-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T2D5fgG3XhdlopZgg5Z45GFFsOhEfU4JZkqewi0JhjnZgXJrRqUAFhJqCeOxuUgT RhkWHKbHdY5H6diwmY/+GQ== 0000822708-04-000128.txt : 20041112 0000822708-04-000128.hdr.sgml : 20041111 20041112134159 ACCESSION NUMBER: 0000822708-04-000128 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041112 DATE AS OF CHANGE: 20041112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZOOM TECHNOLOGIES INC CENTRAL INDEX KEY: 0000822708 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 510448969 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18672 FILM NUMBER: 041137909 BUSINESS ADDRESS: STREET 1: 207 SOUTH ST CITY: BOSTON STATE: MA ZIP: 02111 BUSINESS PHONE: 6174231072 MAIL ADDRESS: STREET 1: 207 SOUTH ST CITY: BOSTON STATE: MA ZIP: 02111 FORMER COMPANY: FORMER CONFORMED NAME: ZOOM TELEPHONICS INC DATE OF NAME CHANGE: 19950622 10-Q 1 q310qvf.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 0-18672 ZOOM TECHNOLOGIES, INC. ---------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 51-0448969 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 207 South Street, Boston, Massachusetts 02111 - --------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (617) 423-1072 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES [ ] NO [X] The number of shares outstanding of the registrant's Common Stock, $.01 Par Value, as of November 3, 2004 was 8,883,466 shares. ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY INDEX Part I. Financial Information Page Item 1. Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 (unaudited) 3 Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (unaudited) 5 Notes to Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Item 4. Controls and Procedures 20 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 Exhibit Index 23 PART I - FINANCIAL INFORMATION ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY Consolidated Balance Sheets (unaudited)
September 30, 2004 December 31, 2003 ------------------ ----------------- Assets Current assets: Cash and cash equivalents $ 10,339,816 $ 9,904,384 Accounts receivable, net of reserves for doubtful accounts, returns, and allowances of $1,674,208 at September 30, 2004 and $1,790,205 at December 31, 2003 2,698,792 3,944,699 Inventories 5,369,610 4,771,216 Prepaid expenses and other current assets 358,068 434,694 ---------- ---------- Total current assets 18,766,286 19,054,993 Property, plant and equipment, net 2,733,422 2,918,985 ---------- ---------- Total assets $ 21,499,708 $ 21,973,978 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 230,891 $ 223,833 Accounts payable 1,770,176 2,172,028 Accrued expenses 1,163,559 1,011,910 ---------- ---------- Total current liabilities 3,164,626 3,407,771 Long-term debt, less current portion 4,926,368 5,095,986 ---------- ---------- Total liabilities 8,090,994 8,503,757 ---------- ---------- Stockholders' equity: Common stock, $0.01 par value. Authorized 25,000,000 shares; issued 8,882,041 shares and outstanding 8,873,641 shares at September 30, 2004 and issued 8,084,616 shares and outstanding 8,076,216 shares at December 31, 2003 88,820 80,846 Additional paid-in capital 30,513,478 28,500,421 Retained earnings (accumulated deficit) (17,604,149) (15,438,333) Accumulated other comprehensive income (loss) 417,887 334,609 Treasury stock, at cost (7,322) (7,322) ---------- ---------- Total stockholders' equity 13,408,714 13,470,221 ---------- ---------- Total liabilities and stockholders' equity $ 21,499,708 $ 21,973,978 ========== ==========
See accompanying notes to consolidated financial statements. ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- --------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net sales $ 7,142,608 $ 9,103,652 $ 23,025,683 $ 24,178,829 Costs of goods sold 5,645,772 6,145,972 16,966,396 17,316,554 ------------ ------------ ------------ ------------ Gross profit 1,496,836 2,957,680 6,059,287 6,862,275 Operating expenses: Selling 1,114,928 1,376,364 3,511,959 3,965,098 General and administrative 780,681 611,753 2,797,396 2,412,588 Research and development 721,942 659,806 2,065,603 2,154,979 ------------ ------------ ------------ ------------ Total operating expenses 2,617,551 2,647,923 8,374,958 8,532,665 ------------ ------------ ------------ ------------ Operating income (loss) (1,120,715) 309,757 (2,315,671) (1,670,390) Other income (expense): Interest income 40,241 17,017 89,848 61,601 Interest (expense) (52,950) (52,672) (159,109) (147,936) Other, net 105,035 131,941 219,116 332,085 ------------ ------------ ------------ ------------ Total other income (expense), net 92,326 96,286 149,855 245,750 ------------ ------------ ------------ ------------ Income (loss) before income tax expense (1,028,389) 406,043 (2,165,816) (1,424,640) Income tax expense (benefit) - - - - ------------ ------------ ------------ ------------ Net income (loss) $ (1,028,389) $ 406,043 $ (2,165,816) $( 1,424,640) ============ ============ ============ ============ Earnings (loss) per common share: Basic $ (.12) $ .05 $ (.26) $ (.18) ============ ============ ============ ============ Diluted $ (.12) $ .05 $ (.26) $ (.18) ============ ============ ============ ============ Weighted average common and common equivalent shares: Basic 8,791,016 7,857,117 8,486,167 7,854,315 ============ ============ ============ ============ Diluted 8,791,016 8,081,312 8,486,167 7,854,315 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2004 2003 -------------- -------------- Cash flows from operating activities: Net income (loss) $ (2,165,816) $ (1,424,640) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Non-operating gain on refund of deposit - (40,237) Depreciation and amortization 330,794 492,451 Changes in operating assets and liabilities: Accounts receivable, net 1,331,756 (636,410) Inventories (598,394) 2,983,434 Prepaid expenses and other assets 76,626 464,355 Accounts payable and accrued expenses (250,203) (578,329) ---------- --------- Net cash provided by (used in) operating activities (1,275,237) 1,260,624 ---------- --------- Cash flows from investing activities: Additions to property, plant and equipment (145,231) (24,670) ---------- --------- Net cash provided by (used in) investing activities (145,231) (24,670) ---------- --------- Cash flows from financing activities: Principal payments on long-term debt (162,560) (158,893) Proceeds from exercise of stock options 2,021,031 75,717 Purchase of Treasury stock - (5,126) ---------- --------- Net cash provided by (used in) financing activities 1,858,471 (88,302) ---------- --------- Effect of exchange rate changes on cash and cash equivalents (2,571) 910 ---------- --------- Net increase (decrease) in cash and cash equivalents 435,432 1,148,562 Cash and cash equivalents - beginning of period 9,904,384 7,612,274 ---------- --------- Cash and cash equivalents - end of period $ 10,339,816 $ 8,760,836 ========== ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 159,109 $ 163,978 ========= ========= Income taxes $ - $ - ========= =========
See accompanying notes to consolidated financial statements. ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (1) Summary of Significant Accounting Policies (a) Basis of Presentation and Principles of Consolidation The consolidated financial statements of Zoom Technologies, Inc. (the "Company") presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2003 included in the Company's 2003 Annual Report on Form 10-K. The consolidated balance sheet as of September 30, 2004, the consolidated statements of operations for the three months and nine months ended September 30, 2004 and 2003, and the consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003 are unaudited, but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of results for these interim periods. The consolidated financial statements include the accounts and operations of the Company's wholly-owned subsidiary, Zoom Telephonics, Inc., a Delaware corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the entire year ending December 31, 2004. (b) Stock-Based Compensation The Company accounts for its stock option plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees, and Related Interpretations." No stock-based compensation expense is reflected in net income (loss) for these plans, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock Based Compensation", to stock based compensation:
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, (UNAUDITED) (UNAUDITED) --------------------------- --------------------------- 2004 2003 2004 2003 ------------ ----------- ------------ ----------- Net income (loss), as reported......... $(1,028,389) $ 406,043 $(2,165,816) $(1,424,640) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects............ (139,829) (43,069) (486,421) (265,873) ------------ ------------ ------------ ------------ Pro forma net income (loss)............ $(1,168,218) $ 362,974 $(2,652,237) $(1,690,513) ============ ============ ============ ============ Earnings (loss) per share: Basic and diluted - as reported........ $ (.12) $ 0.05 $ (0.26) $ (0.18) Basic and diluted - pro forma.......... $ (.13) $ 0.05 $ (0.31) $ (0.22)
(c) RECENTLY ISSUED ACCOUNTING STANDARDS In October 2004, the FASB indicated that they will require stock-based employee compensation to be recorded as a charge to earnings pursuant to an exposure draft they have published for comment, which they believe will become effective for awards that are granted in interim or annual periods beginning after June 15, 2004. The Company will continue to monitor the progress on the issuance of this standard and the impact it may have on the Company's consolidated financial statements. (2) Liquidity On December 31, 2003 Zoom had cash and cash equivalents of approximately $9.9 million. On September 30, 2004 Zoom had cash and cash equivalents of approximately $10.3 million. Currently the Company does not have a debt facility from which it can borrow. The Company is currently reviewing a non-binding proposal from a lender for a one-year $2 million line of credit. Should Zoom decide to proceed with this facility, it cannot assure that the debt facility will ultimately be available on terms acceptable to the Company, if at all, or that the parties will be able to agree on definitive documentation. To conserve cash and manage its liquidity, the Company implemented expense reductions throughout the past three years. The employee headcount was 185 at December 31, 2002, 159 at December 31, 2003 and 155 at September 30, 2004. The Company intends to continue to assess its cost structure as it relates to its revenues and cash position in 2004 and thereafter, and may make further reductions if these actions are deemed necessary. Management believes it has sufficient resources to fund its planned operations over the next 12 months. However, if over time the Company continues to incur losses or does not raise capital, the Company's longer-term ability to continue as a going concern and achieve its intended business objectives could be adversely affected. See "Risk Factors" below, for further information with respect to events and uncertainties that could harm the Company's business, operating results, and financial condition. (3) Earnings Per Share The reconciliation of the numerators and denominators of the basic and diluted net earnings (loss) per share computations for the Company's reported net income (loss) is as follows:
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 2004 2003 2004 2003 ------------ ------------- ---------- ----------- Basic: Net income (loss) $(1,028,389) $ 406,043 $(2,165,816) $(1,424,640) Weighted average shares outstanding 8,791,016 7,857,117 8,486,167 7,854,315 ----------- ----------- ----------- ----------- Net earnings (loss) per share $ (.12) $ .05 $ (.26) $ (.18) =========== =========== =========== =========== Diluted: Net income (loss) $(1,028,389) $ 406,043 $(2,165,816) $(1,424,640) Weighted average shares outstanding 8,791,016 7,857,117 8,486,167 7,854,315 Net effect of dilutive stock options based on the Treasury stock method using average market price -- 224,195 -- -- Weighted average shares outstanding 8,791,016 8,081,312 8,486,167 7,854,315 ----------- ----------- ----------- ----------- Net earnings (loss) per share $ (.12) $ .05 $ (.26) $ (.18) =========== =========== =========== ===========
Potential common shares for which inclusion would have the effect of increasing diluted earnings per share (i.e., antidilutive) are excluded from the computations. Options to purchase 1,054,050 and 1,478,600 shares of common stock at September 30, 2004 and 2003, respectively, were outstanding but not included in the computations of diluted earnings per share for the three months ended September 30, 2004 and the nine months ended September 30, 2004 and 2003, as their effect would be antidilutive. (4) Inventories
Inventories consist of the following: September 30, 2004 December 31, 2003 ------------------ ----------------- Raw materials $ 2,370,156 $ 1,754,850 Work in process 1,493,648 639,425 Finished goods 1,505,806 2,376,941 ---------- ---------- $ 5,369,610 $ 4,771,216 ========== ==========
