UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-18672
ZOOM TECHNOLOGIES, INC.
-----------------------
(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, $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]
The aggregate market value of the common stock, $0.01 par value, of the
registrant held by non-affiliates of the registrant as of June 28, 2002
(computed by reference to the closing price of such stock on The Nasdaq Market
on such date) was approximately $6,288,693.
The number of shares outstanding of the registrant's common stock, $0.01 par
value, as of March 20, 2003 was 7,858,266 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the registrant's 2003 annual
meeting of shareholders to be filed with the SEC in April 2003 are incorporated
by reference into Part III, Items 10-13 of this Form 10-K, as amended.
INTRODUCTORY NOTE
This Amendment No. 1 to Annual Report on Form 10-K is primarily being filed to
amend and restate footnote 2(k) and footnote 11 of the Company's financial
statements contained in Item 8 of Part II of the Company's Annual Report on Form
10-K for the year ended December 31, 2002, as filed by the Company on March 28,
2003, to correct the results of inadvertent errors made in the calculation of
the pro forma effect on net income (loss) and earnings (loss) per share applying
the fair value recognition provisions of FASB No. 123 to stock-based
compensation included therein and the per share weighted average fair value of
stock options granted. No other changes have been made to the financial
statements or notes relating thereto. The Company is also filing additional
exhibits.
The effect of the restatement of footnote 2(k) and footnote 11 on previously
reported consolidated financial statements as of and for the years ended
December 31, 2002, 2001 and 2000 is as follows:
As originally reported:
YEAR ENDED DECEMBER 31,
2000 2001 2002
---------- ------------ -----------
Net income (loss), as reported.................... $(3,077,248) $(18,328,922) $(5,135,586)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects........ (837,541) (683,521) (225,230)
--------- ---------- ---------
Pro forma net income (loss)....................... $(3,914,789) $(19,012,443) $(5,360,816)
========= ========== =========
Earnings (loss) per share:
Basic -- as reported.............................. $ (0.40) $ (2.33) $ (0.65)
Basic - pro forma................................. $ (0.50) $ (2.42) $ (0.68)
========= ========= =========
Diluted -- as reported............................ $ (0.40) $ (2.33) $ (0.65)
Diluted - pro forma............................... $ (0.50) $ (2.42) $ (0.68)
========= ========= =========
Weighted-average assumptions: 2000 - expected dividend yield 0.0%, risk-free
interest rate of 5.90%, volatility 110% and an expected life of 3.0 years; 2001
- expected dividend yield 0.0%, risk-free interest rate of 4.63%, volatility
101% and an expected life of 1.7 years; 2002 - expected dividend yield 0.00%,
risk-free interest rate of 3.53%, volatility 140% and an expected life of 1.4
years.
On December 31, 2002 there were 845,446 additional shares available for issuance
under all three stock option plans. The per share weighted-average fair value of
stock options granted during 2000, 2001, and 2002 was $6.84, $2.70 and $0.93,
respectively, on the date of grant using the Black Scholes option-pricing model.
As restated:
YEAR ENDED DECEMBER 31,
2000 2001 2002
---------- ------------ -----------
Net income (loss), as reported.................... $(3,077,248) $(18,328,922) $(5,135,586)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects........ (1,616,219) (1,834,280) (1,109,003)
--------- ---------- ---------
Pro forma net income (loss)....................... $(4,693,467) $(20,163,202) $(6,244,589)
========= ========== =========
Earnings (loss) per share:
Basic -- as reported.............................. $ (0.40) $ (2.33) $ (0.65)
Basic - pro forma................................. $ (0.61) $ (2.57) $ (0.79)
========= ========= =========
Diluted -- as reported............................ $ (0.40) $ (2.33) $ (0.65)
Diluted - pro forma............................... $ (0.61) $ (2.57) $ (0.79)
========= ========= =========
Weighted-average assumptions: 2000 - expected dividend yield 0.0%, risk-free
interest rate of 6.26%, volatility 90% and an expected life of 2.0 years; 2001 -
expected dividend yield 0.0%, risk-free interest rate of 3.83%, volatility 102%
and an expected life of 2.0 years; 2002 - expected dividend yield 0.00%,
risk-free interest rate of 2.65%, volatility 106% and an expected life of 2.5
years.
On December 31, 2002 there were 845,446 additional shares available for issuance
under all three stock option plans. The per share weighted-average fair value of
stock options granted during 2000, 2001, and 2002 was $3.48, $1.47 and $0.54,
respectively, on the date of grant using the Black Scholes option-pricing model.
PART II
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ZOOM TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Independent Auditors' Report 5
Consolidated Balance Sheets as of December 31, 2001 and 2002 6
Consolidated Statements of Operations for the years ending December 31, 7
2000, 2001 and 2002
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ending December 31, 2000, 2001 and 2002 8
Consolidated Statements of Cash Flows for the years ending December 31, 9
2000, 2001 and 2002
Notes to Consolidated Financial Statements 10-25
Schedule II: Valuation and Qualifying Accounts for the years ending
December 31, 2000, 2001 and 2002 32
Independent Auditors' Report
The Board of Directors and Stockholders
Zoom Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Zoom
Technologies, Inc. and subsidiary as of December 31, 2001 and 2002, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss and cash flows for each of the years in the three-year period
ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zoom Technologies,
Inc. and subsidiary as of December 31, 2001 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
February 11, 2003, except as to notes 3
and 7(c) which are as of March 28, 2003.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------
Assets 2001 2002
------ ---- ----
Current assets:
Cash and cash equivalents $ 5,252,058 $ 7,612,274
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances $2,816,449 in
2001 and $2,646,408 in 2002 (note 13) 5,652,035 3,714,202
Inventories, net (note 5) 11,083,143 6,782,550
Prepaid expenses and other current assets 999,662 1,037,733
---------- ----------
Total current assets 22,986,898 19,146,759
Property, plant and equipment, net (note 6) 4,128,916 3,485,911
Net deferred tax assets (note 12) 2,012,844 -
Other assets 56,666 -
---------- ----------
Total assets $ 29,185,324 $ 22,632,670
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 2,750,174 $ 2,406,843
Accrued expenses 1,879,566 1,207,724
Current portion of long term debt (note 10) 139,201 191,550
---------- ----------
Total current liabilities 4,768,941 3,806,117
Long-term debt, less current portion (note 10) 5,745,368 5,342,057
Other non-current liabilities (note 8) 255,287 -
---------- ----------
Total liabilities 10,769,596 9,148,174
---------- ----------
Stockholders' equity (note 11):
Common stock, no par value at December 31, 2001
and $0.01 par value at December 31, 2002.
