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, 1996
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 TELEPHONICS, INC.
(Exact Name of Registrant as Specified in its Charter)
Canada 04-2621506
(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 in the U.S.) (Zip Code)
1200 Royal Center
1055 West Georgia Street, Vancouver, B.C. V6E 3P3
(Address of Principal Executive Offices in Canad (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 [ ]
The number of shares outstanding of the registrant's Common Stock, No Par Value,
as of November 13, 1996 was 7,446,104 shares.
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 3
Consolidated Statements of Income for the Three
Months Ending September 30, 1996 and 1995 4
Consolidated Statements of Income for the Nine
Months Ending September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for the Nine
Months Ending September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 11
Part II.Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ZOOM TELEPHONICS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
9/30/96 12/31/95
ASSETS
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $12,599,654 $ 150,671
Accounts receivable, net of reserves
for doubtful accounts, returns and allowances of
$2,928,312 at 9/30/96 and $2,717,463 at 12/31/95 ....................... 12,813,962 20,396,314
Inventories ............................................................... 18,783,073 24,173,557
Refundable income taxes ................................................... 1,701,031 --
Deferred income taxes ..................................................... 1,513,461 1,513,461
Prepaid expenses and other assets ......................................... 321,693 221,907
----------- -----------
Total current assets ................................ 47,732,874 46,455,910
Property and equipment, net .................................................... 4,052,348 3,138,907
Other non-current assets ....................................................... 1,712,917 --
----------- -----------
$53,498,139 $49,594,817
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Credit line payable ....................................................... $ -- $ 2,500,000
Accounts payable .......................................................... 4,948,883 18,635,269
Accrued expenses .......................................................... 998,780 948,911
Income taxes payable ...................................................... -- 236,493
----------- -----------
Total current liabilities ........................... 5,947,663 22,320,673
----------- -----------
Stockholders' equity:
Common stock, no par value, 25,000,000 shares authorized; 7,443,204 shares
issued and outstanding at September 30, 1996
and 6,200,930 at December 31, 1995 ...................................... 24,842,968 7,289,577
Retained earnings ......................................................... 22,707,508 19,984,567
----------- -----------
Total stockholders' equity .......................... 47,550,476 27,274,144
----------- -----------
$53,498,139 $49,594,817
=========== ===========
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending September 30,
---------------------------------
1996 1995
---- ----
<S> <C> <C>
Net sales ............................. $ 20,002,140 $ 23,530,876
Costs of goods sold ................... 16,124,408 17,493,742
------------ ------------
Gross profit ..................... 3,877,732 6,037,134
Operating expenses:
Selling .......................... 2,198,975 2,442,476
General and administrative ....... 924,131 737,494
Research and development ......... 715,242 446,900
------------ ------------
Total operating expenses ..... 3,838,348 3,626,870
------------ ------------
Income from operations ........... 39,384 2,410,264
Other income, net ..................... 144,013 31,737
------------ ------------
Income before income taxes ....... 183,397 2,442,001
Income tax expense/(benefit) .......... (69,429) 900,000
------------ ------------
Net income ....................... $ 252,826 $ 1,542,001
============ ============
Income per common and common equivalent
share:
Primary .......................... $ .03 $ .25
============ ============
Fully diluted .................... $ .03 $ .25
============ ============
Average common and common equivalent
shares outstanding:
Primary .......................... 7,481,791 6,208,904
============ ============
Fully diluted .................... 7,510,290 6,238,310
============ ============
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ending September 30,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Net sales ............................. $74,378,283 $60,991,884
Costs of goods sold ................... 58,975,745 45,824,619
----------- -----------
Gross profit ..................... 15,402,538 15,167,265
Operating expenses:
Selling .......................... 6,856,203 6,180,352
General and administrative ....... 2,621,048 1,775,582
Research and development ......... 1,945,145 1,233,468
----------- -----------
Total operating expenses ..... 11,422,396 9,189,402
----------- -----------
Income from operations ........... 3,980,142 5,977,863