During the three months ended September 30, 2004 and September 30, 2003 the Company recorded no lower of cost or market write-downs related to broadband and wireless inventory. During the nine months ended September 30, 2004 and September 30, 2003, the Company recorded lower of cost or market write-downs of $0 and $495,099, respectively, related to broadband and wireless inventory. (5) Comprehensive Income (Loss) Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" establishes rules for the reporting and display of comprehensive income (loss) and its components; however, it has no impact on the Company's net income (loss). SFAS No. 130 requires all changes in equity from non-owner sources to be included in the determination of comprehensive income (loss). The components of comprehensive income (loss), net of tax, are as follows:
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net income (loss) $(1,028,389) $ 406,043 $(2,165,816) $(1,424,640) Foreign currency translation adjustment (12,779) 90,724 83,278 110,527 ----------- ----------- ----------- ----------- Comprehensive income (loss) $(1,041,168) $ 496,767 $(2,082,538) $(1,314,113) =========== =========== =========== ===========
At September 30, 2004 and December 31, 2003, Accumulated other comprehensive income (loss) as reported on the Company's balance sheet is comprised solely of foreign currency translation adjustments. (6) Long-Term Debt On January 10, 2001 the Company obtained a mortgage loan for $6 million secured by the real estate property located at 201 and 207 South Street, Boston, Massachusetts. This is a 20-year direct reduction mortgage with a five-year balloon payment due January 10, 2006. As of September 30, 2004, our indebtedness was $5.2 million. This real estate was appraised on July 24, 2002 at $9.3 million and generally the real estate market in Boston has remained relatively flat. The interest rate on the mortgage is fixed for one year, based on the one year Federal Home Loan Bank rate plus 2.5% per annum. The interest rate is adjusted on January 10th of each calendar year commencing on January 10, 2002. Zoom's interest rate was adjusted to 3.99% on January 10, 2004. (7) Commitments During the nine month period ended September 30, 2004 there were no material changes to the capital commitments and contractual obligations of the Company from those disclosed in the Form 10-K for the year ended December 31, 2003. (8) Segment and Geographic Information The Company's operations are classified into one reportable segment. The Company's United States and international net sales for the three and nine months ended September 30, 2004 and 2003, respectively, were comprised as follows:
Three Months Three Months Nine Months Nine Months Ended % of Ended % of Ended % of Ended % of Sept 30, 2004 Total Sept 30, 2003 Total Sept 30, 2004 Total Sept 30, 2003 Total ------------- ----- ------------- ----- ------------- ----- ------------- ----- United States $ 3,321,564 46% $ 5,526,123 61% $10,938,878 48% $14,423,455 60% International-UK 1,835,555 26% 2,805,007 31% 6,219,888 27% 7,415,266 30% Other International 1,985,489 28% 772,522 8% 5,866,917 25% 2,340,108 10% ----------- ---- ----------- ---- ----------- ---- ----------- ---- Total $ 7,142,608 100% $ 9,103,652 100% $23,025,683 100% $24,178,829 100% =========== ==== =========== ==== =========== ==== =========== ====
(9) Customer Concentrations Three customers accounted individually for more than 10% of net sales in the first nine months of 2004 and collectively for approximately 36% of net sales in the first nine months of 2004. In the third quarter of 2004, these same three customers accounted for approximately 34% of net sales. Of the three customers that accounted individually for more than 10% of net sales, one is included in each of these Footnote (8) geographic categories: Other International, the UK, and the United States. Our net sales and operating income could fluctuate significantly due to, among other things, new product introductions, old product phase-outs, approvals and delays in the deployment by service providers of ADSL and cable service in these countries, changes in political or economic conditions, or the loss, reduction of business, or less favorable terms for any of our significant customers. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the safe harbor statement and the risk factors contained herein and set forth in our Annual Report on Form 10-K for the year ended December 31, 2003. Readers should also be cautioned that results of any reported period are often not indicative of results for any future period. OVERVIEW Zoom primarily sells communication products, principally dial-up and ADSL modems, to retailers, distributors, Internet Service Providers (ISPs), and Original Equipment Manufacturers (OEMs). We sell our products to these customers through our direct sales force and through commissioned sales representatives. The majority of our employees work in Boston, Massachusetts, either in our corporate-owned headquarters or our leased production facility. We also have a sales and support office in the United Kingdom and a support center in Boca Raton, Florida. Historically most of Zoom's sales have resulted from the after-market sale of dial-up modems through retailers to end-users for use in the home or business. These end-user customers typically either wanted to add a modem to a computer that did not have a modem, needed to replace a defective modem, or wanted to upgrade to a modem with a higher speed or more advanced features. Since the vast majority of retail personal computers now come with 56K modems installed, and since 56K is the highest speed dial-up modem available, the upgrade market has steadily declined over the past few years. This decline, coupled with competition from broadband access devices like ADSL and cable modems and lower selling prices for dial-up modems, has resulted in a corresponding decline in Zoom's dial-up modem sales. As a vehicle for potential growth, Zoom has made significant investments in broadband and other technologies. The broadband market has grown rapidly over the past few years and is expected to continue to grow quickly. So far Zoom has been more successful in the ADSL modem market than in the cable modem market. Zoom's product philosophy emphasizes quality, reliability, and low cost. We therefore continually seek to optimize our product designs and lower our cost of goods through intelligent design, aggressive outsourcing, and the use of new technology. Most of our products use modem or other chipsets purchased from outside vendors. This allows us to take advantage of the extensive research and development capabilities and competitiveness of our chipset suppliers and reduces our development time and the associated costs and risks of bringing new products to market. As a result of this approach, Zoom is able to quickly develop new and innovative products while keeping its research and development expense relatively small as a percentage of sales. Zoom also outsources most of its board-level manufacturing, allowing us to take advantage of the competitive worldwide market for contract manufacturing services. This contract manufacturing frees us from the capital equipment cost and the inflexibility, expense, and management burden associated with maintaining a dedicated workforce for electronics assembly operations. Packaging, testing and shipping are typically done at our Boston, Massachusetts manufacturing facility. This helps to reduce shipping costs from our contract assemblers and gives us the opportunity to monitor manufacturing quality and to efficiently customize products for our customers. In recent years Zoom has benefited from purchase discount programs with our major chipset suppliers. These agreements have resulted in reduced unit costs for our dial-up modems. From the first quarter of 2002 through the third quarter of 2004, we realized significant benefits to our Cost of Goods Sold as a result of these agreements. The benefit to Cost of Goods Sold from these purchase discount agreements will end in the fourth quarter of 2004. Zoom hopes to replace these agreements, but our ability to negotiate favorable terms will depend on a number of factors including our projected volumes, our ability to reach those volumes, and the competitive landscape in the chipset market. The failure to obtain new favorable discount programs could increase our Cost of Goods Sold and could have a significant adverse effect on the gross profit of our products that use chipsets covered by our previous agreements. Our net sales for the third quarter of 2004 declined 21.5% from the third quarter of 2003. Our net sales for the first and second quarters of 2004 increased 3.4% and 7.4% from the first and second quarters of 2003, respectively. In all three quarters our ADSL modem sales increased as compared to the previous year's corresponding quarter, and our dial-up modem sales declined. While we remain optimistic about continued success in the ADSL modem area, our ADSL sales are currently concentrated with a small number of customers, so there is no predictable uniformity for our quarterly ADSL sales and our sales may fluctuate significantly. We are continuing our efforts to expand our ADSL customer base and to use our strength in ADSL to expand our ADSL product line and enter new markets. Late in the third quarter of 2004 we introduced a new product which incorporates "Voice over Internet Protocol" or "VoIP" capability into an ADSL modem. We also introduced our own VoIP (Voice over Internet Protocol) telephone service called "Global Village(TM)" to offer free IP-to-IP phone service, low-cost calling to virtually anyone worldwide, and the option for home users of unlimited fixed price domestic calling. During the past few years, to conserve cash and manage our liquidity we implemented expense reductions, including reductions in employee headcount. Our employee headcount was 185 at December 31, 2002 which was reduced to 159 at December 31, 2003 and 155 at September 30, 2004. We intend to continue to assess our cost structure as it relates to our revenues and cash position in 2004, and may make further reductions if these actions are deemed necessary. Our cash and cash equivalents balance at September 30, 2004 was $10.3 million, up from $9.9 million at December 31, 2003. This improvement resulted primarily from cash received from the exercise of employee stock options, partially offset by a reduction of cash from operating activities. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The following is a discussion of what we view as our more significant accounting policies and estimates. These policies and estimates are also described in the notes to our audited consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003. As described below, management judgments and estimates must be made and used in connection with the preparation of our consolidated financial statements. Where noted, material differences could result in the amount and timing of our net sales, costs, and expenses for any period if we made different judgments or used different estimates. REVENUE (NET SALES) RECOGNITION. We currently sell hardware products to our customers. These products include dial-up modems, embedded modems, cable modems, PC cameras, ISDN and ADSL modems, telephone dialers, and wireless and wired networking equipment. While we generally have not sold software or services, we now offer phone service to VoIP customers under our Global Village brand. We currently derive our net sales primarily from the sale of hardware products to four types of customers: o computer product retailers, o computer product distributors, o Internet Service Providers (ISPs), and o original equipment manufacturers (OEMs). We recognize net sales for all four types of customers at the point when the customer takes legal ownership of the delivered products. Legal ownership passes from Zoom to the customer based on the contractual FOB point specified in signed contracts and purchase orders, which are both used extensively. Many of our customer contracts or purchase orders specify FOB destination. We verify the delivery date on all significant FOB destination shipments made during the last 10 business days of each quarter. Our net sales to computer products retailers are reduced by certain events that are characteristic of sales of hardware to computer products retailers. These events are product returns, certain sales and marketing incentives, price protection refunds, and consumer and in-store mail-in rebates. Each of these is accounted for as a reduction to net sales based on detailed management estimates, which are reconciled to actual customer or end-consumer credits on a monthly or quarterly basis. Product Returns. Products are returned by retail stores and distributors for inventory balancing, contractual stock rotation privileges, and warranty repair or replacements. We estimate the sales and cost value of expected future product returns of previously sold products. Our estimates for product returns are based on recent historical trends plus estimates for returns prompted by, among other things, new product introductions, announced stock rotations and announced customer store closings, etc. Management reviews historical returns, current economic trends, and changes in customer demand and acceptance of our products when estimating sales return allowances. The estimate for future returns is recorded as a reserve against accounts receivable, a reduction of net sales, and the corresponding change to inventory and cost of sales. The relationship of quarterly physical product returns to quarterly product sales has remained relatively stable