Authorized 25,000,000 shares; issued
7,860,866 shares and outstanding 7,860,866 and
7,858,266 shares at December 31, 2001 and
December 31, 2002, respectively. 28,245,215 282,452
Additional paid-in capital - 27,962,763
Retained earnings (accumulated deficit) (9,634,692) (14,770,278)
Accumulated other comprehensive income (loss) (194,795) 11,755
Treasury stock, at cost - (2,196)
---------- ----------
Total stockholders' equity 18,415,728 13,484,496
---------- ----------
Total liabilities and stockholders'
equity $ 29,185,324 $ 22,632,670
========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ending December 31, 2000, 2001 and 2002
2000 2001 2002
------------ ------------ ------------
Net sales (notes 4, 13 and 17) .............. $ 57,708,456 $ 41,570,276 $ 37,274,287
Cost of goods sold (note 5) ................. 39,404,320 35,193,449 27,937,544
----------- ----------- -----------
Gross profit ........... 18,304,136 6,376,827 9,336,743
----------- ----------- -----------
Operating expenses:
Selling ............................. 10,672,025 7,480,297 5,848,137
General and administrative (note 8).. 6,228,317 7,938,175 3,405,043
Research and development ............ 6,249,092 5,327,968 3,526,350
----------- ----------- -----------
Total operating expenses 23,149,434 20,746,440 12,779,530
----------- ----------- -----------
Operating loss ......... (4,845,298) (14,369,613) (3,442,787)
----------- ----------- -----------
Other income (expense):
Interest income ..................... 447,148 198,805 102,604
Interest expense..................... - (454,708) (293,104)
Equity in losses of affiliate (note 14) (215,834) (145,165) (56,666)
Other, net .......................... 237,820 241,759 313,619
----------- ----------- -----------
Total other income (expense), net 469,134 (159,309) 66,453
----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item (4,376,164) (14,528,922) (3,376,334)
Income tax expense (benefit)(note 12) ....... (1,298,916) 3,800,000 2,014,539
----------- ----------- -----------
Income (loss) before extraordinary
item (3,077,248) (18,328,922) (5,390,873)
Extraordinary gain on elimination
of negative goodwill - - 255,287
----------- ----------- -----------
Net Income (loss) ...... $ (3,077,248) $(18,328,922) $ (5,135,586)
=========== =========== ===========
Basic and diluted earnings (loss) per share (note 2):
Loss before extraordinary item:
Basic and diluted....... $ (.40) $ (2.33) $ (.68)
=========== =========== ===========
Extraordinary gain on elimination of negative goodwill $ - $ - $ .03
=========== =========== ===========
Net loss:
Basic and diluted....... $ (.40) $ (2.33) $ (.65)
=========== =========== ===========
Weighted average common and common equivalent
shares:
Basic and diluted....... 7,756,815 7,860,866 7,860,650
=========== =========== ===========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
Retained Accumulated
Additional Earnings Other Total
Common Stock Paid In (accumulated Comprehensive Treasury Stock Stockholders'
Shares Amount Capital deficit) Income(Loss) Shares Amount Equity
--------- ---------- ---------- ---------- ----------- ------ ------ ------------
Balance at December 31, 1999 .... 7,560,296 25,780,231 - 11,771,478 (37,626) - - 37,514,083
Net profit (loss) ............... - - - (3,077,248) - - - (3,077,248)
Foreign currency translation
adjustment ...................... - - - - (80,788) - - (80,788)
Unrealized holding gain on
investments ..................... - - - - 26,255 - - 26,255
Comprehensive loss ............ - - - - - - - (3,131,781)
Exercise of stock options (note
11) ............................. 300,570 1,822,722 - - - - - 1,822,722
Compensation expense related to
issuance of restricted stock ... - 52,577 - - - - - 52,577
Tax effect of exercises of non-
qualified stock options (notes
11 and 12) .................... - 489,845 - - - - - 489,845
---------- ------------ ---------- ----------- ---------- ------ ------ ------------
Balance at December 31, 2000 .. 7,860,866 $28,145,375 - $ 8,694,230 $ (92,159) - - $36,747,446
Net profit (loss) ............. - - - (18,328,922) - - - (18,328,922)
Foreign currency translation
adjustment .................... - - - - (102,689) - - (102,689)
Unrealized holding gain on
investments ................... - - - - 53 - - 53
Comprehensive loss . ......... - - - - - - - (18,431,558)
Compensation expense related to
issuance of restricted stock .. - 99,840 - - - - - 99,840
---------- ------------ ---------- ----------- ---------- ------ ------ ------------
Balance at December 31, 2001 .. 7,860,866 $28,245,215 - $(9,634,692) $ (194,795) - - $18,415,728
Net profit (loss) ............. - - - (5,135,586) - - - (5,135,586)
Foreign currency translation
adjustment .................... - - - - 206,550 - - 206,550
Comprehensive loss ........... - - - - - - - (4,929,036)
Incorporation to Delaware
corporation .................. - (27,962,763) 27,962,763 - - - - -
Purchase of treasury stock .... - - - - - 2,600 (2,196) (2,196)
---------- ----------- ---------- ------------ ---------- ------- ------- ------------
Balance at December 31, 2002 .. 7,860,866 $ 282,452 27,962,763 $(14,770,278) $ 11,755 2,600 (2,196) $ 13,484,496
========== =========== ========== ============ ========== ====== ======= ============
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ending December 31, 2000, 2001 and 2002
2000 2001 2002
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (3,077,248) $(18,328,922) $ (5,135,586)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Extraordinary gain on negative goodwill - - (255,287)
Depreciation and amortization 1,613,276 1,769,608 837,968
Impairment of goodwill - 2,294,881 -
Amortization of unearned compensation
expense 52,577 99,840 -
Equity in losses of affiliate 215,834 145,165 56,666
Net deferred income taxes (1,843,874) 3,800,000 2,012,844
Tax benefit from exercise of
nonqualified stock options 489,845 - -
Changes in operating assets and liabilities,
net of acquisitions
Accounts receivable (2,514,401) 2,271,932 2,139,336
Inventories (7,593,276) 10,813,740 4,300,593
Prepaid expenses and other
current assets (106,651) (296,655) (38,071)
Accounts payable and accrued
expenses 4,766,116 (5,214,009) (1,015,173)
---------- ---------- ----------
Net cash provided by (used in)
operating activities (7,997,802) (2,644,420) 2,903,290
---------- ---------- ----------
Cash flows from investing activities:
Sales of investment securities, net 3,215,329 53 -
Investment in affiliates - (141,665) -
Purchases of property, plant and equipment (1,324,268) (650,060) (194,963)
---------- ---------- ----------
Net cash provided by (used in)
investing activities 1,891,061 (791,672) (194,963)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt - 6,000,000 -
Repayment of long-term debt - (115,431) (350,962)
Exercise of nonqualified stock options 1,875,299 - -
Payments to acquire treasury stock - - (2,196)
---------- ---------- ----------
Net cash provided by (used in)
financing activities 1,875,299 5,884,569 (353,158)
---------- ---------- ----------
Effect of exchange rate changes on cash (80,788) (102,689) 5,047
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (4,312,230) 2,345,788 2,360,216
---------- ---------- ----------
Cash and cash equivalents at beginning of year 7,218,500 2,906,270 5,252,058
---------- ---------- ----------
Cash and cash equivalents at end of year $ 2,906,270 $ 5,252,058 $ 7,612,274
========== ========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ending December 31, 2000, 2001 and 2002
(1) Incorporation and Nature of Operations
Zoom Telephonics, Inc. (the "Company") was incorporated under the federal
laws of Canada (Canada Business Corporations Act). Its principal
business activity, the design, production, and marketing of faxmodems
and other communication peripherals, is conducted through its
wholly-owned subsidiary, Zoom Telephonics, Inc. ("Zoom US"), a
Delaware corporation based in Boston, Massachusetts.
In February 2002, the Company completed a transaction in which it changed
its jurisdiction of incorporation from Canada to the State of Delaware
effective March 1, 2002. In connection with the change in
jurisdiction, the Company changed its name to Zoom Technologies, Inc.
These changes were accomplished through a process called a continuance
under the laws of Canada and a domestication under the laws of the
State of Delaware, and were approved by the Company's shareholders at
a stockholders' meeting on February 15, 2002.
As part of the continuation, each share of Zoom Telephonics, Inc. was
automatically converted into one share of Zoom Technologies, Inc.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation and Use of Estimates
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America and are stated in US dollars.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results may differ
from those estimates. Significant estimates made by the Company
include the useful lives of property, plant and equipment and
goodwill, the recoverability of long-lived assets, the collectibility
of accounts receivable, the valuation allowance for deferred tax
assets, the valuation of sales returns and allowances, the reserves
for obsolete and slow moving inventory, and the write-downs of
inventory valuation for the lower cost of market.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Zoom US, and all of its wholly owned
subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all investments with original maturities of less
than 90 days to be cash equivalents. Included in cash and cash
equivalents at December 31, 2002 and 2001 was a deposit for
approximately $241,000 and $218,000, respectively, in a duty deferment
account approved by H.M. Customs and Excise in the United Kingdom for
the deferment of value added taxes for imports.
(d) Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method.
(e) Property, plant and equipment
Property, plant and equipment is stated and recorded at cost. Depreciation
of property, plant and equipment is provided by using the
straight-line method at rates sufficient to amortize the costs of the
fixed assets over their estimated useful lives.
(f) Accounting for Impairment of Long-Lived Assets
The Company uses the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." This statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less cost
to sell.
(g) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis and operating loss and
tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(h) Earnings (Loss) Per Common Share
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the
period. Diluted loss per share is computed by dividing net income by
the weighted average number of common shares and dilutive potential
common shares outstanding during the period. Under the treasury stock
method, the unexercised options are assumed to be exercised at the
beginning of the period or at issuance, if later. The assumed proceeds
are then used to purchase common shares at the average market price
during the period.
2000 2001 2002
---- ---- ----
Basic weighted
average shares outstanding 7,756,815 7,860,866 7,860,650
Net effect of dilutive potential
common shares outstanding, based
on the treasury stock method - - -
--------- --------- ---------
Diluted weighted
average shares outstanding 7,756,815 7,860,866 7,860,650
========= ========= =========
Potential common shares for which inclusion would have the effect of
increasing diluted earnings per share (i.e., antidilutive) are
excluded from the computation. The dilutive effect of options to
purchase 419,039, 13,870 and 3,814 shares of common stock at December
31, 2000, 2001, and 2002, respectively, were outstanding, but not
included in the computation of diluted earnings per share as their
effect would be antidilutive.