Other income, net ..................... 128,070 82,031
----------- -----------
Income before income taxes ....... 4,108,212 6,059,894
Income tax expense .................... 1,385,271 2,315,000
----------- -----------
Net income ....................... $ 2,722,941 $ 3,744,894
=========== ===========
Income per common and common equivalent
share:
Primary .......................... $ .38 $ .62
=========== ===========
Fully diluted .................... $ .38 $ .61
=========== ===========
Average common and common equivalent
shares outstanding:
Primary .......................... 7,095,663 6,034,038
=========== ===========
Fully diluted .................... 7,095,663 6,185,626
=========== ===========
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ending September 30,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 2,722,941 $ 3,744,894
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................. 429,649 184,497
Changes in assets and liabilities:
Accounts receivable ......................................... 7,582,351 (2,234,142)
Inventories ................................................. 5,486,169 (8,969,765)
Refundable income taxes ..................................... (116,226) --
Prepaid expenses and other assets ........................... (462,375) (427,933)
Accounts payable and accrued expenses ....................... (13,636,515) 5,205,350
Accrued income taxes ........................................ (236,493) (613)
------------ ------------
Net cash provided by (used in) operating activities .... 1,769,501 (2,497,712)
------------ ------------
Cash flows from investing activities:
Purchase of certain assets of a business product line ......... (81,375) --
Additions to property, plant and equipment .................... (1,116,800) (891,383)
------------ ------------
Net cash used in investing activities ............. (1,198,175) (891,383)
------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving bank line of credit (2,500,000) 2,100,000
Proceeds from the issuance of common stock .................... 11,573,218 --
Proceeds from exercise of stock options ....................... 2,804,439 1,064,700
------------ ------------
Net cash provided by financing activities .............. 11,877,657 3,164,700
------------ ------------
Net increase (decrease) in cash and cash equivalents ................ 12,448,983 (224,395)
Cash and cash equivalents, beginning of period ...................... 150,671 975,400
------------ ------------
Cash and cash equivalents, end of period ............................ $ 12,599,654 $ 751,005
============ ============
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The consolidated financial statements of Zoom Telephonics, 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 note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ending December 31, 1995
included in the Company's 1995 Annual Report on Form 10-K.
The consolidated balance sheet as of September 30, 1996, the consolidated
statements of income for the three and nine months ending September 30, 1996 and
1995, and the consolidated statements of cash flows for the nine months ending
September 30, 1996 and 1995 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 results of operations for the three and nine months ending September 30,
1996 are not necessarily indicative of the results to be expected for the entire
fiscal year ending December 31, 1996.
Certain expenses, including employee benefit and occupancy expenses, have been
reclassified from general and administrative expense to cost of goods sold,
selling, and research and development expenses in order to more accurately
reflect the Company's cost structure. These reclassifications have been made to
the 1995 statements in order to conform to the 1996 presentation.
(2) Inventories
<TABLE>
<CAPTION>
Inventories consist of the following: 9/30/96 12/31/95
------------------------------------- ------- --------
<S> <C> <C>
Raw materials $ 9,014,628 $ 13,300,407
Work in process 7,009,156 6,647,963
Finished goods 2,759.289 4,225,187
-------------- -------------
$ 18,783,073 $ 24,173,557
============== ============
</TABLE>
(3) Secondary Stock Offering
On April 11, 1996 the Company sold 800,000 shares of its common stock in a
registered offering on a direct placement basis for proceeds of $11,573,218 net
of expenses and underwriters fees of $926,782. The net proceeds were used to
repay certain obligations of the Company.
<PAGE>
(4) Product Line Acquisition
On June 24, 1996, the Company issued 102,641 shares of common stock to acquire
certain assets, including inventory and property and equipment, associated with
a product line of Tribe Computer Works, Inc. The acquisition was recorded using
the purchase method of accounting, whereby the net assets acquired were recorded
at their estimated fair values and the excess of cost over the fair value of the
assets acquired of $1,546,469 was allocated to goodwill and is being amortized
over 10 years. Transaction costs incurred to complete the acquisition amounted
to $241,468 and are included in the total consideration allocated to the assets
purchased, including goodwill.