for many years. Price Protection Refunds. We have a policy of offering price protection to certain of our retailer and distributor customers for some or all their inventory. Under the price protection policies, when we reduce our prices for a product, the customer receives a credit for the difference between the original purchase price and our reduced price for their unsold inventory of that product. Our estimates for price protection refunds are based on a detailed understanding and tracking by customer and by sales program. Estimated price protection refunds are recorded in the same period as the announcement of a pricing change. Information from customer inventory-on-hand reports or from direct communications with the customers is used to estimate the refund, which is recorded as a reduction of net sales and a reserve against accounts receivable. In the third quarter of 2004, we recorded a price protection charge against sales in the UK of $.25 million, primarily the result of price reductions on dial-up modems. Sales and Marketing Incentives. Many of our retail customers require sales and marketing support funding, usually set as a percentage of our sales in their stores. The percentages are taken from our customer contracts. Consumer Mail-In and In-Store Rebates and Store Rebates. Our estimates for consumer mail-in rebates are based on a detailed understanding and tracking by customer and by sales program, supported by actual rebate claims processed by the rebate redemption centers plus an accrual for an estimated lag in processing at the redemption centers. Our estimates for store rebates are comprised of actual credit requests from the eligible customers. The estimate for mail-in and store rebates is recorded as a reserve against accounts receivable and a reduction of net sales in the same period that the rebate obligation was triggered. To ensure that the sales, discounts, and marketing incentives are recorded in the proper period, we perform extensive tracking and documenting by customer, by period, and by type of marketing event. This tracking includes reconciliation to the accounts receivable records for deductions taken by our customers for these discounts and incentives. ACCOUNTS RECEIVABLE VALUATION. We establish accounts receivable reserves equal to the above-discussed net sales adjustments for estimates of product returns, price protection refunds, and consumer and store rebates. These reserves are drawn down as actual credits are issued to the customer's accounts. Our bad-debt write-offs have not been significant during the last three years. INVENTORY VALUATION AND COST OF GOODS SOLD. Inventory is valued on a standard cost basis where the material standards are periodically updated for current material pricing. Reserves for obsolete inventory are established by management based on usability reviews performed each quarter. Our reserves against the inventory of a particular product range from 0% to 100%, based on management's estimate of the probability that the material will not be consumed. Our valuation process is to compare our cost to the selling prices each quarter, less cost to sell or dispose, and if the selling price of a product is less than the "if completed" cost of our inventory, we write-down the inventory on a "lower of cost or market" basis. In 2002 we 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 one of these arrangements, we 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. We believe that at September 30, 2004, we are on track to meet the $8.0 million commitment in 2004. In connection with this arrangement, we became entitled to receive at least $3.0 million of no-charge components, based upon the supplier's market price for the components in late 2001 and early 2002, and other pricing concessions based on our purchase volumes. We received $1.2 million of these no-charge components in the fourth quarter of 2001. We received the remainder of the no-charge components in the first quarter of 2002. The favorable impact to our statement of operations has been calculated as a purchase discount over the estimated total number of components acquired through the approximate 30 month supply agreement and recognized on a delayed basis as the products employing the acquired components involved in the supply arrangement are sold. This method of accounting has been consistent each year. The benefit to our statement of operations for the delayed recognition of the $3.0 million of no-charge components is expected to end in the fourth quarter of 2004. VALUATION AND IMPAIRMENT OF DEFERRED TAX ASSETS. As part of the process of preparing our consolidated financial statements we are required to estimate our income tax expense and deferred income tax position. This process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Significant management judgment is required in determining our provision for income taxes and any valuation allowance recorded against our net deferred tax assets. At September 30, 2004, we currently have a 100% valuation allowance against our deferred tax assets. It is management's estimate that, after considering all the available objective evidence, historical and prospective, with greater weight given to historical evidence, it is more likely than not that these assets will not be realized. If we establish a record of continuing profitability, at some point we will be required to reverse the valuation allowance and restore the deferred asset value to the balance sheet, recording an equal income tax benefit which will increase net income in that period(s). VALUATION OF INVESTMENT IN AFFILIATES. We have a minority interest in a privately held software development company, which we have been accounting for under the equity method of accounting. Under the equity method of accounting, our investment is increased or decreased, not below zero, based upon our proportionate share of the net earnings or losses of the investee company. We made our original investment in 1999, at the time of the company's formation, and have subsequently made additional investments which have maintained our 30% ownership interest. As a result of the losses incurred by the investee subsequent to our investments, our investment balance was reduced to zero during 2002. We discontinued applying the equity method when the investment was reduced to zero and did not provide for additional losses, as we have not guaranteed obligations of the investee and are not committed to provide further financial support. The investee has recently reported to us that it is beginning to achieve profitability and that its prospects have been improving in recent months. We have requested that management of the investee provide us with audited financial statements in the near term to allow us to verify this financial information. If the investee reports net income in future periods, we will resume applying the equity method only after our share of that net income equals the share of net losses not recognized during the period the equity method was suspended. Results of Operations SUMMARY. Net sales were $7.1 million for the third quarter ended September 30, 2004, down 21.5% from $9.1 million for the third quarter of 2003. We had a net loss of $1.0 million for the third quarter of 2004, compared to net income of $.4 million for the third quarter of 2003. Loss per diluted share was $0.12 for the third quarter of 2004 compared to net income per diluted share of $.05 for the third quarter of 2003. Net sales were $23.0 million for the nine months ended September 30, 2004, down 4.8% from $24.2 million for the nine months ended September 30, 2003. We had a net loss of $2.2 million for the nine months ended September 30, 2004, compared to a net loss of $1.4 million for the nine months ended September 30, 2003. Loss per diluted share for the nine month period in 2004 was $.26 compared to a loss per diluted share of $.18 for the nine month period in 2003. NET SALES. Our net sales were $7.1 million for the third quarter ended September 30, 2004, down 21.5% from $9.1 million for the third quarter of 2003. Net sales were $23.0 million for the nine months ended September 30, 2004, down 4.8% from $24.2 million for the nine months ended September 30, 2003. The $2.0 million net sales decrease for the third quarter of 2004 from the third quarter of 2003 was primarily due to a $2.9 million decrease in dial-up modem sales, a $.4 million decrease in cable modem and other product sales, and a $1.3 million increase in ADSL modem sales. The $1.2 million net sales decrease for the first nine months of 2004 from the first nine months of 2003 was primarily due to a decrease in dial-up modem sales of $5.3 million, a decrease of cable modem and other product sales of $1.1 million, and an increase of $5.2 million in ADSL modem sales. Dial-up modem sales declined due to a decrease of both dial-up modem unit sales and, to a lesser extent, declining dial-up modem average selling prices. Dial-up modem unit sales declined primarily as a result of the loss of a major retail customer, Best Buy, and the continued decline of the dial-up modem after-market, due in part to the trend toward faster connection speeds and broadband access products. The increase in ADSL modem sales was primarily due to an increase in unit sales in international markets, which was partially offset in the period by lower selling prices as a result of competitive pressures. Our net sales in the United States declined from $5.5 million in the third quarter of 2003 to $3.3 million in the third quarter of 2004. Our net sales in the United States declined from $14.4 million in the first nine months of 2003 to $10.9 million in the first nine months of 2004. Our international net sales increased from $3.6 million in the third quarter of 2003 to $3.8 million in the third quarter of 2004. Our international net sales increased from $9.8 million in the first nine months of 2003 to $12.1 million in the first nine months of 2004. These changes reflect our declining sales of dial-up modems worldwide, our relatively strong ADSL sales in the international markets, and the positive currency impact on a significant portion of our international sales. The positive currency impact on our net sales was $.2 million for the third quarter of 2004 as measured against the third quarter of 2003, and $.7 million for the first nine months of 2004 as measured against the first nine months of 2003. Three customers accounted individually for more than 10% of net sales in the first nine months of 2004 and collectively for approximately 36% of total net sales in the first nine months of 2004. In the third quarter of 2004, these same three customers accounted for approximately 34% of net sales. Of the three customers that accounted individually for more than 10% of net sales, one is included in each of these Footnote (8) geographic categories: Other International, the UK, and the United States. Our net sales and operating income could fluctuate significantly due to, among other things, approvals and delays in the deployment by service providers of ADSL and cable service in these countries, changes in political or economic conditions, or the loss, reduction of business, or less favorable terms for any of our significant customers. GROSS PROFIT. Our gross profit decreased to $1.5 million for the third quarter of 2004 from $3.0 million for the third quarter of 2003. Our gross profit as a percentage of net sales was 21.0% for the third quarter of 2004 compared to 32.5% for the third quarter of 2003. Our gross profit decreased to $6.1 million for the first nine months of 2004 from $6.9 million for the first nine months of 2003. Our gross profit as a percentage of net sales reduced to 26.3% for the first nine months of 2004 from 28.4% for the first nine months of 2003. The decline in gross profit as a percentage of net sales in the third quarter of 2004 compared to the third quarter of 2003 resulted primarily from lower sales, a product mix shift away from dial-up modems, our highest margin product category, the negative effect of fixed manufacturing costs spread over lower sales, and a $.3 million price protection credit in the UK due to the lowering of selling prices in some channels. The decline in gross profit as a percentage of net sales in the first nine months of 2004 compared to the first nine months of 2003 resulted primarily from lower sales, a product mix shift away from dial-up modems, our highest margin product category, and a decline in ADSL margins due to competitive pressure on our selling prices. In the three months and nine months of both 2004 and 2003 we recorded a benefit to our gross profit as a result of discount purchase agreements for chipsets, which will end in the fourth quarter of 2004. If we are unable to obtain new favorable discount programs, our costs for chipsets could increase and our gross profit could be adversely affected. In both the three months and the first nine months of 2004, the chipset discounts contributed 3.5 percentage points of gross profit. OPERATING EXPENSE. Our operating expense remained approximately level at $2.6 million for the third quarter of 2004 compared to the third quarter of 2003. As a percentage of net sales, our operating expense increased to 36.6% in the third quarter of 2004 from 29.1% in the third quarter of 2003. Our operating expense decreased by $.1 million to $8.4 million or 36.4% of net sales for nine months ended