(i) Revenue Recognition
The Company sells hardware products to its customers. The products are
dial-up modems, embedded modems, cable modems, PC cameras, ISDN and
ADSL modems, telephone dialers, and wireless and wired networking
equipment. The Company generally does not sell software or services.
The Company earns a small amount of royalty revenue. The Company
derives its revenue primarily from the sales of hardware products to
three types of customers (1) computer peripherals retailers, (2)
computer product distributors, and (3) original equipment
manufacturers (OEMs). The Company sells a very small amount of its
hardware products to direct consumers or to any customers via the
Internet. As described below, management judgments and estimates must
be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and
timing of the Company's revenue for any period if its management makes
different judgments or utilizes different estimates.
Revenue is recognized by the Company for all three types of customers at
the point when the customers take legal ownership of the delivered
products. Legal ownership passes from the Company to the customer
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
based on the contractual FOB point specified in signed contracts and
purchase orders, which are both used extensively. Many of the
Company's customer contracts or purchase orders specify FOB
destination. Since it would be impractical to verify ownership change
for each individual delivery to the FOB destination point, the Company
estimates the day of delivery receipt by the customer based on its
ship date and the carrier's published delivery schedule specific to
the freight class and location.
The Company's revenues are reduced by certain events which are
characteristic of hardware sales to computer peripherals retailers.
These events are product returns, price protection refunds, store
rebates, and consumer mail-in rebates. Each of these is accounted for
as a reduction of revenue based on careful management estimates, which
are reconciled to actual customer or end-consumer refunds and credits
on a monthly or quarterly basis. The estimates for product returns are
based on recent historical trends plus estimates for returns prompted
by new product introductions, announced stock rotations, announced
customer store closings, etc. Management analyzes historical returns,
current economic trends, and changes in customer demand and acceptance
of the Company's products when evaluating the adequacy of sales return
allowances. The Company's estimates for price protection refunds
require a detailed understanding and tracking by customer, by sales
program. Estimated price protection refunds are recorded in the same
period as the announcement of a pricing change. Information from
customer inventory-on-hand reports or from direct communications with
the customers is used to estimate the refund, which is recorded as a
reserve against accounts receivable and a reduction of current period
revenue. The Company's estimates for consumer mail-in rebates are
comprised of actual rebate claims processed by the rebate redemption
centers plus an accrual for an estimated lag in processing. The
Company's estimates for store rebates are comprised of actual credit
requests from the eligible customers.
(j) Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, and
borrowings. Due to the short term nature of these instruments of
conversion to cash or the corresponding variable interest rate
attached to the debt, the carrying amount of these financial
instruments approximates fair value.
(k) Stock-Based Compensation
The Company accounts for stock based compensation under SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). As permitted by
SFAS 123, the Company measures compensation cost in accordance with
Accounting Principles Board Opinion (APB) No. 25 (APB 25), "Accounting
for Stock Issued to Employees," and FASB interpretation No. 44 (FIN
44). Accordingly, no accounting recognition is given to stock options
granted at fair market value until they are exercised. Upon exercise,
net proceeds, including tax benefits realized, if any, are credited to
equity.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of FASB 123 to stock based compensation.
YEAR ENDED DECEMBER 31,
2000 2001 2002
---------- ------------ -----------
Net income (loss), as reported.................... $(3,077,248) $(18,328,922) $(5,135,586)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects........ (1,616,219) (1,834,280) (1,109,003)
--------- ---------- ---------
Proforma net income (loss)........................ $(4,693,467) $(20,163,202) $(6,244,589)
========= ========== =========
Earnings (loss) per share:
Basic -- as reported.............................. $ (0.40) $ (2.33) $ (0.65)
Basic -- proforma................................. $ (0.61) $ (2.57) $ (0.79)
========= ========= =========
Diluted -- as reported............................ $ (0.40) $ (2.33) $ (0.65)
Diluted -- proforma............................... $ (0.61) $ (2.57) $ (0.79)
========= ========= =========
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Weighted-average assumptions: 2000 - expected dividend yield 0.0%,
risk-free interest rate of 6.26%, volatility 90% and an expected life
of 2.0 years; 2001 - expected dividend yield 0.0%, risk-free interest
rate of 3.83%, volatility 102% and an expected life of 2.0 years; 2002
- expected dividend yield 0.00%, risk-free interest rate of 2.65%,
volatility 106% and an expected life of 2.5 years.
(l) Advertising Costs
Advertising costs are expensed as incurred and reported in selling,
general, and administrative expenses in the accompanying consolidated
statements of operations and include costs of advertising, production,
trade shows, and other activities designed to enhance demand for the
Company's products. There are no deferred advertising costs in the
accompanying consolidated balance sheets.
(m) Investments in Affiliates
Investments in which the Company has no significant influence over the
investee are accounted for under the cost method of accounting.
Investments in which the Company exercises significant influence but
which the Company does not control are accounted for under the equity
method of accounting. Under the equity method, investments are stated
at cost and are adjusted for the Company's share of earnings and
losses, contributions and distributions.
(n) Foreign Currencies
The Company generates a portion of its revenues in international markets
and denominated in foreign currencies, which subjects its operations
to exposure to foreign currency fluctuations. The impact of currency
fluctuations can be positive or negative in any given period. During
the years ending December 31, 2000, 2001, and 2002 foreign currency
transaction activity, gains, and losses were not material. At December
31, 2002, the Company's foreign currency-denominated net assets were
not material. The Company has no involvement with derivative financial
instruments.
The Company considers the local currency to be the functional currency for
its international subsidiary. Assets and liabilities denominated in
foreign currencies are translated using the exchange rate of the
balance sheet date. Revenues and expenses are translated at average
exchange rates prevailing during the year. Translation adjustments
resulting from this process are charged or credited to accumulated
other comprehensive loss.
(o) Warranty Costs
The Company provides currently for the estimated costs that may be
incurred under its standard warranty obligations.
(3) Liquidity
In 2002, the Company's net cash provided by operating activities was $2.9
million and net cash used in investing activities was $.2 million. In
2001, the Company obtained a mortgage on its corporate headquarters,
which provided financing of $6 million. On December 31, 2002 Zoom had
cash and cash equivalents of approximately $7.6 million. Currently the
Company does not have a debt facility from which it can borrow, and it
does not expect to obtain one on acceptable terms unless there is
operating performance improvement.
To conserve cash and manage the Company's liquidity, the Company has
implemented expense reductions throughout 2001 and 2002. The employee
headcount was 313 at December 31, 2000, which has been reduced to 185
at December 31, 2002. The Company will continue to assess its cost
structure as it relates to its revenues and cash position in 2003, and
may make further reductions if these actions are deemed necessary.
Trends including the bundling, by PC manufacturers, of dial-up modems into
computers and the increased popularity of broadband modems lower the
total available market through our sales channels. Because of this,
our dial-up modem sales are unlikely to grow unless the Company's
market share grows, or the new V.92 and V.44 modem standards grow
sales through the Company's channels. If the Company's dial-up modem
sales do not grow, the Company's future success will depend in large
part on its ability to successfully penetrate the broadband modem,
networking, and dialer markets.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
The Company's cash position at December 31, 2002 was $7.6 million.
Management believes it has sufficient resources to fund its planned
operations over the next 12 months. However, if the Company is unable
to increase its revenues, reduce its expenses, or raise capital, the
Company's longer- term ability to continue as a going concern and
achieve its intended business objectives could be adversely affected.
(4) New Accounting Pronouncements
FASB Emerging Issues Task Force Issue No. 00-14 "Accounting for Certain
Sales Incentives" addresses the recognition, measurement, and income
statement classification for certain types of sales incentives. The
application of the guidance in Issue No. 00-14 results in a change in
the manner in which the Company records certain types of discounts and
sales and marketing incentives that are provided to its customers. The
Company has historically recorded certain types of these incentives as
marketing expenses. Under Issue No. 00-14, the Company will record
these discounts and incentives as reductions of revenue. In April
2001, the FASB Emerging Issues Task Force reached a consensus on Issue
No. 00-25 "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products".