(5) Stock Options
Proceeds from the exercise of stock under the Company's stock option plans and
income tax benefits attributable to stock options exercised are credited to
common stock. During the nine months ended September 30, 1996, options with
respect to 339,633 shares were exercised and such exercises resulted in a tax
benefit to the Company of $1,584,805. This amount is recorded as refundable
income taxes on the balance sheet.
(6) Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
Nine months ending September 30,
1996 1995
------ ------
<S> <C> <C>
Cash paid during the year for interest: $ 169,248 $ --
Cash paid during the year for income taxes: 1,873,000 1,210,000
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During the second quarter of 1996, the Company issued 102,641 shares of common
stock to acquire certain assets of Tribe Computer Works, Inc., including
inventory of $95,685 and property and equipment of $107,467. In addition, the
tax effect of the exercise of stock options resulted in increases to additional
paid-in capital and an increase in refundable income taxes of $1,584,805 for the
first nine months of 1996. These non-cash transactions have been excluded from
the statements of cash flows.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Zoom Telephonics, Inc. ("Zoom" or the "the Company") achieved net sales of
$20,002,140 for its third quarter ending September 30, 1996, down 15% from
$23,530,876 in the third quarter of 1995, primarily due to lower average
faxmodem selling prices. Net sales for the nine month period ending September
30, 1996 grew 22% to $74,378,283 from $60,991,884 in the first nine months of
1995, primarily due to unit volume increases for V.34 faxmodems, partially
offset by lower average faxmodem selling prices. Third quarter 1996 net income
of $252,826 or $.03 per share was down from $1,542,001 or $.25 per share in the
third quarter of 1995, primarily due to lower sales and gross margin. Net income
for the first nine months of 1996 of $2,722,941 or $.38 per share was down from
$3,744,894 or $.62 per share for the first nine months of 1995 primarily due to
lower gross margin. Net income decreased to 1.3% of net sales for the third
quarter of 1996 from 6.6% of net sales for the third quarter of 1995 primarily
due to a decline in gross margin to 19.4% from 25.7%. Net income for the first
nine months of 1996 fell to 3.7% of net sales from 6.2% for the first nine
months of 1995 as gross margin declined to 20.7% from 24.9%.
Sales of branded Zoom products in North America continued to account for the
majority of net sales, despite significant gains in other markets. Worldwide OEM
sales were 19.4% of net sales in the third quarter of 1996 up from 9.3% in the
third quarter of 1995. For the first nine months of 1996 worldwide OEM sales
were 21.2% of net sales up from 12.5% for the first nine months of 1995.
Zoom-brand sales outside of North America were 16% of net sales in the third
quarters of both 1996 and 1995. For the first nine months of 1996 Zoom-brand
sales outside of North America were 18% of net sales, up from 15% for the first
nine months of 1995.
Gross margin declined to 19.4% of net sales in the third quarter of 1996 from
25.7% in the third quarter of 1995, reflecting an increase in lower-margin OEM
sales and increased price competition. These factors also affected the first
nine months of 1996, as gross margin dropped from 24.9% of net sales to 20.7%.
Operating expenses for the third quarter of 1996 rose to $3,838,348 or 19.2% of
net sales from $3,626,870 or 15.4% of net sales in the third quarter of 1995.
The spending increase was primarily due to operating costs associated with the
Tribe product line purchased in the second quarter of 1996.
Selling and marketing expenses decreased to $2,198,975 from $2,442,476,
reflecting increased OEM sales and the impact of lower variable selling
expenses, but rose as a percentage of net sales to 11.0% from 10.4%, due to the
lower third quarter sales in 1996. Selling and marketing expenses for the first
nine months of 1996 increased to $6,856,203 from $6,180,352 over the first nine
months of 1995; but declined as a percentage of net sales to 9.2% from 10.1%
respectively primarily due to the higher mix of OEM sales.
