop more slowly than currently expected, our future results
of operations may be harmed.
Fluctuations in the foreign currency exchange rates in relation to the U.S.
dollar could have a material adverse effect on our operating results.
Changes in currency exchange rates that increase the relative value of the
U.S. dollar may make it more difficult for us to compete with foreign
manufacturers on price, or may otherwise have a material adverse effect on our
sales and operating results. A significant increase in our foreign currency
denominated sales would increase our risk associated with foreign currency
fluctuations.
Our future success will depend on the continued services of our executive
officers and key research and development personnel with expertise in hardware
and software development.
The loss of any of our executive officers or key research and development
personnel, the inability to attract or retain qualified personnel in the future
or delays in hiring skilled personnel could harm our business. Competition for
skilled personnel is significant. We may be unable to attract and retain all the
personnel necessary for the development of our business. In addition the loss of
Frank B. Manning, our president and chief executive officer, or Peter Kramer,
our executive vice president, some other member of the management team, a key
engineer, or other key contributors, could harm our relations with our
customers, our ability to respond to technological change, and our business.
Our business may be harmed by acquisitions we may complete in the future.
We may pursue acquisitions of related businesses, technologies, product
lines, or products. Our identification of suitable acquisition candidates
involves risk inherent in assessing the values, strengths, weaknesses, risks and
profitability of acquisition candidates, including the effects of the possible
acquisition on our business, diversion of our management's attention, risk of
increased leverage, shareholder dilution, risk associated with unanticipated
problems, and risks associated with liabilities we assume.
We may have difficulty protecting our intellectual property.
Our ability to compete is heavily affected by our ability to protect our
intellectual property. We rely primarily on trade secret laws, confidentiality
procedures, patents, copyrights, trademarks, and licensing arrangements to
protect our intellectual property. The steps we take to protect our technology
may be inadequate. Existing trade secret, trademark and copyright laws offer
only limited protection. Our patents could be invalidated or circumvented. We
have more intellectual property assets in some countries than we do in others.
In addition, the laws of some foreign countries in which our products are or may
be developed, manufactured or sold may not protect our products or intellectual
property rights to the same extent as do the laws of the United States. This may
make the possibility of piracy of our technology and products more likely. We
cannot assure that the steps that we have taken to protect our intellectual
property will be adequate to prevent misappropriation of our technology.
We could infringe the intellectual property rights of others.
Particular aspects of our technology could be found to infringe on the
intellectual property rights or patents of others. Other companies may hold or
obtain patents on inventions or may otherwise claim proprietary rights to
technology necessary to our business. We cannot predict the extent to which we
may be required to seek licenses. We cannot assure that the terms of any
licenses we may be required to seek will be reasonable. We are often indemnified
by our suppliers relative to certain intellectual property rights but these
indemnifications do not cover all possible suits, and there is no guarantee that
a relevant indemnification will be honored by the indemnifying company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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. The 20 year mortgage of our
headquarters building is a variable rate loan with the interest rate adjusted
annually. A 1% change in the interest rate would result in a decrease or
increase of approximately $58,000 of interest expense per year.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Securities Exchange Act 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 recognized 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 September 30, 2003, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in enabling
us to record, process, summarize and report information required to be included
in our periodic SEC filings within the required time period.
There have been no changes in our internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) No reports on Form 8-K were filed by the Company during the quarter ending
September 30, 2003.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZOOM TECHNOLOGIES, INC.
Date: November 12, 2003 By: /s/ Frank B. Manning
------------------------------------------
Frank B. Manning, President
Date: November 12, 2003 By: /s/ Robert Crist
-------------------------------------------
Robert Crist, Vice President of Finance and
Chief Financial Officer (Principal Financial
and Accounting Officer)
EXHIBIT INDEX
Exhibit No. Description
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32.1 CEO Certification Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
32.2 CFO Certification Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002