Issue No. 00-25 addresses whether certain consideration offered by a
vendor to a distributor, including slotting fees, cooperative
advertising arrangements and "buy-down" programs, should be
characterized as operating expenses or reductions of revenue. The
requirements of Issue No. 00-14 and 00-25 were implemented in the
first fiscal quarter of 2002, at which time prior period reported
amounts were reclassified to conform to the new presentation. There is
no current year or historical impact on our consolidated balance
sheets. EITF Issue No. 01-9, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products),"
subsequently codified the guidance in Issue No. 00-14 and 00-25. Prior
year reclassifications have been made to conform to current
presentation and are as follows:
Years ending December 31,
2000 2001
--------------------------
Revenues:
As previously reported $ 59,750,187 $ 43,709,528
As reclassified 57,708,456 41,570,276
Sales and Marketing expenses:
As previously reported 12,713,756 9,619,549
As reclassified 10,672,025 7,480,297
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. This statement is effective
for restructuring activities commencing after December 31, 2002. The
Company does not believe that the impact of adopting SFAS 146 will
have a material impact on its consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", which
clarifies disclosure and recognition/measurement requirements related
to certain guarantees. The disclosure requirements are effective for
financial statements issued after December 15, 2002 and the
recognition/measurement requirements are effective on a prospective
basis for guarantees issued or modified after December 31, 2002. The
application of the requirements of FIN 45 did not have a material
impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation -- Transition and Disclosure" (SFAS 148).
SFAS 148 amends SFAS No. 123 "Accounting for Stock Based
Compensation", to provide alternative methods of transition for a
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition guidance and annual
disclosure provisions of SFAS 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are
effective for financial reports containing financial statements for
interim periods beginning after December 15, 2002. As the Company did
not make a voluntary change to the fair value based method of
accounting for stock-based employee compensation in 2002, the adoption
of SFAS 148 did not have a material impact on the Company's financial
position and results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("VIEs"). This Interpretation addresses
the consolidation of variable interest entities in which the equity
investors lack one or more of the essential characteristics of a
controlling financial interest or where the equity investment at risk
is not sufficient for the entity to finance its activities without
subordinated financial support from other parties. The Interpretation
applies to VIEs created after January 31, 2003 and to VIEs in which an
interest is acquired after that date. Effective July 1, 2003, it also
applies to VIEs in which an interest is acquired before February 1,
2003. The Company may apply the Interpretation prospectively, with a
cumulative effect adjustment as of July 1, 2003, or by restating
previously issued financial statements with a cumulative effect
adjustment as of the beginning of the first year restated. The Company
is in the process of evaluating the effects of applying Interpretation
No. 46 in 2003. Based on our preliminary analysis, the Company does
not anticipate that adoption of Interpretation No. 46 will have a
material effect on the Company's consolidated financial statements.
(5) Inventories
Inventories consist of the following at December 31:
2001 2002
---- ----
Raw materials $ 6,276,480 $ 2,808,421
Work in process 462,389 673,275
Finished goods 4,344,274 3,300,854
---------- -----------
Net Inventory $ 11,083,143 $ 6,782,550
========== ==========
During 2001 and 2002 the Company recorded lower of cost or market
write-downs of $4.6 million and $0.7 million, respectively, related to
broadband and wireless inventory.
(6) Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31:
Estimated
2001 2002 useful lives
---- ---- ------------
Land $ 309,637 $ 309,637 -
Buildings and improvements 2,695,346 2,761,616 31.5 years
Leasehold improvements 473,723 483,039 5 years
Computer hardware and software 3,509,445 3,550,749 3 years
Machinery and equipment 1,699,564 1,735,057 5 years
Molds, tools and dies 1,489,484 1,532,064 5 years
Office furniture and fixtures 275,516 275,516 5 years
---------- -----------
10,452,715 10,647,678
Less accumulated depreciation
and amortization (6,323,799) (7,161,767)
--------- ---------
$ 4,128,916 $ 3,485,911
========= =========
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(7) Commitments and Contingencies
(a) Lease Obligations
The Company leases a manufacturing and warehousing facility in Boston,
Massachusetts, an office facility in Camberley, United Kingdom, and a
technical support facility in Boca Raton, Florida. The Boston,
Massachusetts lease expires in August 2006. In September 2002, we
entered into a 5 year lease, as a tenant, for approximately 3,500
square feet at 950 Broken Sound Parkway NW, Boca Raton, Florida. In
March 1999, the Company assumed an office lease from Hayes
Microcomputer Products, Inc. at 430 Frimley Business Park, Camberley
Surrey, U.K. We have an agreement in principle to extend this lease
term to 2006. Total rent expense, under non-cancelable operating
leases, was $463,693, $546,034 and $782,000 for the years ending
December 31, 2000, 2001 and 2002, respectively.
The Company's estimated future minimum rental payments, excluding
executory costs, under these operating leases are set forth in the
table below.
Year Total
2003 $ 739,836
2004 741,561
2005 743,286
2006 490,632
2007 41,389
(b) Purchase Commitments
The Company has entered into supply arrangements with suppliers of some
components that include price and other concessions, including
no-charge components, for meeting certain purchase requirements or
commitments. Under these arrangements the Company is committed to
purchase approximately $8.0 million of components over a period of
approximately 30-months that commenced on January 1, 2002, provided
that those components were offered at competitive terms and prices.
The Company believes that at December 31, 2002, it is on track to meet
the $8.0 million commitment. The Company is also required to purchase
either a minimum percentage, as measured by unit purchases or dollar
amount of components, from a supplier over a two-year period
commencing on January 1, 2002, and the Company is currently exceeding
that percentage. In connection with these arrangement, the Company was
entitled to receive at least $3.0 million of no-charge components,
based upon the supplier's market price for the components in late 2001
and early 2002, and other pricing concessions based on our purchase
volumes. The Company received $1.2 million of these no-charge
components in the fourth quarter of 2001. The Company received the
remainder of the no-charge components in the first quarter of 2002.
Through December 31, 2002, the Company consumed $1.8 million of these
chips in its manufacturing process and they were shipped in finished
products to customers in 2002. In 2002, the Company purchased and paid
approximately $2 million less than would have expected without the
no-charge components. Of the original $3.0 million chip valuation, $.3
million has been written down as a result of a decline in the market
value of the free chips. The favorable impact to the statement of
operations is being recognized on a delayed basis as a purchase
discount over the total number of components acquired through the 30
month supply agreement. The Company expects that the remaining $0.8
million total market value of "no charge" components will be consumed
in its manufacturing process and shipped in finished products to
customers in 2003.
(c) Contingencies
During 2001, the Company entered into an agreement to purchase the ground
lease for a manufacturing facility located at 27 Drydock Avenue in
Boston, Massachusetts (the "Drydock Building"). In connection with the
proposed purchase of the Drydock Building, the Company paid $513,500
which was held in escrow as a deposit pending the closing of the
transaction. Of this deposit, $25,000 was nonrefundable. When Zoom was
unable to obtain acceptable financing the Seller (the current
leaseholder) retained the deposit pending resolution of some disputed
facts concerning Zoom's withdrawal from the transaction under the
terms of the Purchase and Sale Agreement. While Zoom believed that it
was entitled to a return of the $488,500 refundable portion of the
deposit plus interest, the seller directed the escrow agent to hold
the funds pending resolution of the dispute.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
As an alternative to pursing legal remedies to obtain a return of the
deposit, Zoom pursued an arrangement to acquire the Drydock Building
in partnership with the following individuals: Frank B. Manning,
President and a director of Zoom; Peter R. Kramer, Executive Vice
President and a director of Zoom; Bruce M. Kramer, Peter Kramer's
brother; and a third party. Under this arrangement, these individuals,
either directly or through entities controlled by them, joined
together with us as of March 29, 2002 to form the Zoom Group LLC, a
Massachusetts limited liability company ("Zoom Group") to purchase the
Drydock Building. Zoom and each of the investors owned a 20% interest
in the Zoom Group. The managers of the Zoom Group are Peter Kramer and
the third party. There are no special allocations among the members of
the Zoom Group, and each member is required to contribute his or its
proportionate amount of capital in return for its 20% interest.
Effective as of March 29, 2002, the Company entered into a Reinstatement
Agreement, Assignment Agreement and Second Amendment to Agreement of
Purchase and Sale with the Zoom Group and the owner of the Drydock
ground lease. Under this Reinstatement Agreement, the original
purchase agreement for the Drydock Building was amended and
reinstated, and the company assigned its rights under the purchase
agreement to the Zoom Group, together with rights to the $488,500
refundable portion of the deposit. In connection with this
transaction, under a separate letter agreement, the other members of
the Zoom Group paid us $390,800 ($97,700 each), representing their
proportionate share of the deposit assigned to the Zoom Group.