September 30, 2004 from $8.5 million or 35.3% of net sales for the nine months ended September 30, 2003. Selling Expense. Selling expense decreased approximately $.3 million to $1.1 million or 15.6% of net sales in the third quarter of 2004 from $1.4 million or 15.1% of net sales in the third quarter of 2003. Selling expense decreased $.5 million to $3.5 million or 15.3% of net sales in the first nine months of 2004 from $4.0 million or 16.4% of net sales in the first nine months of 2003. Selling expense was lower in both the quarter and the nine month period primarily because of lower sales which resulted in lower commissions, product delivery expense, and marketing expense. Selling headcount and salaries were also lower. General and Administrative Expense. General and administrative expense increased $.2 million to $.8 million or 10.9% of net sales in the third quarter of 2004 from $.6 million or 6.7% of net sales in the third quarter of 2003. General and administrative expense increased $.4 million to $2.8 million or 12.1% of net sales in the nine months ended September 30, 2004 from $2.4 million or 10.0% of net sales in the nine months ended September 30, 2003. General and administrative expense increased $.2 million in the quarter primarily due to recoveries of bad debts in the third quarter of 2003 which reduced the Q3 2003 General and Administrative expense by $.1 million. For the nine month period, the increase of $.4 million was due primarily to $.3 million ($286,000) of acquisition-related expense for an acquisition that was not consummated and the 2003 bad debt reversals, partially offset by reduced depreciation and insurance expense. Research and Development Expense. Research and development expense increased slightly, less than $.1 million to $0.7 million or 10.1% of net sales in the third quarter of 2004 from $0.7 million or 7.2% of net sales in the third quarter of 2003. Research and development expense decreased $.1 million to $2.1 million or 9.0% of net sales in the first nine months of 2004 from $2.2 million or 8.9% of net sales in the first nine months of 2003. Research and development costs increased in the third quarter primarily as a result of increased headcount and related personnel costs. Research and development costs decreased in the first nine months primarily as a result of decreased costs for regulatory approvals. Development and support continues on all of our major product lines, with particular emphasis on VoIP hardware, the Global Village phone service, ADSL modems, and dial-up modems. OTHER INCOME (EXPENSE), NET. Other income (expense), net was relatively unchanged with income of $.09 million in the third quarter of 2004 and 2003. Other income (expense), net decreased to income of $.15 million in the first nine months of 2004 compared to income of $.25 million in the first nine months of 2003, primarily due to increased losses realized on foreign currency exchange and a one-time gain on the sale of an internet domain name in the prior year period. INCOME TAX EXPENSE (BENEFIT). We did not record any income tax benefit in the three and nine months ended September 30, 2004 or the three and nine months ended September 30, 2003. The net deferred tax asset balance at September 30, 2004 is zero. This accounting treatment is described in further detail under the caption CRITICAL ACCOUNTING POLICIES AND ESTIMATES above. Liquidity and Capital Resources On September 30, 2004 we had working capital of $15.6 million, including $10.3 million in cash and cash equivalents. In the nine months ended September 30, 2004 operating activities used $1.3 million in cash. Our net loss in the nine months ended September 30, 2004 was $2.2 million. Adjustments to reconcile our net loss of $2.2 million to our net cash used in operating activities of $1.3 million include favorable adjustments of $1.3 million for our decrease of accounts receivable, $.3 million for depreciation and amortization, and $.1 million for our decrease of prepaid expense. Unfavorable adjustments include our increase of inventory of $0.6 million and our reduction of accounts payable and accrued expenses of $.3 million. Our accounts receivable balance decreased primarily due to reduced sales and faster collections of sales. Our inventory increased primarily to support our increased ADSL sales. In the nine months ended September 30, 2004, investing activities used $.1 million in cash for additions to our property, plant, and equipment. In the nine months ended September 30, 2004 financing activities provided $1.9 million of cash, due primarily to receipt of $2.0 million cash from the exercise of employee stock options, partially offset by $.2 million in cash used for monthly principal payments of our $6.0 million mortgage. Currently we do not have a debt facility from which we can borrow. We are, however, currently reviewing a non-binding proposal from a lender for a one-year $2 million line of credit. Should we decide to proceed with this facility, we cannot be assured that the debt facility will ultimately be available on terms acceptable to us, if at all, or that the parties will be able to agree on definitive documentation. To conserve cash and manage our liquidity, we implemented certain expense reductions throughout the past three years. Our employee headcount was 185 at December 31, 2002 which has been reduced to 159 at December 31, 2003 and 155 at September 30, 2004. We intend to continue to assess our cost structure as it relates to our revenues and cash position in 2004, and we may make further reductions if the actions are deemed necessary. Management believes we have sufficient resources to fund our planned operations over the next 12 months. However, if over time we continue to incur losses or do not raise capital, our longer-term ability to continue as a going concern and achieve our intended business objectives could be adversely affected. See "Risk Factors" below, for further information with respect to events and uncertainties that could harm our business, operating results, and financial condition. Commitments During the nine months ended September 30, 2004, there were no material changes to our capital commitments and contractual obligations from those disclosed in the Form 10-K for the year ended December 31, 2003. RECENTLY ISSUED ACCOUNTING STANDARDS In October 2004, the FASB indicated that they will require stock-based employee compensation to be recorded as a charge to earnings pursuant to an exposure draft they have published for comment, which they believe will become effective for awards that are granted in interim or annual periods beginning after June 15, 2005. We will continue to monitor their progress on the issuance of this standard and the impact it may have on our consolidated financial statements. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown risks, uncertainties and other factors which may cause our or our industry's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to statements regarding: Zoom's plans, expectations and intentions, including statements relating to Zoom's prospects and plans relating to sales of our dial-up, cable and ADSL modems and VoIP products; the anticipated development and timing and growth of new product introductions; the consolidation in and the decline of the dial-up modem market; the anticipated development of Zoom's markets and sales channels; the level of demand for Zoom's products; Zoom's ability to obtain debt or equity financing; the anticipated impact of Zoom's cost-cutting initiatives; and Zoom's financial condition or results of operations. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Factors that could cause or contribute to differences in our future financial results include those discussed in the risk factors set forth below as well as those discussed elsewhere in this report and in our filings with the Securities and Exchange Commission. We qualify all of our forward-looking statements by these cautionary statements. RISK FACTORS This report contains forward-looking statements that involve risks and uncertainties, such as statements of our objectives, expectations and intentions. The cautionary statements made in this report should be read as applicable to all forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this report. WE MAY CONTINUE TO INCUR NET LOSSES IF WE ARE UNABLE TO INCREASE SALES OF OUR BROADBAND MODEMS. Our net sales continue to decline primarily due to the decline in the dial-up modem market, decreases in average selling prices of dial-up modems, and the trend toward faster connection speeds and broadband access products. Despite numerous cost reductions over the last few years, we have continued to incur significant net losses primarily due to our continuous decline in net sales from dial-up modems. We believe that the future of our business is largely dependent on the success of our broadband modems and other products, such as our VoIP products and services the first of which was released in Q3 2004 and an additional product is expected to be released in Q4 2004. Although we believe that we have sufficient resources to fund our planned operations over the next year, if we fail to increase our net sales of our broadband modems and other products, our longer-term ability to stay in business and to achieve our intended business objectives could be adversely effected. Our continuing losses could also adversely affect our ability to fund the growth of our business should our strategies prove successful. TO STAY IN BUSINESS WE MAY REQUIRE FUTURE ADDITIONAL FUNDING WHICH WE MAY BE UNABLE TO OBTAIN ON ACCEPTABLE TERMS, IF AT ALL. Over the next twelve months, we may require additional financing for our operations either to fund losses beyond those we anticipate or to fund an increase of our inventory should growth occur. We currently do not have a debt facility from which we can borrow and may not be able to obtain one on acceptable terms unless we have a change in circumstances. We currently have a non-binding proposal from a lender for a one-year $2 million line of credit. Should we decide to proceed with this facility, we cannot be assured that the debt facility will ultimately be available on terms acceptable to us, if at all, or that the parties will be able to agree on definitive documentation. Additional financing may not be available to us on a timely basis if at all, or on terms acceptable to us. If we fail to obtain acceptable additional financing when needed, we may be required to further reduce planned expenditures or forego business opportunities, which could reduce our net sales, increase our losses, and harm our business. Moreover, additional equity financing could dilute the per share value of our common stock held by current shareholders, while additional debt financing could restrict our ability to make capital expenditures or incur additional indebtedness, all of which would impede our ability to succeed. OUR CUSTOMER BASE IS CONCENTRATED, AND THE RECENT LOSS OF A SIGNIFICANT CUSTOMER WILL REDUCE REVENUES AND THE PROFIT CONTRIBUTION OF OUR DIAL-UP MODEM BUSINESS. Three customers accounted individually for more than 10% of net sales in the first nine months of 2004 and collectively for approximately 36% of total net sales in the first nine months of 2004. In the third quarter of 2004, these same three customers accounted for approximately 34% of net sales. Our fourth largest customer in the first quarter of 2004, Best Buy, discontinued the sales of our dial-up modems around June 2004. This action was taken to reduce the amount of Best Buy shelf space allocated to dial-up modems and to increase Best Buy's house-brand share of their modem category. In the first quarter of 2004, Best Buy accounted for 6.6% of our total net sales. In the second quarter of 2004, our net sales to Best Buy were reduced to approximately $140,000, or 1.7% of net sales, and no further net sales are expected at this time. The loss of Best Buy as a customer has reduced net sales and negatively impacted our dial-up modem business. Sales of our ADSL modems are concentrated in a relatively few customers primarily in Turkey, the UK and other European countries. Our sales could fluctuate significantly due to, among other things, approvals and delays in the deployment by service providers of ADSL and cable service in these countries, changes in the political or economic conditions, or the loss, reduction of business or less favorable terms for any of our significant customers. The loss, reduction of business or less favorable terms of sale for any other of our significant customers, may further reduce revenues and negatively impact our business. OUR NET SALES AND OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BECAUSE OF A DECLINE IN AVERAGE SELLING PRICES AND BECAUSE OF THE DECLINE IN THE RETAIL MARKET FOR DIAL-UP MODEMS. The dial-up modem industry has been characterized by declining average selling prices and a declining retail market. The decline in average selling prices is due to a number of factors, including technological change, lower component costs, and competition. The decline in the size of the retail market for dial-up modems is primarily due to the inclusion of dial-up modems in most new PCs, and alternatives to dial-up modems including broadband modems. Less advantageous terms of sales, decreasing average selling prices and reduced demand for our dial-up modems have resulted and may in the