General and administrative expense increased to $924,131 or 4.6% of net sales
from $737,494 or 3.1% of net sales, primarily reflecting increased personnel
costs. For the first nine months of 1996 general and administrative expense
increased to $2,621,048 or 3.5% of net sales from $1,775,582 or 2.9% of net
sales for the first nine months of 1995. These increases were primarily due to
increased personnel expenses to support the Company's growth.
<PAGE>
Research and development expenses rose to $715,242 or 3.6% of net sales during
the third quarter of 1996 from $446,900 or 1.9% of net sales in the third
quarter of 1995. For the first nine months of 1996, research and development
expenses rose to $1,945,145 or 2.6% of net sales from $1,233,468 or 2.0% of net
sales for the first nine months of 1995. The increases were primarily due to the
addition of personnel to support the Company's development efforts and increased
government approvals required for international sales.
Liquidity and Capital Resources
- -------------------------------
Zoom's balance sheet was strong at September 30, 1996. Working capital rose to
$41,785,211 from $24,135,237 on December 31, 1995, the current ratio improved to
8.0 from 2.1, and cash increased to $12,599,654 from $150,671. In addition, the
Company has a commitment to renew a $10 million line of credit.
Operating activities provided $1,769,501 in cash during the first nine months of
1996. The primary use of cash was the reduction in accounts payable by
$13,636,515. The primary generators of cash were decreased accounts receivable
of $7,582,351, decreases in inventories of $5,486,169 and net income of
$2,722,941. The reduction in accounts receivable was primarily due to lower
sales in the third quarter of 1996 than in the fourth quarter of 1995.
Zoom's capital expenditures of $1,198,175 during the first nine months of 1996
reflected purchases of computer equipment, leasehold improvements to a new
manufacturing facility occupied in the third quarter, and continuing renovations
to its headquarters. In addition, on June 24, 1996 the Company issued 102,641
shares of common stock to acquire certain assets of Tribe Computer Works, Inc.,
including intellectual property, inventory, and property and equipment. The
acquisition was recorded using the purchase method of accounting, whereby the
net assets acquired were recorded at their estimated fair values and the excess
of the cost over the fair value of the assets acquired of $1,546,469 was
allocated to goodwill that is being amortized over 10 years.
During the first nine months of 1996 financing activities provided the Company
$11,877,657 of cash. The Company realized net proceeds of $11,573,218 from the
sale of 800,000 shares of its common stock in a registered offering on a direct
placement basis, and proceeds of $2,804,439 from the exercise of stock options.
These proceeds were offset by $2,500,000 of repayments of the Company's
revolving line of credit.
The Company believes that its existing cash, together with funds generated from
operations and available sources of financing, will be sufficient to meet its
normal working capital requirements.
<PAGE>
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
Forward-looking statements in this report, including without limitation
statements relating to the adequacy of the Company's resources, are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such forward-looking statements
involve risks and uncertainties, including without limitation: potential
quarterly fluctuations in the Company's operating results, seasonality of sales,
rapid technological change, competition, the concentration of the Company's
customers, the Company's dependence upon a principal supplier for its modem
chipsets and on third-party assemblers, risks associated with inventory
management, risk of product returns and price-protection, sales channel risks,
risks associated with international sales, the ability of the Company to manage
its growth, the Company's reliance on key employees, risks associated with
proprietary technology, and other risks and uncertainties indicated from time to
time in the Company's filings with the Securities and Exchange Commission.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. - Legal Proceedings
On March 21, 1996, James A. Storer and REFAC International, Ltd., a
company engaged in the business of acquiring and licensing patents, filed a
complaint in the United States District Court, District of Massachusetts, naming
Hayes Microcomputer Products, Inc. and the Company as defendants in a patent
lawsuit. The complaint alleges that the V.42 bis international
telecommunications standard for data compression in computer modems is covered
by a patent owned by the plaintiffs, and the defendants' modems that incorporate
this standard infringe the patent. While the complaint seeks to permanently
enjoin the defendants from infringing the patent and monetary damages for past
infringement, REFAC has offered to negotiate a royalty for licensing the patent.