Under the Reinstatement Agreement, the Zoom Group purchased the Drydock
Building for a purchase price of $6.1 million. The Zoom Group obtained
a mortgage of $4.2 million, less closing costs and legal fees. Each
member of the Zoom Group contributed $482,577 for their share of the
investment plus initial working capital. These initial capital
contributions include each member's share of the deposit.
Under the Zoom Group Operating Agreement, the Company had both the right to
sell its interest in the Zoom Group to the other members of the Zoom
Group by January 5, 2003 for the Company's original purchase price,
and the right to purchase the other members' entire interests in the
Zoom Group through December 31, 2005 in accordance with a
predetermined formula. Effective January 5, 2003, we exercised our
right to sell our interest in the Zoom Group to the other members of
the Zoom Group. In March 2003, we received the proceeds from the sale
of our interest from the remaining members of the Zoom Group, LLC to
the value of $.48 million, which represents the Company's investment
amount less the non-refundable deposit and the negotiated share of
losses in the Zoom Group, plus interest earned on the Company's
original deposit. This action was taken to improve our liquidity
position and to reduce our exposure to the Boston real estate market.
Additionally, the Company is party to various lawsuits and administrative
proceedings arising in the ordinary course of business. The Company
evaluates such lawsuits and proceedings on a case-by-case basis, and
its policy is to vigorously contest any such claims which it believes
are without merit. The Company's management believes that the ultimate
resolution of such pending matters will not materially and adversely
affect the Company's business, financial position, results of
operations or cash flows. The Company had no Letters of Credit
outstanding at December 31, 2002.
(d) Concentrations
The Company participates in the PC peripherals industry, which is
characterized by aggressive pricing practices, continually changing
customer demand patterns and rapid technological developments. The
Company's operating results could be adversely affected should the
Company be unable to successfully anticipate customer demand
accurately; manage its product transitions, inventory levels and
manufacturing process efficiently; distribute its product quickly in
response to customer demand; differentiate its products from those of
its competitors or compete successfully in the markets for its new
products.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
The Company depends on many third-party suppliers for key components
contained in its product offerings. For some of these components, the
Company may only use a single source supplier, in part due to the lack
of alternative sources of supply. If the supply of a key material
component is delayed or curtailed, the Company's ability to ship the
related product or solution in desired quantities and in a timely
manner could be adversely affected, possibly resulting in reductions
in net sales. In cases where alternative sources of supply are
available, qualification of the sources and establishment of reliable
supplies could result in delays and possible reduction in net sales.
In the event that the financial condition of the Company's third-party
suppliers for key components was to erode, the delay or curtailment of
deliveries of key material components could occur. Additionally, the
Company's reliance on third-party suppliers of key material components
exposes the Company to potential product quality issues that could
affect the reliability and performance of its products and solutions.
Any lesser ability to ship its products in desired quantities and in a
timely manner due to a delay or curtailment of the supply of material
components, or product quality issues arising from faulty components
manufactured by third-party suppliers, could adversely affect the
market for the Company's products and lead to a reduction in the
Company's net sales.
(8) Impairment
In March 1999, the Company entered into a series of independent
agreements to acquire most of the modem assets of Hayes Microcomputer
Products, Inc. for $5.0 million in cash. The purchase included the
Hayes, Practical Peripherals, Accura, Optima, Century 2, and Cardinal
brands and product rights for the USA, Canada, South & Central
America, Europe, and the Middle East. In July 1999 the Company
finalized the purchase of Hayes Asia Pacific for $1.1 million in cash.
The acquisitions were accounted for as purchases. The excess of cost
over fair value of net assets acquired was being amortized on a
straight-line method over five years.
The Company also recorded negative goodwill that resulted from the
purchase of the Hayes U.K., business, where the value of the net
assets acquired exceeded the cost. This transaction was independent of
other Hayes purchases.
The Company recorded goodwill for two acquisitions, Tribe Computer Works,
Inc. in 1996 and certain assets of Hayes Microcomputer Products, Inc.
in 1998. The goodwill values for Tribe and Hayes were being amortized
over 13 years and 5 years, respectively. In 2001, the Company
determined that based on its history of negative cash flows from
operations, a forecast of future positive cash flows could not be
sufficiently relied upon to support retaining the remaining goodwill
assets on the consolidated balance sheet. Therefore, the Company
recorded an impairment charge of $2.3 million in 2001 and on January
1, 2002, the Company recorded an extraordinary gain of $0.3 million
upon the adoption of SFAS No. 142. The gain resulted from the
elimination of the remaining negative goodwill on the Company's
consolidated balance sheet. As of December 31, 2002, the Company's net
goodwill and negative goodwill balances on its consolidated balance
sheet are zero.
Net loss before goodwill amortization, net of tax and related per
share amounts for the years ended December 31, 2000, 2001, 2002 is as
follows (in thousands, except per share amounts):
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Year ended December 31,
2000 2001 2002
---- ---- ----
Net loss as reported $ (3,077) $ (18,329) $ (5,136)
Add back: Goodwill amortization
expense net of tax effect 569 781 -
----- ------ -----
Adjusted net loss $ (2,508) $ (17,548) $ (5,136)
Basic and diluted loss per share,
as reported $ (0.39) $ (2.33) $ (0.65)
Add back: Goodwill amortization
expense net of tax effect 0.07 0.10 -
----- ------ -----
Proforma basic and diluted loss
per share $ (0.32) $ (2.23) $ (0.65)
(9) Comprehensive Income (loss)
The components of comprehensive income (loss), net of tax, are as follows:
2000 2001 2002
---- ---- ----
Net income (loss) $(3,077,248) $(18,328,922) $(5,135,586)
Foreign currency translation
adjustment (80,788) (102,689) 206,550
Net unrealized holding gain
on investment securities 26,255 53 -
--------- ---------- ---------
Comprehensive income (loss) $(3,131,781) $(18,431,558) $(4,929,036)
========= ========== =========
(10) Long-Term Debt
On January 10, 2001, the Company obtained a mortgage for $6 million on
the real estate property located at 201 and 207 South Street, Boston,
Massachusetts. This is a 20-year direct reduction mortgage with a
five-year balloon due January 10, 2006. The interest rate is fixed for
one year, based on the one year Federal Home Loan Bank rate plus 2.5 %
per annum. The rate is adjusted on January 10th of each calendar year
commencing on January 10, 2002. The rate was adjusted to 3.81% on
January 10, 2003. On September 24, 2002 the Company paid an additional
principal payment of $178,761 in compliance with a mortgage covenant.
Future minimum principal payments are due as follows at December 31,
2002.
Year Total
2003 $ 191,550
2004 200,664
2005 211,776
2006 4,929,617
---------
Total $ 5,533,607
=========
(11) Stock Option Plans
At December 31, 2002, the Company had three stock option plans, which are
described below:
Employee Stock Option Plan
The Employee Stock Option Plan (the "Employee Stock Option Plan") is for
officers and certain full-time and part-time employees of the Company.
Non-employee directors of the Company are not entitled to participate
under this plan. The Employee Stock Option Plan provides for the
availability of 2,800,000 shares of common stock for issuance upon the
exercise of stock options granted under the plan. Shares of common
stock were registered for issuance under this plan in accordance with
the Securities Act of 1933. Under this plan, stock options are granted
at the discretion of the Stock Option Committee of the Board of
Directors at an option price not less than the fair market value of
the stock on the date of grant. The options are exercisable in
accordance with terms specified by the Stock Option Committee not to
exceed ten years from the date of grant. Options outstanding under
this plan are as follows:
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Weighted average
Number of shares exercise price
Balance at December 31, 1999 1,031,467 $ 7.21
Granted 377,000 7.43
Exercised (196,181) 7.09
Expired (254,675) 10.67
------- -----
Balance at December 31, 2000 957,611 $ 6.40
Granted 631,000 2.77
Exercised - -
Expired (550,611) 5.85
-------- ----
Balance at December 31, 2001 1,038,000 $ 4.48
Granted 325,000 1.00
Exercised - -
Expired (115,000) 4.84
-------- ----
Balance at December 31, 2002 1,248,000 $ 3.54
========= ====
The following table summarizes information about fixed stock options under
the Employee Stock Option Plan outstanding on December 31, 2002:
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 1.00 to $ 1.75 325,000 2.40 $ 1.00 - $ 0.00
1.75 to 3.50 350,000 1.60 2.20 175,000 2.20
3.50 to 5.25 251,000 1.00 3.63 125,500 3.63
5.25 to 7.00 100,000 .50 6.36 100,000 6.36
7.00 to 8.75 222,000 .10 8.00 222,000 8.00
---------------- ------- ---- ---- ------- ----
$ 1.00 to $ 8.75 1,248,000 1.30 years $ 3.54 622,500 $ 5.22
================ ========= ========== ====== ======= ======
The Company recognized a tax benefit of $489,845 in 2000 upon the exercise
of nonqualified stock options under the Employee Stock Option Plan.