future result in decreased net sales for dial-up modems, which has been our primary source of net sales. If we fail to replace declining revenue from the sales of dial-up modems with the sales of our other products, including our broadband modems, our business and results of operation will be harmed. WE BELIEVE THAT OUR FUTURE SUCCESS WILL DEPEND IN LARGE PART ON OUR ABILITY TO MORE SUCCESSFULLY PENETRATE THE BROADBAND MODEM MARKETS, WHICH HAVE BEEN CHALLENGING MARKETS WITH SIGNIFICANT BARRIERS TO ENTRY. With the shrinking of the dial-up modem market, we believe that our future success will depend in large part on our ability to more successfully penetrate the ADSL modem, VoIP, and cable modem markets. These markets have been challenging, with significant barriers to entry that have adversely affected our sales to these markets. Although some ADSL and cable modems are sold at retail, in most countries the high volume purchases of these modems are concentrated in a relatively few large cable, telecommunications, and Internet service providers which offer broadband modem services to their customers. These customers typically also have extensive and varied approval processes for modems to be approved for use on their network. These approvals can be expensive and time consuming. Successfully penetrating the broadband modem market therefore presents a number of challenges including: o the current limited retail market for broadband modems; o the relatively small number of cable, telecommunications and Internet service provider customers that make up a substantial part of the market for broadband modems in most countries; o the significant bargaining power of these large volume purchasers; o the time consuming, expensive, uncertain and varied approval process of the various cable service providers; and o the strong relationships with service providers enjoyed by incumbent some equipment providers. Our sales of broadband products have been adversely affected by all of these factors. Sales of our broadband products in Turkey, the United States, the United Kingdom and other European countries have fluctuated and may continue to fluctuate due to approvals and delays in the deployment by service providers of cable and ADSL service in these countries. We cannot assure that we will be able to successfully maintain or grow our sales in these markets. OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO A NUMBER OF RISKS INHERENT IN INTERNATIONAL ACTIVITIES. Our international sales continue to represent an increasingly significant portion of our sales. International sales have increased from 38% of net sales in 2001 to approximately 54% of our net sales in the third quarter of 2004. Currently our operations are significantly dependent on our international operations, and may be materially and adversely affected by many factors including: o international regulatory and communications requirements and policy changes; o political and economic changes and disruptions; o pricing of Internet and voice services; o bundling of discounted or free equipment with services; o favoritism toward local suppliers; o delays in the rollout of broadband services by cable and ADSL service providers; o local language and technical support requirements; o difficulties in inventory management, accounts receivable collection and the management of distributors or representatives; o difficulties in staffing and managing foreign operations; o governmental currency controls; o shipping costs; o currency exchange rate fluctuations; and o tariff regulations. We anticipate that our international sales will continue to account for a significant percentage of our net sales and, in particular, our net sales of ADSL products. If foreign markets for our current and future products develop more slowly than currently expected, our sales and our future results of operations may be harmed. OUR EXISTING INDEBTEDNESS COULD MAKE IT MORE DIFFICULT FOR US TO OBTAIN ADDITIONAL FINANCING, WHICH COULD HARM OUR LIQUIDITY. In January 2001 we obtained a 5 year, $6 million, 20 year direct reduction mortgage from a bank, secured by our owned real estate in Boston, Massachusetts. As of September 30, 2004, our outstanding indebtedness was $5.2 million. This mortgage has a balloon payment due in January 2006. This real estate was appraised on July 24, 2002 at $9.3 million, and generally the real estate market in Boston has remained relatively flat. Our outstanding indebtedness could adversely affect our ability to obtain additional financing for working capital, acquisitions, or other purposes. Our existing indebtedness could also make us more vulnerable to economic downturns and competitive pressures, make it more difficult to obtain additional debt financing, and adversely affect our liquidity. In the event of a cash shortfall, we could be forced to reduce other expenditures to meet our requirements with respect to our outstanding debt. Our ability to meet our obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations. Many of these factors are beyond our control. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to refinance all or a portion of these obligations or obtain additional financing in order to stay in business. OUR FAILURE TO MEET CHANGING CUSTOMER REQUIREMENTS AND EMERGING INDUSTRY STANDARDS WOULD ADVERSELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS. The market for communications products and high-speed broadband access products is characterized by aggressive pricing practices, continually changing customer demand patterns, rapid technological advances, emerging industry standards and short product life cycles. In the past some of our product developments and enhancements have taken longer than planned and have delayed the availability of our products, which adversely affected our sales and profitability in the past. Any significant delays in the future may adversely impact our ability to sell our products, and our results of operations and financial condition may be adversely affected. Our future success will depend in large part upon our ability to: o identify and respond to emerging technological trends in the market; o develop and maintain competitive products that meet changing customer demands; o enhance our products by adding innovative features that differentiate our products from those of our competitors; o bring products to market on a timely basis; o introduce products that have competitive prices; o manage our product transitions, inventory levels and manufacturing processes efficiently; and o respond effectively to new technological changes or new product announcements by others. Our product cycles tend to be short, and we may incur significant non-recoverable expenses or devote significant resources to sales that do not occur when anticipated. Therefore the resources we devote to product development, sales, and marketing may not generate material net sales for us. In addition, short product cycles have resulted in and may in the future result in excess and obsolete inventory, which has had and may in the future have an adverse affect on our results of operations. In an effort to develop innovative products and technology, we have incurred and may in the future incur substantial development, sales, marketing, and inventory costs. If we are unable to recover these costs, our financial condition and operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions and we still have higher cost products in inventory, our business would be harmed and our results of operations and financial condition would be adversely affected. OUR OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BECAUSE OF PRICE PROTECTION PROGRAMS. Our operating results have been adversely affected by reductions in average selling prices because of credits given to some of our customers as a result of contractual price protection guarantees. Specifically, when we reduce the price for a product, the customer receives a credit for the difference between the customer's most recent purchase price and our reduced price for the product, for all unsold product at the time of the price reduction. In the third quarter of 2004, we gave a $.3 million price protection credit in the UK due to the lowering of selling prices in some channels. If the amount of credits we give to our customers increases by a material amount, our operating results could be adversely affected. WE MAY BE SUBJECT TO PRODUCT RETURNS RESULTING FROM DEFECTS, OR FROM OVERSTOCKING OF OUR PRODUCTS. PRODUCT RETURNS COULD RESULT IN THE FAILURE TO ATTAIN MARKET ACCEPTANCE OF OUR PRODUCTS, WHICH WOULD HARM OUR BUSINESS. If our products contain undetected defects, errors, or failures, we could face: o delays in the development of our products; o numerous product returns; and o other losses to us or to our customers or end users. Any of these occurrences could also result in the loss of or delay in market acceptance of our products, either of which would reduce our sales and harm our business. We are also exposed to the risk of product returns from our customers as a result of contractual stock rotation privileges and our practice of assisting some of our customers in balancing their inventories. Overstocking has in the past led and may in the future lead to higher than normal returns. OUR FAILURE TO EFFECTIVELY MANAGE OUR INVENTORY LEVELS COULD MATERIALLY AND ADVERSELY AFFECT OUR LIQUIDITY AND HARM OUR BUSINESS. In the past, we built up our inventory for our broadband access products in response to shortages of components for these products at the time. We have also had difficulty in generating significant orders for some of our products, particularly broadband products, and as a result, we experienced a significant increase in our inventory. Although we have been able to reduce our inventory levels of broadband products as a result of sales, raw material returns to suppliers, and the write-down of value of some of our inventory, our failure to effectively manage our inventory may adversely affect our liquidity and increases the risk of inventory obsolescence, a decline in market value of the inventory, or losses from theft, fire, or other casualty. WE MAY BE UNABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE WE DEPEND ON THIRD PARTY MANUFACTURERS. IF THESE THIRD PARTY MANUFACTURERS FAIL TO PRODUCE QUALITY PRODUCTS IN A TIMELY MANNER, OUR ABILITY TO FULFILL OUR CUSTOMER ORDERS WOULD BE ADVERSELY IMPACTED. We use contract manufacturers to manufacture our products. We use these third party manufacturers to help ensure low costs, rapid market entry, and reliability. Any manufacturing disruption could impair our ability to fulfill orders, and failure to fulfill orders would adversely affect our sales. Although we currently use four contract manufacturers for the bulk of our purchases, in some cases a given product is only provided by one of these companies. The loss of the services of any of our significant third party manufacturers or a material adverse change in the business of or our relationships with any of these manufacturers could harm our business. Since third parties manufacture our products and we expect this to continue in the future, our success will depend, in part, on the ability of third parties to manufacture our products cost effectively and in sufficient quantities to meet our customer demand. We are subject to the following risks because of our reliance on third party manufacturers: o reduced management and control of component purchases; o reduced control over delivery schedules; o reduced control over quality assurance; o reduced control over manufacturing yields; o limited warranties on products supplied to us; o potential increases in prices; o interruption of supplies from assemblers as a result of a fire, natural calamity, strike or other significant event; and o misappropriation of our intellectual property. WE MAY BE UNABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE WE OBTAIN KEY COMPONENTS FROM, AND DEPEND ON, SOLE OR LIMITED-SOURCE SUPPLIERS. We obtain certain key parts, components, and equipment from sole or limited sources of supply. For example, we purchase dial-up and broadband modem chipsets from Conexant Systems and Agere Systems. Integrated circuit product areas covered by one or both companies include dial-up modems, ADSL modems, cable modems, networking, routers, and gateways. In the past, we have experienced delays in receiving shipments of modem chipsets from our sole source suppliers. We may experience similar delays in the future. In addition, some products may have other components that are available from only one source. The market for some components, including memory components, has recently experienced shortages, increased lead times, and higher prices. If we are unable to obtain a sufficient supply of components from our current sources, we could experience difficulties in obtaining alternative sources or in altering product designs to use alternative components. Resulting delays or reductions in product shipments could damage relationships with our customers and our customers could decide to purchase products from our competitors. Inability to meet our customers' demand or a decision by one or more of our customers to purchase products from our competitors could harm our operating results. OUR FAILURE TO OBTAIN NEW CHIPSET PURCHASE PROGRAMS WITH CHIPSET SUPPLIERS COULD REDUCE OUR GROSS PROFIT. Our primary dial-up modem chipset