The Company believes that the alleged infringement involves technology
incorporated in chipsets provided to it from Rockwell International and that, if
so, the Company will be indemnified by Rockwell. By an agreement dated July 12,
1996 Rockwell has agreed, subject to certain conditions, to assume defense of
Zoom against the action.
ITEM 6 - Exhibits and reports on Form 8-K
(a) Exhibit Description
11 Statement of Computation of Per Share Earnings
(b) No reports on Form 8-K were filed by the Company during the quarter
ending September 30, 1996
<PAGE>
ZOOM TELEPHONICS, INC.
FINANCIAL INFORMATION NOT AUDITED
The preceding financial information, with the exception of the consolidated
balance sheet at December 31, 1995, has not been audited. However, in the
opinion of management, all material adjustments, consisting only of normal
recurring accruals necessary to present a fair statement of the results for
these periods, have been reflected. The results for these periods are not
necessarily indicative of the results for the full fiscal year.
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 TELEPHONICS, INC.
Date: November 14, 1996 By: /s/ Frank Manning
--------------------------
Frank B. Manning, President
Date: November 14, 1996 By: /s/ Steven T. Shedd
----------------------------
Steven T. Shedd, Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 11. Statement of computation of per share earnings
<TABLE>
<CAPTION>
Three Months Ending September 30,
1996 1995
---------------------------- --------------------------
Fully Fully
Primary diluted Primary diluted
<S> <C> <C> <C> <C>
Net income ......................... $ 252,826 $ 252,826 $ 1,542,001 $ 1,542,001
=========== =========== =========== ===========
Weighted average number of common
shares outstanding ............... 7,442,264 7,442,264 6,093,944 6,093,944
Incremental shares from the assumed
exercise of dilutive stock options 404,157 389,759 474,600 474,600
Common shares assumed to have been
repurchased, treasury stock method (364,630) (321,733) (359,640) (330,234)
----------- ----------- ----------- -----------
Weighted average common and
common equivalent shares
outstanding ...................... 7,481,791 7,510,290 6,208,904 6,238,310
=========== =========== =========== ===========
Net income per share ............... $ .03 $ .03 $ .25 $ .25
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ending September 30,
1996 1995
----------------------------- --------------------------
Fully Fully
Primary diluted Primary diluted
<S> <C> <C> <C> <C>
Net income ......................... $ 2,722,941 $ 2,722,941 $ 3,744,894 $ 3,744,894
=========== =========== =========== ===========
Weighted average number of common
shares outstanding ............... 6,941,510 6,941,510 6,041,259 6,041,259
Incremental shares from the assumed
exercise of dilutive stock options 398,091 398,091 474,600 474,600
Common shares assumed to have been
repurchased, treasury stock method (243,938) (243,938) (481,821) (330,233)
----------- ----------- ----------- -----------
Weighted average common and
common equivalent shares
outstanding ...................... 7,095,663 7,095,663 6,034,038 6,185,626
=========== =========== =========== ===========
Net income per share ............... $ .38 $ .38 $ .62 $ .61
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S Dollars
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Sep-30-1996
<EXCHANGE-RATE> 1
<CASH> 12,599,654
<SECURITIES> 0
<RECEIVABLES> 12,813,962
<ALLOWANCES> 2,928,312
<INVENTORY> 18,783,073
<CURRENT-ASSETS> 47,732,874
<PP&E> 4,052,348
<DEPRECIATION> 1,765,973
<TOTAL-ASSETS> 53,498,139
<CURRENT-LIABILITIES> 5,947,663
<BONDS> 0
0
0
<COMMON> 24,842,968
<OTHER-SE> 22,707,508
<TOTAL-LIABILITY-AND-EQUITY> 53,498,139
<SALES> 86,671,139
<TOTAL-REVENUES> 74,378,283
<CGS> 58,975,745
<TOTAL-COSTS> 11,422,396
<OTHER-EXPENSES> 128,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169,248
<INCOME-PRETAX> 4,108,212
<INCOME-TAX> 1,385,271
<INCOME-CONTINUING> 2,722,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,722,941
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