This benefit has been recorded as an increase to the value of common
stock.
1991 Director Stock Option Plan
In 1991, the Company established the Director Stock Option Plan (the
"Directors Plan"). Shares of common stock were registered for issuance
under this plan in accordance with the Securities Act of 1933. The
Directors Plan was established for all directors of the Company except
for any director who is a full-time employee or full-time officer of
the Company. Under the Directors Plan, each eligible director is
automatically granted an option to purchase 6,000 shares of common
stock on July 10 and January 10 of each year, beginning July 10, 1991.
The option price is the fair market value of the common stock on the
date the option is granted. There are 198,000 shares authorized for
issuance. Each option expires two years from the grant date. Options
outstanding under this plan are as follows:
Weighted average
Number of shares exercise price
Balance at December 31, 1999 72,000 $ 5.93
Granted 36,000 7.69
Exercised (42,000) 5.99
Expired (6,000) 7.75
-------- ----
Balance at December 31, 2000 60,000 $ 6.76
Granted 36,000 3.26
Exercised - -
Expired (24,000) 5.37
-------- ----
Balance at December 31, 2001 72,000 $ 5.48
Granted 36,000 1.17
Exercised - -
Expired (36,000) 7.69
-------- ----
Balance at December 31, 2002 72,000 $ 2.21
====== ====
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
The following table summarizes information about fixed stock options under
the Directors Plan on December 31, 2002:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 0.65 to $ 1.75 36,000 1.300 $ 1.17 18,000 $ 1.68
1.75 to $ 3.50 18,000 0.500 2.40 18,000 2.40
3.50 to 5.25 18,000 0.000 4.13 18,000 4.13
---------------- ------- --------- ------ ------ ------
$ 0.65 to $ 5.25 72,000 .8 years $ 2.21 54,000 $ 2.74
================ ======= ========= ====== ====== ======
1998 Employee Equity Incentive Stock Option Plan
The 1998 Employee Equity Incentive Stock Option Plan (the "1998 Plan") was
adopted by the Board of Directors to attract and retain employees and
provide an incentive for them to assist the Company to achieve
long-range performance goals, and to enable them to participate in the
long-term growth of the Company. Non-employee directors of the Company
and certain officers of the Company are not entitled to participate
under this plan. The authorized number of shares available for
issuance under the 1998 Plan is 1,200,000 shares of common stock.
Shares of common stock were registered for issuance under the 1998
Plan in accordance with the Securities Act of 1933. Under this plan,
stock options may be granted at the discretion of the Stock Option
Committee of the Board of Directors at an option price determined by
the Stock Option Committee. In addition, in 1999, the Board of
Directors authorized the Chief Executive Officer of the Company to
grant up to an aggregate of 100,000 stock options to employees who are
not executive officers or directors of the Company and in 2000, the
Board of Directors authorized the Chief Executive Officer to grant to
such persons stock options to purchase up to 100,000 shares in any
fiscal quarter, not to exceed an aggregate of 350,000 stock options in
any fiscal year. All options under this grant have been at fair market
value on the date of the grant. The options are exercisable in
accordance with terms specified by the Stock Option Committee or, in
certain cases, the Chief Executive Officer. Options outstanding under
this plan are as follows:
Weighted average
Number of shares exercise price
Balance at December 31, 1999 328,050 $ 4.25
Granted 514,650 6.36
Exercised (42,050) 4.27
Expired (150,275) 5.01
------- ----
Balance at December 31, 2000 650,375 $ 5.74
Granted 248,825 2.45
Exercised - -
Expired (199,300) 5.82
------- ----
Balance at December 31, 2001 699,900 $ 4.55
Granted 363,600 1.00
Exercised - -
Expired (283,000) 3.55
------- ----
Balance at December 31, 2002 780,500 $ 3.16
======= ====
The following table summarizes information about fixed stock options under
the 1998 Plan outstanding on December 31, 2002:
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 1.00 to $ 1.75 336,900 2.40 $ 1.01 4,000 $ 1.22
1.75 to 3.50 196,350 1.30 2.68 122,512 2.81
3.50 to 5.25 12,000 1.00 3.63 6,000 3.63
5.25 to 7.00 168,250 0.50 5.86 168,250 5.86
7.00 to 8.75 47,000 0.20 7.98 47,000 7.98
8.75 to 10.50 20,000 0.30 10.00 20,000 10.00
---------------- ------- --------- ----- ------ -----
$ 1.00 to $10.50 780,500 1.5 years $ 3.16 367,762 $ 5.25
================ ======= ========= ====== ======= ======
On December 31, 2002 there were 845,446 additional shares available for
issuance under all three stock option plans. The per share
weighted-average fair value of stock options granted during 2000,
2001, and 2002 was $3.48, $1.47 and $0.54, respectively, on the date
of grant using the Black Scholes option-pricing model.
(12) Income Taxes
Income tax expense (benefit) consists of the following:
Current Deferred Total
Year ending December 31, 2000:
US federal $ 48,160 $ (1,539,591) $ (1,491,431)
State and local - 192,515 192,515
Foreign - - -
------- ----------- -----------
$ 48,160 $ (1,347,076) $ (1,298,916)
====== =========== ===========
Year ending December 31, 2001:
US federal $ - $ 3,337,900 $ 3,337,900
State and local - 462,100 462,100
Foreign - - -
------ ----------- -----------
$ - $ 3,800,000 $ 3,800,000
====== =========== ===========
Year ending December 31, 2002:
US federal $ - $ 1,612,634 $ 1,612,634
State and local - 400,210 400,210
Foreign 1,695 - 1,695
------- ----------- -----------
$ 1,695 $ 2,012,844 $ 2,014,539
======= =========== ===========
Income tax expense (benefit) was ($1,298,916), $3,800,000 and $2,014,539
for the years ending December 31, 2000, 2001 and 2002, respectively, and
differed from the amounts as computed by applying the US statutory tax rate of
34% to pretax loss as a result of the following:
2000 2001 2002
---- ---- ----
Computed "expected" US tax benefit $ (1,487,896) $ (4,939,834) $(1,147,954) -
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit 127,061 304,986 264,139
Increase (reduction) in federal valuation allowance - 8,427,351 2,885,398
Other, net 61,919 7,497 12,956
----------- ----------- ---------
Income tax expense (benefit) $ (1,298,916) $ 3,800,000 $ 2,014,539
=========== =========== =========
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Total income tax expense (benefit) was allocated as follows:
2000 2001 2002
---- ---- ----
Loss from operations $ (1,298,916) $ 3,800,000 $ 2,014,539
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial statement purposes (489,845) - -
----------- --------- -----------
$ (1,788,761) $ 3,800,000 $ 2,014,539
=========== ========= ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2000, 2001, and 2002 are presented below:
2000 2001 2002
---- ---- ----
Deferred tax assets:
Inventories, primarily non-deductible reserves $ 1,830,940 $ 2,862,364 $ 2,688,239
Accounts receivable,
primarily returns and allowances 534,204 497,510 340,213
Accrued expenses, principally provisions
not currently deductible 392,011 345,249 228,992
Net operating loss carryforwards and
credits 3,697,196 8,307,793 9,768,697
Other 525,493 1,224,952 1,544,889
------- --------- ---------
Total gross deferred tax assets 6,979,844 13,237,868 14,571,030
Less valuation allowance (1,167,000) (11,225,024) (14,571,030)
--------- ---------- ----------
Net deferred tax assets $ 5,812,844 $ 2,012,844 $ -
========= ========== ==========
On December 31, 2002, the Company had federal and state net operating
loss carryforwards of approximately $20,841,000 and $20,597,000,
respectively. These federal and state net operating losses are
available to offset future taxable income, and are due to expire
beginning 2018 and 2003, respectively. The Company recorded a deferred
tax asset valuation allowance against a portion of the deferred tax
assets that management believes may expire unused. The valuation
allowance reduces deferred tax assets to reflect the estimated amount
of deferred tax assets, which will more likely not be realized.
Realization of deferred tax assets is dependent upon the generation of
future taxable income or gains from the sale or certain real estate.
The Company has recorded a valuation allowance against its deferred
tax assets because management believes that, after considering all the
available objective evidence, historical and prospective, with greater
weight given to historical evidence, it is more likely than not that
these assets will not be realized.