purchase agreement, which includes price and other concessions for meeting minimum purchase requirements or commitments, is expected to expire in 2004. If we are unable to replace this agreement with an equally favorable chipset purchase agreement, our chipset costs could increase significantly and our gross profit could be adversely affected. THE MARKET FOR HIGH-SPEED COMMUNICATIONS PRODUCTS AND SERVICES HAS MANY COMPETING TECHNOLOGIES AND, AS A RESULT, THE DEMAND FOR OUR PRODUCTS AND SERVICES IS UNCERTAIN. The market for high-speed communications products and services has a number of competing technologies. For instance, Internet access can be achieved by: o using a standard telephone line and appropriate service for dial-up modems, ISDN modems, or ADSL modems, possibly in combination; o using a cable modem with a cable TV line and cable modem service; o using a router and some type of modem to service the computers connected to a local area network; or o other approaches, including wireless links to the Internet. Although we currently sell products that include many of these technologies, the market for high-speed communication products and services is fragmented and evolving. The introduction of new products by competitors, market acceptance of products based on new or alternative technologies, or the emergence of new industry standards could render and have in the past rendered our products less competitive or obsolete. If any of these events occur, we may be unable to sustain or grow our business. Industry analysts believe that the market for our dial-up modems will continue to decline. If we are unable to increase demand for and sales of our broadband modems, we may be unable to sustain or grow our business. WE FACE SIGNIFICANT COMPETITION, WHICH COULD RESULT IN DECREASED DEMAND FOR OUR PRODUCTS OR SERVICES. We may be unable to compete successfully. A number of companies have developed, or are expected to develop, products that compete or will compete with our products. Furthermore, many of our current and potential competitors have significantly greater resources than we do. Intense competition, rapid technological change and evolving industry standards could result in less favorable selling terms to our customers, decrease demand for our products or make our products obsolete. CHANGES IN CURRENT OR FUTURE LAWS OR GOVERNMENTAL REGULATIONS THAT NEGATIVELY IMPACT OUR PRODUCTS AND TECHNOLOGIES COULD HARM OUR BUSINESS. The jurisdiction of the Federal Communications Commission, or the FCC, extends to the entire United States communications industry including our U.S. customers and their products and services that incorporate our products. Our products are also required to meet the regulatory requirements of other countries throughout the world where our products are sold. Obtaining government regulatory approvals is time-consuming and very costly. In the past, we have encountered delays in the introduction of our products, as a result of government certifications and other certifications. We may face further delays if we are unable to comply with governmental regulations and other certifications. Delays caused by the time it takes to comply with regulatory requirements and other certifications may result in cancellations or postponements of product orders or purchases by our customers, which would harm our business FLUCTUATIONS IN THE FOREIGN CURRENCY EXCHANGE RATES IN RELATION TO THE U.S. DOLLAR COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS. Changes in currency exchange rates that increase the relative value of the U.S. dollar may make it more difficult for us to compete with foreign manufacturers on price, or may otherwise have a material adverse effect on our sales and operating results. A significant increase in our foreign currency denominated sales would increase our risk associated with foreign currency fluctuations. OUR FUTURE SUCCESS WILL DEPEND ON THE CONTINUED SERVICES OF OUR EXECUTIVE OFFICERS AND KEY RESEARCH AND DEVELOPMENT PERSONNEL WITH EXPERTISE IN HARDWARE AND SOFTWARE DEVELOPMENT. The loss of any of our executive officers or key research and development personnel, the inability to attract or retain qualified personnel in the future or delays in hiring skilled personnel could harm our business. Competition for skilled personnel is significant. We may be unable to attract and retain all the personnel necessary for the development of our business. In addition, the loss of Frank B. Manning, our president and chief executive officer, or Peter Kramer, our executive vice president, some other member of the management team, a key engineer, or other key contributors, could harm our relations with our customers, our ability to respond to technological change, and our business. OUR BUSINESS MAY BE HARMED BY ACQUISITIONS WE MAY COMPLETE IN THE FUTURE. We may pursue acquisitions of related businesses, technologies, product lines, or products. Our identification of suitable acquisition candidates involves risk inherent in assessing the values, strengths, weaknesses, risks and profitability of acquisition candidates, including the effects of the possible acquisition on our business, diversion of our management's attention, risk of increased leverage, shareholder dilution, risk associated with unanticipated problems, and risks associated with liabilities we assume. If we pursue any such transaction, we cannot assure that we would be able to successfully negotiate the terms of such transaction, finance such transaction, or integrate such business, products or technologies into our existing business and products. WE MAY HAVE DIFFICULTY PROTECTING OUR INTELLECTUAL PROPERTY. Our ability to compete is heavily affected by our ability to protect our intellectual property. We rely primarily on trade secret laws, confidentiality procedures, patents, copyrights, trademarks, and licensing arrangements to protect our intellectual property. The steps we take to protect our technology may be inadequate. Existing trade secret, trademark and copyright laws offer only limited protection. Our patents could be invalidated or circumvented. We have more intellectual property assets in some countries than we do in others. In addition, the laws of some foreign countries in which our products are or may be developed, manufactured or sold may not protect our products or intellectual property rights to the same extent as do the laws of the United States. This may make the possibility of piracy of our technology and products more likely. We cannot assure that the steps that we have taken to protect our intellectual property will be adequate to prevent misappropriation of our technology. WE COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. Particular aspects of our technology could be found to infringe on the intellectual property rights or patents of others. Other companies may hold or obtain patents on inventions or may otherwise claim proprietary rights to technology necessary to our business. We cannot predict the extent to which we may be required to seek licenses. We cannot assure that the terms of any licenses we may be required to seek will be reasonable. We are often indemnified by our suppliers relative to certain intellectual property rights; but these indemnifications do not cover all possible suits, and there is no guarantee that a relevant indemnification will be honored by the indemnifying company. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We own financial instruments that are sensitive to market risks as part of our investment portfolio. The investment portfolio is used to preserve our capital until it is required to fund operations, including our research and development activities. None of these market-risk sensitive instruments are held for trading purposes. We do not own derivative financial instruments in our investment portfolio. The investment portfolio contains instruments that are subject to the risk of a decline in interest rates. Investment Rate Risk - Our investment portfolio consists entirely of money market funds, which are subject to interest rate risk. Due to the short duration and conservative nature of these instruments, we do not believe that it has a material exposure to interest rate risk. The 20 year mortgage of our headquarters building is a variable rate loan with the interest rate adjusted annually. A 1% change in the interest rate would result in a decrease or increase of approximately $53,000 of interest expense per year. Item 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of September 30, 2004 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period. There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K (a) Exhibits 10.1 International Distributor Agreement. 31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Form 8-K On October 27, 2004, the Company furnished a Current Report on Form 8-K relating to its financial information for the quarter ended September 30, 2004, as presented in a press release dated October 27, 2004. ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ZOOM TECHNOLOGIES, INC. Date: November 12, 2004 By: /s/ Frank B. Manning ------------------------------------------ Frank B. Manning, President Date: November 12, 2004 By: /s/ Robert Crist ------------------------------------------- Robert Crist, Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT INDEX Exhibit No. Description 10.1 International Distributor Agreement. 31.1 CEO Certification Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. 31.2 CFO Certification Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. 32.1 CEO Certification Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 32.2 CFO Certification Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. EX-10 2 olusum.txt Exhibit 10.1 ZOOM TELEPHONICS, INC. INTERNATIONAL DISTRIBUTOR AGREEMENT This AGREEMENT is made as of the 10th day of October 2001 by and between Zoom Telephonics, Inc., a corporation organized under the laws of the state of Delaware, which has a usual place of business at 207 South Street, Boston, Massachusetts 02111 (hereinafter "ZOOM") and Olusum, a partnership organized under the laws of Turkey, which has a usual place of business at: Ergenekon Cad. Bilgic Sok; No: 1-3, Kat: 4; 80260 Ferikoy; Instanbul; Turkey (hereinafter "DISTRIBUTOR"). 1. Facts ZOOM designed and created the PRODUCTS, as hereinafter defined, and is the owner of or has rights to all trade secret, trademark, patent, and other intellectual property rights associated with the PRODUCTS. DISTRIBUTOR desires to obtain certain rights to distribute the PRODUCTS for resale in the TERRITORY, as that term is hereinafter defined. 2. Definitions (a) "PRODUCT" as used in this Agreement, means the modems, faxmodems, and other items that are described in Exhibit A, which is attached hereto and incorporated herein. (b) "TERRITORY" as used in this Agreement, means the geographic areas described in Exhibit B, which is attached hereto and incorporated herein by reference. 3. Appointment (a) Subject to the terms of the Agreement, ZOOM hereby appoints DISTRIBUTOR as a non-exclusive distributor of the PRODUCTS in the TERRITORY. Said appointment applies only to DISTRIBUTOR'S establishment at the above address and other sales offices in the TERRITORY. Accordingly, DISTRIBUTOR shall refrain from actively soliciting customers, establishing any branch, or maintaining any distribution center with respect to the PRODUCTS outside the TERRITORY. ZOOM reserves the right to appoint additional DISTRIBUTORS in the TERRITORY as its best judgment may dictate. DISTRIBUTOR accepts this appointment only on the basis of its own opinion of potential sales in the TERRITORY as its best judgment may dictate. DISTRIBUTOR accepts this appointment only on the basis of its own opinion of potential sales in the TERRITORY and not on the basis of any representations made by ZOOM or its representatives. (b) Subject to the terms of this Agreement, ZOOM hereby grants DISTRIBUTOR a non-exclusive, non transferable, license to use the trademarks identified in Exhibit C, which is attached hereto and incorporated herein, in connection with DISTRIBUTORS marketing, sales, and distribution of PRODUCTS. 4. Prices and Terms of Payment (a) DISTRIBUTOR will pay ZOOM'S distributor price for each unit of the PRODUCTS shipped to DISTRIBUTOR, set forth in the Distributor Price List, subject to revision from time to time. The current Distributor Price List is set forth in Exhibit D, attached hereto and incorporated herein. ZOOM shall determine the distributor price, and may change that price from time to time in its sole discretion, provided however, that ZOOM shall give at least thirty (30) days notice of any price increase. The amount to be paid by DISTRIBUTOR shall be based on the distributor price in effect on the date of the order (i) received or (ii) shipped, whichever is lower. (b) All prices quoted to DISTRIBUTOR for PRODUCTS under this Agreement and all amounts payable to ZOOM shall be in U.S. Dollars. If, by law, regulations or fiscal policy of particular countries, conversion into or transfer to United States Dollars is restricted or forbidden, notice thereof in writing will be given to ZOOM and payment of all amounts due hereunder shall be made through such lawful means or methods as ZOOM designates. (c) All payments, including charges for the purchase price, taxes, shipping, and other costs that are payable by DISTRIBUTOR shall be (i) prepaid or (ii) paid by site letter of credit at a bank in the United States acceptable to ZOOM, OR (iii) at the sole discretion of ZOOM and upon written consent of exceeding, the maximum amount of an irrevocable standby letter of credit acceptable to ZOOM or (iv) upon such other payment terms as may be agreed to in writing by ZOOM and set forth on Exhibit D, which is attached hereto and incorporated herein. 