(13) Significant Customers
Two customers accounted for approximately 15% and 11% of net sales for the
year ending December 31, 2000. Four customers each comprised over 10%
of net sales for the year ending December 31, 2001. Three customers
each comprised over 10% of net sales for the year ending December 31,
2002. On December 31, 2001, two customers comprised approximately 40%
of net accounts receivable. On December 31, 2002, three customers
comprised approximately 79% of net accounts receivable.
(14) Investment in Affiliates
In September 1999, the Company made an investment in a limited liability
company ("LLC"). The Company granted the LLC the rights to a software
license in exchange for 300,000 Class A shares of the LLC, which were
valued by the Company at $300,000. The value at which the outside
investors paid cash for shares received as part of the same equity
infusion was used by the Company to value their shares received. In
May 2000, the LLC converted to a "C" corporation. In March 2001, and
December 2001, the Company made additional investments in the
affiliate for a total of $141,665, maintaining the same percent of
ownership. As a result of the recognition of the Company's share of
equity in losses of the affiliate, the investment balance as of
December 31, 2002 has been reduced to zero.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(15) Supplemental Disclosure of Cash Flow Information
2000 2001 2002
---- ---- ----
Cash paid during year for interest $ - $ 426,803 $ 306,237
====== ========= =========
Cash paid during year for income taxes $ - $ - $ 66,624
====== ========= =========
The tax benefit of the exercise of stock options resulted in increases to common
stock of $489,845 in 2000. No options were exercised in 2001 or 2002.
(16) Dependence on Key Suppliers and Contract Manufacturers
The Company produces its products using components or subassemblies
purchased from third-party suppliers. An important factor in the
Company's liquidity is the receipt and use of "no-charge components".
The Company has entered into supply arrangements with suppliers of
some components that include price and other concessions, including
no-charge components, for meeting certain purchase requirements or
commitments. Under these arrangements, the Company is committed to
purchase approximately $8.0 million of components over a period of
approximately 30-months that commenced on January 1, 2002, provided
that those components are were offered at competitive terms and
prices. The Company believes that at December 31, 2002, that it's on
track to meet the $8.0 million commitment. The Company is also
required to purchase either a minimum percentage, as measured by unit
purchases or dollar amount of components, from a supplier over a
two-year period commencing on January 1, 2002, and the Company is
currently exceeding that percentage. In connection with these
arrangements, the Company became entitled to receive at least $3.0
million of no-charge components, based upon the supplier's market
price for the components in late 2001 and early 2002, and other
pricing concessions based on our purchase volumes. The Company
received $1.2 million of these no-charge components in the fourth
quarter of 2001. The Company received the remainder of the no-charge
components in the first quarter of 2002. Through December 31, 2002,
the Company consumed $1.8 million of these chips in our manufacturing
process and they were shipped in finished products to customers in
2002. In 2002, the Company's purchases and payments were approximately
$2 million less than expected without the no-charge components. Of the
original $3.0 million chip valuation, $.3 million has been written
down as a result of a decline in the market value of the free chips.
The favorable impact to the Company's statement of operations is being
recognized on a delayed basis as a purchase discount over the total
number of components acquired through the 30 month supply agreement.
Since the start of these arrangements in January 2002, the favorable
impact to the Company's statement operations was $.8 million.
A substantial percentage of the Company's manufacturing in 2002 was
performed by a contract manufacturer, SameTime Electronics, Inc.
("SameTime"); the loss of SameTime's services or a material adverse
change in SameTime's business or in the Company's relationship with
SameTime could materially and adversely harm the Company's business.
(17) Segment and Geographic Information
The Company's operations are classified into one reportable segment.
Substantially all of the Company's operations and long-lived assets
reside primarily in the United States. The Company's net sales to
North America and net sales to international locations for 2000, 2001,
and 2002 were comprised as follows:
2000 % of Total 2001 % of Total 2002 % of Total
---- ---------- ---- ---------- ---- ----------
North America $ 40,524,456 70% $ 25,828,176 62% $ 22,375,552 60%
International 17,184,000 30% 15,742,100 38% 14,898,735 40%
---------- --- ---------- --- ---------- ---
Total $ 57,708,456 100% $ 41,570,276 100% $ 37,274,287 100%
========== ==== ========== ==== ========== ====
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(18) Retirement Plan
The Company established a 401(k) retirement savings plan for employees in
January 1996. Under the provisions of the plan, the Company matches
25% of an employee's contribution, up to a maximum of $350 per
employee per year. Total Company contributions in 2000, 2001 and 2002
were $55,314, $46,749 and $34,531, respectively.
(19) Selected Quarterly Financial Information (in thousands, except per share
data, unaudited)
The following table sets forth selected quarterly financial for the years
ended December 31, 2001 and 2002. The operating results for any given
quarter are not necessarily indicative of results for any future
period.
2001 Quarter Ending 2002 Quarter Ending
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept.30 Dec. 31
------- ------- -------- ------- ------- ------- ------- -------
Net sales 10,027 $10,246 $11,719 $ 9,578 $ 8,973 $ 9,207 $10,879 $ 8,215
Costs of goods sold 9,875 8,091 8,889 8,338 7,183 7,225 7,708 5,822
------ ------ ------ ------ ------ ------ ------ ------
Gross profit (loss) 152 2,155 2,830 1,240 1,790 1,982 3,171 2,393
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling 2,224 1,813 1,802 1,642 1,572 1,492 1,423 1,361
General and administrative 1,635 1,503 1,433 3,367 911 852 825 817
Research and development 1,479 1,341 1,334 1,174 1,076 856 879 716
------ ----- ----- ----- ----- ----- ----- -----
Total operating expenses 5,338 4,657 4,569 6,183 3,559 3,200 3,127 2,894
------ ----- ----- ----- ----- ----- ----- -----
Operating profit (loss) (5,186) (2,502) (1,739) (4,943) (1,769) (1,218) 44 (501)
Other income (expense), net (29) (128) 22 (24) 35 11 48 (25)
--- --- -- -- -- -- -- --
Income (loss) before income
taxes and extraordinary item (5,215) (2,630) (1,717) (4,967) (1,734) (1,207) 92 (526)
Income tax expense (benefit) - 3,800 - - 2,013 - - 2
------ ----- ------ ----- ------ ----- ----- -----
Income (loss) before
extraordinary item - - - - (3,747) (1,207) 92 (528)
Extraordinary gain on
elimination of goodwill - - - - 255 - - -
------ ----- ------ ----- ------ ----- ----- -----
Net income (loss) $(5,215) $(2,630) $(5,517) $(4,967) $(3,492) $(1,207) $ 92 $ (528)
===== ===== ===== ===== ===== ===== ===== =====
Net loss per common share:
Basic and diluted $ (0.66) $ (0.33) $ (0.70) $ (0.63) $ (0.44) $ (0.15) $ 0.01 $ (0.07)
Weighted average common
and common equivalent
Shares:
Basic and diluted 7,861 7,861 7,861 7,861 7,861 7,861 7,861 7,861
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits:
(1), (2) The consolidated financial statements and required schedules are
indexed on page F-1.
(3) Exhibits required by the Exhibit Table of Item 601 of SEC
Regulation S-K. (Exhibit numbers refer to numbers in the Exhibit
Table of Item 601.)
3.1 Certificate of Incorporation, filed as Exhibit 3.1 to Zoom
Technologies, Inc. Current Report on Form 8-K dated February 28,
2002, filed with the Commission on March 4, 2002 (the "March 2002
Form 8-K). *
3.2 By-Laws of Zoom Technologies, Inc., filed as Exhibit 3.2 to the
March 2002 Form 8-K. *
**10.1 1990 Stock Option Plan, as amended, of Zoom Telephonics, Inc.,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998. *
**10.2 1991 Director Stock Option Plan, as amended, of Zoom Telephonics,
Inc., filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996 (the "June 1996 Form
10-Q") and as further amended on June 14, 2001, filed as Exhibit
10.2 to the Annual Report on Form 10-K for the fiscal year ending
December 31, 2001. *
10.3 1998 Employee Equity Incentive Plan, as amended, filed as Exhibit
99.1 to Registration Statement on Form S-8 (Reg. No.333-47188).*
10.4 Lease between Zoom Telephonics, Inc. and "E" Street Associates,
filed as Exhibit 10.5 to the June 1996 Form 10-Q. *
10.5 Form of Indemnification Agreement, filed as Exhibit 10.6 to the
June 1996 Form 10-Q. *
**10.6 Letter Agreement between Zoom and an executive officer, filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal
quarter ending September 30, 2000. *
**10.7 Employment Agreement, filed as Exhibit 10.9 to the Form 10-K for
the fiscal year ended December 31, 2002. *
10.8 Mortgage, Security Agreement and Assignment between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2001 (the "March 2001 Form 10-Q"). *
10.9 Commercial Real Estate Promissory Note, between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.2 to the
March 2001 Form 10-Q. *
10.10 Operating Agreement, Zoom Group LLC dated as of March 29, 2002,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the fiscal quarter ended March 2002. *
10.11 Agreement between Zoom Telephonics, Inc and Members of the Zoom
Group dated as of March 22, 2002, filed as Exhibit 10.2 to the
March 2002 Form 10-Q. *
10.12 Reinstatement Agreement, Assignment Agreement and Second
amendment of Purchase and Sale dated as of March 29, 2002, filed
as Exhibit 10.3 to the March 2002 Form 10-Q. *
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
21. Subsidiaries. *
23. Consent of KPMG LLP.
99.1 Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).