5. Purchase Orders, Shipping and Returns (a) DISTRIBUTOR may submit purchase orders by mail, telecopy, telex, telephone, or any other form of communication, provided that all oral purchase orders will be confirmed in writing. ZOOM may, but is not required to, ship the ordered PRODUCTS prior to its receipt of written confirmation of the purchase order. Orders will be deemed accepted by ZOOM when acknowledged in writing by ZOOM'S standard forms then prevailing or when the ordered PRODUCTS are shipped by ZOOM. (b) At the time of acceptance of each order from DISTRIBUTOR, ZOOM shall quote its estimated lead time for shipment, and will use reasonable efforts to meet quoted lead times, but ZOOM shall not be liable to DISTRIBUTOR or any person claiming under DISTRIBUTOR for either delays or failure to ship any PRODUCT for any cause whatsoever. (c) ZOOM will package, whenever possible, its PRODUCTS in containers designed to allow ease of handling and storage by DISTRIBUTOR. ZOOM shall have the right, in its sole discretion, to change package design without prior notice to DISTRIBUTOR. Where standard bulk or quantity packaging will contribute towards expedient service, ZOOM may, at its discretion, use such packaging. (d) To the extent possible, all orders will be shipped in the manner requested by DISTRIBUTOR at the time of order. In the event that DISTRIBUTOR does not specify a means of shipment, or shipment by such means is not possible, ZOOM will ship the order by a freight forwarder it selects. All shipments will be made F.O.B ZOOM'S U.S. warehouse. (e) PRODUCTS shall be returned to ZOOM only after receipt by DISTRIBUTOR of written Return Authorization Form from ZOOM obtained in advance of the return, which authorization, if given, shall specify the terms and conditions under which any such return shall be made. Such consent may provide for a handling charge to cover the cost of putting the returned PRODUCTS in salable condition. DISTRIBUTOR will be responsible for furnishing ZOOM with information necessary for issuance of authorizations for warranty returns. In all cases, final decision as to replacement or credit is dependent upon the results of inspection and testing of returned PRODUCTS by ZOOMS Quality Control Department. Unauthorized returns will be reshipped to DISTRIBUTOR freight collect. All returns should be shipped to ZOOM freight prepaid. All authorized returns serviced by ZOOM under warranty terms will be returned to DISTRIBUTOR freight prepaid. 6. Marketing and Promotional Materials (a) During the term of this Agreement, DISTRIBUTOR shall exercise its best efforts in order to promote the sale of and sell the PRODUCTS in the TERRITORY; shall maintain an adequate business organization for such purposes; shall visit all customers and keep them fully informed of new products and product developments; shall list all of ZOOM'S PRODUCTS in DISTRIBUTOR'S catalogs; shall, in an expeditious manner, answer and follow up on all customer inquires with respect to the PRODUCTS; and shall establish and maintain an adequate distribution warehouse for the PRODUCTS. (b) ZOOM will provide reasonable quantities of existing brochures and other promotional materials, in the English language, as requested by DISTRIBUTOR. Such materials shall be provided free of charge, except that DISTRIBUTOR shall pay all shipping costs attributable to such materials. ZOOM hereby grants DISTRIBUTOR the right to make and use copies of ZOOM'S promotional materials in identical form. DISTRIBUTOR, at it's sole expense, may translate any existing brochures and promotional material into languages other than English. DISTRIBUTOR shall furnish ZOOM with copies of such material for its review and prior approval before any distribution or use is made of such material. DISTRIBUTOR may also develop its own brochures, advertising and promotional material for use in the TERRITORY, subject, in each instance, to the prior written approval of ZOOM. ZOOM will provide DISTRIBUTOR, upon request, with existing photographs and graphic materials for such purposed. ZOOM may, from time to time, participate in cooperative advertising programs and may offer advertising credits or other promotional programs or incentives, but only with ZOOM'S prior written authorization in each instance, and except in such instances, ZOOM shall have no obligation or liability to DISTRIBUTOR or any third party. (c) DISTRIBUTOR shall deliver to ZOOM, on or before the 10th day of each month, a Monthly Business Report, as hereinafter described, for the preceding calendar month. A Monthly Business Report shall contain such information as may from time to time be specified by ZOOM, including without limitation, the following: (I) inventory of each PRODUCT at the end of each month; (ii) forecasted sales of each PRODUCT, on a monthly basis, for the following six months; (iii) feedback from customers with installed PRODUCTS; (iv) a description (with copies, if available) of any scientific or commercial papers or articles published that discuss the PRODUCTS; and (v) a description of competitors activities within the TERRITORY known to DISTRIBUTOR. ZOOM may communicate with any customer or potential customer regarding any matter, including, but not limited to, any amendment to or termination of this Agreement. (d) ZOOM will provide DISTRIBUTOR with such sales and technical assistance as ZOOM customarily provides its foreign distributors of the PRODUCTS. 7. Inventory Maintenance and Minimum Sales (a) DISTRIBUTOR acknowledges that it can only provide prompt service to its customers by maintaining a minimum representative inventory of PRODUCTS. ZOOM and DISTRIBUTOR will annually review DISTRIBUTOR'S inventory and agree upon minimum quantity of each PRODUCT that DISTRIBUTOR should carry and inventory. As ZOOM develops new PRODUCTS, DISTRIBUTOR shall maintain in inventory adequate quantities of each such PRODUCT to meet its obligations hereunder. (b) During the initial one year term of this Agreement, DISTRIBUTOR agrees that its minimum sales of PRODUCTS, net any of its discounts, returns, shipping, insurance and other costs, shall be not less than the amount set forth on Exhibit E. If the term of this Agreement should be extended pursuant to Section 19(a) below, ZOOM and DISTRIBUTOR shall agree on applicable minimum quantities during the prior term. 8. Warranties (a) The literature accompanying the packaged PRODUCTS contains all warranties, representations, and disclosures concerning the PRODUCTS and its use. DISTRIBUTOR has no authority, express or implied, to make any warranties, representations, or disclosures, beyond those provided by ZOOM with the PRODUCTS. (b) EXCEPT AS SPECIFICALLY PROVIDED IN THIS AGREEMENT AND EXCEPT FOR THE WARRANTY OF TITLE, ZOOM MAKES NO WARRANTIES TO DISTRIBUTOR, EXPRESS OR IMPLIED, INCLUDING NO WARRANTIES AGAINST INFRINGEMENT OR WARRANTIES OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE. (c) Any PRODUCTS returned to DISTRIBUTOR during the warranty period shall be tested by DISTRIBUTOR to determine whether the PRODUCT is defective. If the PRODUCT is not defective, DISTRIBUTOR , at its cost, shall return the product to the customer. If the PRODUCT is defective, DISTRIBUTOR shall, upon receipt from ZOOM of a Return Authorization Form, return the defective PRODUCT to ZOOM, freight prepaid and ZOOM shall repair or replace the PRODUCT and return, freight prepaid to DISTRIBUTOR or at ZOOM'S option, issue a credit to DISTRIBUTOR. 9. Intellectual Property Rights (a) Nothing contained in this agreement may be interpreted or construed to transfer any of ZOOM'S right, title or interest in the trade secrets, trademarks, patents, or other intellectual property rights associated with the PRODUCTS to DISTRIBUTOR, except insofar as the grant of the licenses contained in this Agreement conveys the limited right to use certain trademarks or other intellectual property rights. (b) Without limiting the foregoing, DISTRIBUTOR acknowledges that the PRODUCTS are protected by various patents and agrees not to use or exploit these patents, or any know-how or technical information associated with them, except as needed to fulfill its obligation or to exercise its rights under this Agreement. (c) DISTRIBUTOR shall not claim any rights in, nor seek to register any of ZOOM'S trade names, trademarks, or service marks in any jurisdiction, provided that, at ZOOM'S request, DISTRIBUTOR shall cooperate with ZOOM in its efforts to register or otherwise protect its marks, including any registration of DISTRIBUTOR as an authorized user of such marks. Any registration of ZOOM'S trademarks shall be owned by ZOOM. 10. Infringement (a) In the event that any claim, suit, or other legal proceeding is threatened or commenced against DISTRIBUTOR that is founded, in whole or in part, on an allegation that the PRODUCTS infringe trade secret, trademark, patent or other intellectual property rights belonging to a third party, DISTRIBUTOR will give ZOOM prompt written notice of such legal proceedings and ZOOM may elect to control the defense to or settlement of such dispute. In the event that DISTRIBUTOR cannot reasonably anticipate that ZOOM will receive notice of such legal proceeding at least twenty (20) days prior to the date on which any action needs to be taken to preserve and protect ZOOM'S rights, DISTRIBUTOR shall take such action on behalf of ZOOM. DISTRIBUTOR shall cooperate with ZOOM in any defense or settlement made by ZOOM. DISTRIBUTOR shall not enter into any settlement, agreement or other voluntary resolution of any such claim, suit or other legal proceeding without obtaining ZOOM'S prior written consent thereto. If DISTRIBUTOR has complied with the procedures set forth in this Section 10. ZOOM will indemnify and hold DISTRIBUTOR harmless from and against any loss, cost, damage, or other expenses incurred by DISTRIBUTOR as a result of such legal proceeding. This indemnification provision shall be null and void with respect to any PRODUCTS that have been modified or tampered with in any way by DISTRIBUTOR or its employees or independent contractors without the express written consent of ZOOM, provided that such modification or tampering created the condition or occurrence underlying the legal proceeding on which DISTRIBUTORS claim for indemnity is based. This indemnity shall be DISTRIBUTOR'S exclusive remedy, and ZOOM'S exclusive obligation and liability, in connection with the intellectual property claims or third parties. (b) If ZOOM knows or has reason to believe that the sale, use, or distribution of a PRODUCT does or may infringe the intellectual property rights of a third party, ZOOM may require DISTRIBUTOR to cease all further marketing, distribution, and sales of the PRODUCT. ZOOM agrees to reimburse, at DISTRIBUTOR'S cost all new and unused units in DISTRIBUTOR'S inventory of any PRODUCT which ZOOM has prohibited to be sold hereunder. 11. Confidential Information (a) All information conveyed by either party to the other concerning technical, manufacturing, financial or marketing matters shall be deemed to be confidential, unless the party conveying such information clearly identifies it as non-confidential information. (b) DISTRIBUTOR acknowledges that in connection with its responsibilities hereunder, ZOOM will disclose certain technical information which is highly confidential and trade secrets, and ZOOM agrees to treat this information as strictly confidential, in accordance with paragraph (c) below. (c) Neither party will disclose to any third party confidential information conveyed to it by the other party unless such information (i) is shown by documentary evidence to have been known by the disclosing party prior to its disclosure by the other party; or (ii) is or becomes publicly known through publication or otherwise and through no wrongful act of the disclosing party; or (iii) is received from a third party who rightfully discloses it without restriction on its subsequent disclosure and without breach of this Agreement; or (iv) is shown by documentary evidence to have been independently developed by the disclosing party; or (v) is disclosed pursuant to the lawful requirement of a governmental agency or by order of a court of competent jurisdiction or disclosure is permitted by operation of law, provided that such disclosure is subject to all applicable governmental or judicial protection available for like material and that the disclosing party notifies the other as soon as practicable after it learns that such disclosure is required or has been demanded. Each party will take whatever action is necessary or appropriate to ensure that its employees, officers, and directories comply with the provisions of this Section 11 both during and after the time they serve in such capacities. 