99.2 Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).
(b) Reports on Form 8-K.
No current reports on Form 8-K have been filed during the last
quarter for the period covered by this report.
(c) Exhibits - See Item 15(a)(3) above for a list of Exhibits
incorporated herein by reference or filed with this Report.
(d) Schedules - Schedule II: Valuation and Qualifying Accounts.
Schedules other than those listed above have been omitted since
they are either inapplicable or not required.
* In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents previously
filed with the Securities and Exchange Commission, which documents
are hereby incorporated by reference.
** Compensation Plan or Arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ZOOM TECHNOLOGIES, INC.
(Registrant)
By: /s/ Robert A. Crist
----------------------------
Principal Financial and
Accounting Officer
Date: June 12, 2003
CERTIFICATION
I, Frank B. Manning, President and Chief Executive Officer of Zoom Technologies,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K/A of Zoom Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 12, 2003
/s/ Frank B. Manning
-----------------------
Frank B. Manning
President and Chief Executive Officer
CERTIFICATION
I, Robert A. Crist, Chief Financial Officer of Zoom Technologies, Inc., certify
that:
1. I have reviewed this annual report on Form 10-K/A of Zoom Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 12, 2003
/s/ Robert A. Crist
-----------------------
Robert A. Crist
Chief Financial Officer
EXHIBIT INDEX
3.1 Certificate of Incorporation, filed as Exhibit 3.1 to Zoom
Technologies, Inc. Current Report on Form 8-K dated February 28,
2002, filed with the Commission on March 4, 2002 (the "March 2002
Form 8-K). *
3.2 By-Laws of Zoom Technologies, Inc., filed as Exhibit 3.2 to the
March 2002 Form 8-K. *
**10.1 1990 Stock Option Plan, as amended, of Zoom Telephonics, Inc.,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998. *
**10.2 1991 Director Stock Option Plan, as amended, of Zoom Telephonics,
Inc., filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996 (the "June 1996 Form
10-Q") and as further amended on June 14, 2001, filed as Exhibit
10.2 to the Annual Report on Form 10-K for the fiscal year ending
December 31, 2001. *
10.3 1998 Employee Equity Incentive Plan, as amended filed as Exhibit
99.1 to Registration Statement on Form S-8 (Reg. No. 333-47188).*
10.4 Lease between Zoom Telephonics, Inc. and "E" Street Associates,
filed as Exhibit 10.5 to the June 1996 Form 10-Q.*
10.5 Form of Indemnification Agreement, filed as Exhibit 10.6 to the
June 1996 Form 10-Q. *
**10.6 Letter Agreement between Zoom and an executive officer, filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal
quarter ending September 30, 2000. *
**10.7 Employment Agreement, filed as Exhibit 10.9 to the Form 10-K for
the fiscal year ended December 31, 2002. *
10.8 Mortgage, Security Agreement and Assignment between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2001 (the "March 2001 Form 10-Q"). *
10.9 Commercial Real Estate Promissory Note, between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.2 to the
March 2001 Form 10-Q. *
10.10 Operating Agreement, Zoom Group LLC dated as of March 29, 2002,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the fiscal quarter ended March 2002. *
10.11 Agreement between Zoom Telephonics, Inc and Members of the Zoom
Group dated as of March 22, 2002, filed as Exhibit 10.2 to the
March 2002 Form 10-Q. *
10.12 Reinstatement Agreement, Assignment Agreement and Second
amendment of Purchase and Sale dated as of March 29, 2002, filed
as Exhibit 10.3 to the March 2002 Form 10-Q. *
21. Subsidiaries. *
23. Consent of KPMG LLP.
99.1 Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).
99.2 Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).
* In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents previously
filed with the Securities and Exchange Commission, which documents
are hereby incorporated by reference.
** Compensation Plan or Arrangement.
Schedule II
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
Years ending December 31, 2000, 2001 and 2002
Balance at Charged Balance
Beginning (Credited) to Amount at end
Description of year Expense written off of year
-------- ------- ----------- -------
Reserve for doubtful accounts $ 958,663 $ (43,608) $ 560,849 $ 354,206
Reserve for price protection 649,686 235,651 686,588 198,749
Reserve for sales returns 2,934,019 7,532,526 9,401,130 1,065,415
COOP advertising and other
allowances 2,228,223 6,566,840 7,285,978 1,509,085
--------- --------- ---------- ---------
Year ending December 31, 2000 $ 6,770,591 $14,291,409 $17,934,545 $ 3,127,455
========= ========== ========== =========
Reserve for doubtful accounts $ 354,206 $ 162,416 $ 284,351 $ 232,271
Reserve for price protection 198,749 943,820 403,456 739,113
Reserve for sales returns 1,065,415 5,628,163 6,013,536 680,042
COOP advertising and other
allowances 1,509,085 4,332,751 4,676,813 1,165,023
--------- --------- ---------- ---------
Year ending December 31, 2001 $ 3,127,455 $11,067,150 $11,378,156 $ 2,816,449
========= ========== ========== =========
Reserve for doubtful accounts $ 232,271 $ 36,944 $ 209,809 $ 59,406
Reserve for price protection 739,113 699,482 774,263 664,332
Reserve for sales returns 680,042 756,012 522,040 914,014
COOP advertising and other
allowances 1,165,023 3,960,531 4,116,898 1,008,656
--------- --------- ---------- ---------
Year ending December 31, 2002 $ 2,816,449 $ 5,452,969 $ 5,623,010 $ 2,646,408
========= ========== ========== =========
EXHIBIT 23
REPORT ON FINANCIAL STATEMENT SCHEDULE AND
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors;
Zoom Technologies, Inc.
The audits referred to in our report dated February 11, 2003, except as to notes
3 and 7(c), which are as of March 28, 2003, included the related financial
statement schedule for each of the years in the three-year period ended December
31, 2002 included in the annual report on Form 10-K. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We consent to incorporation by reference in the registration statements (No.
33-42834, No.33-90930, No.333-60565, No.333-75575, No.33-90191, No.333-47188 and
No.333-97573) on Form S-8 of Zoom Technologies, Inc., of our report dated
February 11, 2003, except as to notes 3 and 7(c), which are as of March 28,
2003, relating to the consolidated balance sheets of Zoom Technologies, Inc. and
subsidiary as of December 31, 2001 and 2002, and the related consolidated
statements of operations, stockholders' equity and comprehensive loss and cash
flows and related schedule for each of the years in the three-year period ended
December 31, 2002, which report appears in the December 31, 2002 annual report
on Form 10-K/A of Zoom Technologies, Inc.
/s/ KPMG LLP
Boston, Massachusetts
March 28, 2003
Exhibit 99.1
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United
States Code)
I, Frank B. Manning, President and Chief Executive Officer of Zoom
Technologies, Inc., a Delaware corporation (the "Company"), do hereby certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code) that, to the
best of my knowledge and belief:
(1) The Annual Report on Form 10-K/A for the year ended December 31, 2002 (the
"Form 10-K") of the Company fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Form 10-K/A fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: June 12, 2003 /s/ Frank B. Manning
------------------------------------
Frank B. Manning
President and Chief Executive Officer
Exhibit 99.2
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United
States Code)
I, Robert A. Crist, Chief Financial Officer of Zoom Technologies, Inc., a
Delaware corporation (the "Company"), do hereby certify, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code) that, to the best of my knowledge
and belief:
(1) The Annual Report on Form 10-K/A for the year ended December 31, 2002 (the
"Form 10-K") of the Company fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Form 10-K/A fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: June 12, 2003 /s/ Robert A. Crist
------------------------------------
Robert A. Crist
Chief Financial Officer