12. Assignment DISTRIBUTOR may not assign any of its rights or delegate any of its obligations under this Agreement to any third party without the express written consent of ZOOM. 13. Taxes (a) DISTRIBUTOR will pay, or reimburse ZOOM for any taxes, duties and tariffs, however designated, arising from or based upon ZOOM'S sale of the PRODUCT to DISTRIBUTOR, this Agreement, the licenses granted pursuant to the Agreement, or DISTRIBUTOR'S use of sale of the PRODUCTS, but not including any income or corporate excise tax assessed against, or levied on , ZOOM. (b) If applicable, DISTRIBUTOR shall furnish ZOOM with whatever certificates or other instruments may be necessary or appropriate to evidence that ZOOM'S sales of the PRODUCTS to DISTRIBUTOR are not subject to tax under applicable law. 14. Notices Notices required or permitted to be given under this Agreement shall be in writing, shall refer specifically to this Agreement, and shall be delivered in person or sent by international courier or express mail, by telex or telecopy, or by other means that provides proof of delivery to the address of the parties set forth at the beginning of this Agreement, or to such other address of which a party gives notice to the other as provided in this paragraph. All notices shall be deemed effective on the earlier of the date of actual receipt or five days after transmission as provided above. 15. Independent Contractor Status ZOOM and DISTRIBUTOR are independent contractors, and this Agreement shall not be deemed to constitute either party the partner, joint venture, franchisee, servant, employee, or agent of the other. 16. Waiver The waiver by either party of a default or breach of any position of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent default or breach. 17. Limitation of Liability In no event will either party be liable to the other for special ,incidental, or consequential damages arising out of the transactions covered by this Agreement or out of the use or sale of the PRODUCT. 18. Non-Competition DISTRIBUTOR has previously disclosed in Exhibit F attached hereto, any products which it currently manufactures, markets or distributes that are used for a purpose that is the same or substantially similar to the purpose for which any product is used. So long as this Agreement is in effect, DISTRIBUTOR shall give not less than sixty (60) days written notice to ZOOM if it intends in the future to manufacture, market, or distribute in the Territory any product, whether now existing or hereafter developed, that is used for a purpose that is the same as or substantially similar to the purpose for which any PRODUCT is used. If ZOOM does not, in its sole discretion, elect to give its written consent to such manufacture, marketing, or distribution, ZOOM may elect to terminate this Agreement pursuant to Section 19 9d) below without further liability of any nature or kind. 19. Terms and Termination (a) This agreement is in effect for one (1) year from the date first written above. Upon the mutual written consent of both parties, the Agreement may be renewed for successive periods of one (1) year. Absent any such written consent, this Agreement may only be terminated as provided below. ZOOM shall have no obligation to accept any order from DISTRIBUTOR after termination or notice of termination of this Agreement for any reason. Acceptance of any order from DISTRIBUTOR or any sale made to DISTRIBUTOR by ZOOM after the expiration of any term or after notice of termination or termination of this Agreement for any reason as set forth below shall not be construed as a renewal or extension hereof, nor as a waiver of any notice of termination, but in the absence of a new agreement covering such offers or sales signed on behalf of ZOOM, each such order and sale shall be deemed an individual purchase order governed by ZOOM'S general terms and conditions of sale. (b) Either party may terminate this agreement for material defaults or the other party, effective thirty (30) days following written notice to the defaulting party, unless, within said thirty (30) days, the party receiving notice remedies the default. (c) ZOOM may terminate this Agreement, effective immediately upon given notice to DISTRIBUTOR, in the event that (I) proceedings are instituted by DISTRIBUTOR in bankruptcy, reorganization, receivership, or dissolution and such proceedings have not been dismissed or otherwise terminated within sixty (60) days following the date they were initiated; or (iii) DISTRIBUTOR makes an assignment for the benefit of creditors. (d) ZOOM may terminate this Agreement, effective thirty (30) days following written notice to DISTRIBUTOR, IF (i) DISTRIBUTOR fails to submit purchase orders for, and pay ZOOM in full for PRODUCTS for the minimum amounts set forth in Section 7 above or (ii) ZOOM does not consent to DISTRIBUTOR'S activities pursuant to Section 18 above. (e) Upon termination of this Agreement by either party, DISTRIBUTOR will discontinue marketing the PRODUCTS and ZOOM will have the option, which may be exercised by notice to DISTRIBUTOR within fourteen (14) days following the effective date of termination, to repurchase any or all of DISTRIBUTOR'S remaining inventory of the PRODUCTS at the invoice price. If ZOOM does not elect to repurchase DISTRIBUTOR'S remaining inventory as provided above, DISTRIBUTOR may sell any PRODUCTS remaining in its inventory. (f) If this Agreement is terminated, then the party terminating the Agreement shall not be liable to the other for any damages, indemnification's, expenditures, loss of profits or prospective profits of any kind sustained or alleged to have been sustained or arising out of such Agreement, both parties hereby irrevocably waiver any such rights granted by the laws of their respective countries or of any other jurisdiction. Both parties hereby covenant and agree that they will bring no action or proceeding of any nature whatsoever in any court, before any tribunal, or under any arbitration proceeding providing for herein, seeking or claiming any such damages, indemnification, expenditures, loss of profits or prospective profits. Each party recognizes and acknowledges that the other party is entering into this Agreement in reliance upon and in consideration of the agreements and covenants contained herein. (g) Sections 4,8,9,10,11,12,13,15,17,19,21,22,23 and 24 shall all survive termination of this Agreement. 20. Force Majeure Neither party shall be deemed to be in default pursuant to this Agreement, other than the obligation to make money payments, so long as its failure to perform any of its obligations hereunder is occasioned solely by fire, labor disturbance, laws, regulations, orders, requests, recommendations or instructions of any governmental authorities, acts of God, or any similar cause beyond such party's control. 21. Compliance With Laws: USA Export Controls (a) ZOOM, at its expense and its name, shall obtain and shall own all permits for homologation or other regulatory approvals for the technical performance of the PRODUCTS or for the importation into and use within the TERRITORY, or other approvals required in the TERRITORY. DISTRIBUTOR shall render such assistance to ZOOM as ZOOM may reasonably request from time to time. (b) DISTRIBUTOR shall comply with all applicable laws, including but not limited to export control laws, anti boycott laws and the Foreign Corrupt Practices Act, which prohibits certain payments to third parties, in connection with its marketing, distribution, and sale of the PRODUCTS, including obtaining (at it's own expense) any and all governmental approvals and authorizations, other than as provided in subparagraph (a) above, that may be required. Further, DISTRIBUTOR shall, at is own expense, take any measure required within the TERRITORY to declare, record, file, notify, authenticate, or otherwise render valid this Agreement. (c) Without limiting the foregoing, DISTRIBUTOR agrees not to export, re-export, or permit the re-exportation of the PRODUCTS to any country now or hereafter included in the US Department of Commerce's list of countries to which exportation of the PRODUCTS is or may be restricted or prohibited, unless that exportation or re-exportation is specifically authorized by a special license issued by the U.S. Office of Export Administration. This provision shall not be interpreted to expand the definition of "Territory" set forth in Section 2(b) of this Agreement in any way. 22. Execution and Controlling Law This Agreement shall be executed and accepted on behalf of ZOOM in the Commonwealth of Massachusetts by a duly authorized officer, only following signature by a duly authorized representative of DISTRIBUTOR. Except as otherwise set forth in Section 23: (a) the Commonwealth of Massachusetts, USA, shall be the place of performance of the Agreement and the venue for any legal disputes;(b) this Agreement shall be subject to the laws of the Commonwealth of Massachusetts, excluding it's choice of law rules; and (c) ZOOM and DISTRIBUTOR consent to be bound by the provisions of such laws regardless of the forum in which such laws are applied. The Vienna Convention on the International Sale of Goods is expressly excluded from application. 23. Arbitration of Disputes Any controversy or claim arising out of or relating to this Agreement or its breach, which the parties fail to resolve by agreement within fifteen (15) days of notice of such controversy or claim, shall be finally settled by binding arbitration under the rules and auspices of the London Court of International Arbitration, in London, England, by a single arbitrator with experience in commercial arbitration selected by the President of the LCIA, who shall apply the laws of the Commonwealth of Massachusetts or, if the application of such laws shall be prohibited by the country which DISTRIBUTOR is domiciled, then any disputes arising hereunder shall be submitted to the courts of the Commonwealth of Massachusetts, to whose jurisdiction the parties hereby consent, for settlement under the laws of the Commonwealth of Massachusetts. The language of the arbitration shall be English. The parties hereby submit to such arbitration and to the enforcement of any award resulting therefrom by any court of competent jurisdiction. 24. Language The official language of this Agreement is English. In the event of any difference in the meaning between English and translated text, the English text shall govern. It shall be the obligation of DISTRIBUTOR to comply with any laws in the TERRITORY requiring PRODUCT literature to be presented in a language other than English. If any translations of the Agreement are required for import of PRODUCTS into the TERRITORY, the DISTRIBUTOR will furnish a qualified interpreter to make such translations at DISTRIBUTOR'S expense. 25. Amendments This Agreement may not be changed or amended unless in writing signed by both parties. 26. Entire Agreement This Agreement contains the entire agreement of the parties, and supersedes all prior agreements, understandings, representations, conditions, warranties, and covenants, whether oral or written, between ZOOM and DISTRIBUTOR. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the date first above- written, DISTRIBUTOR ZOOM /s/ Ibrihim Sevilmis /s/ Terry Manning - --------------------------------- -------------------------------------- Ibrahim Sevilmis, General Manager Terry Manning, Vice President of Sales EX-31 3 exh31.txt EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Frank B. Manning, President and Chief Executive Officer of Zoom Technologies, Inc., certify that: 1. I have reviewed this report on Form 10-Q of Zoom Technologies, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) (Omitted) c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2004 /s/ Frank B. Manning Frank B. Manning President and Chief Executive Officer (Principal Executive Officer) EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert A. Crist, Chief Financial Officer of Zoom Technologies, Inc., certify that: 1. I have reviewed this report on Form 10-Q of Zoom Technologies, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) (Omitted) c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2004 /s/ Robert A. Crist Robert A. Crist Chief Financial Officer (Principal Financial Officer) EX-32 4 exh32.txt EXHIBIT 32.1 CERTIFICATION 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) 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), each of the undersigned officers of Zoom Technologies, Inc., a Delaware corporation (the "Company"), does hereby certify, to the best of such officer's knowledge and belief, that: (1) The Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (the "Form 10-Q") 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-Q fairly presents, in all materials respects, the financial condition and results of operations of the Company. Dated: November 12, 2004 /s/ Frank B. Manning ------------------------------------ Frank B. Manning Chief Executive Officer EXHIBIT 32.2 CERTIFICATION 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) 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), each of the undersigned officers of Zoom Technologies, Inc., a Delaware corporation (the "Company"), does hereby certify, to the best of such officer's knowledge and belief, that: (1) The Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (the "Form 10-Q") 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-Q fairly presents, in all materials respects, the financial condition and results of operations of the Company. Dated: November 12, 2004 /s/ Robert A. Crist ------------------------------------ Robert A. Crist Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----