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 March 31, 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 Canada) (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 May 8, 1996 was 7,159,530 shares.
1
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ZOOM TELEPHONICS, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1. Consolidated Balance Sheets as of March 31,1996
and December 31, 1995 3
Consolidated Statements of Income for the Three
Months Ending March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Three
Months Ending March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management Discussion and Analysis of
Financial Condition and Results of Operations 7 - 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ZOOM TELEPHONICS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
3/31/96 12/31/95
ASSETS (Unaudited) (Audited)
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 598,410 $ 150,671
Accounts receivable, net of reserves
for doubtful accounts, returns and allowances of
$3,378,658 at 3/31/96 and $2,717,463 at 12/31/95 22,031,419 20,396,314
Inventories 23,753,634 24,173,557
Deferred income taxes 1,513,461 1,513,461
Deferred registration fees 350,000 -
Prepaid expenses and other assets 214,426 221,907
-------------- --------------
Total current assets 48,461,350 46,455,910
Property and equipment, net 3,235,230 3,138,907
-------------- --------------
$ 51,696,580 $ 49,594,817
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Credit line payable $ 6,600,000 $ 2,500,000
Accounts payable 12,497,257 18,635,269
Accrued expenses 1,702,223 948,911
Income taxes payable 888,801 236,493
-------------- --------------
Total current liabilities 21,688,281 22,320,673
-------------- --------------
Stockholders' equity:
Common stock, no par value 25,000,000 shares authorized; 6,247,330 shares
issued and outstanding at March 31, 1996
and 6,200,930 at December 31, 1995 7,810,469 7,289,577
Retained earnings 22,197,830 19,984,567
-------------- --------------
Total stockholders' equity 30,008,299 27,274,144
-------------- --------------
$ 51,696,580 $ 49,594,817
============== ==============
</TABLE>
3
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ZOOM TELEPHONICS, INC.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending March 31,
1996 1995
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<S> <C> <C>
Net sales $ 33,245,098 $ 20,338,965
Costs of goods sold 25,462,178 15,548,995
-------------- --------------
Gross profit 7,782,920 4,789,970
Operating expenses:
Selling 2,705,588 2,018,512
General and administrative 828,003 519,463
Research and development 611,084 403,795
-------------- --------------
Total operating expenses 4,144,675 2,941,770
-------------- --------------
Income from operations 3,638,245 1,848,200
Other income (expense), net (124,982) 21,250
-------------- ---------------
Income before income taxes 3,513,263 1,869,450
Income tax expense 1,300,000 729,000
-------------- --------------
Net income $ 2,213,263 $ 1,140,450
============== ==============
Income per common and common equivalent
share:
Primary $ .35 $ .19
============== ==============
Fully diluted $ .35 $ .19
============== ==============
Average common and common equivalent
shares outstanding:
Primary 6,359,287 6,025,395
============== ==============
Fully diluted 6,359,287 6,025,395
============== ==============
</TABLE>
4
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ZOOM TELEPHONICS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending March 31,
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,213,263 $ 1,140,450
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 116,838 58,281
Changes in assets and liabilities:
Accounts receivable (1,635,105) (1,015,029)
Inventories 419,923 (356,758)
Deferred registration fees (350,000)
Prepaid expenses and other assets 7,481 34,092
Accounts payable and accrued expenses (5,384,700) 2,144,686
Accrued income taxes 652,308 389,500
Tax benefit from exercise of non-qualified
stock options 153,692 -
------------- -------------
Net cash provided by (used in) operating activities (3,806,300) 2,395,222
------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment (213,161) (253,277)
------------- -------------
Cash flows from financing activities:
Net borrowings under revolving bank line of credit 4,100,000 -
Proceeds from exercise of stock options 367,200 -
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Net cash provided by financing activities 4,467,200 -
------------- -------------
Net increase in cash and cash equivalents 447,739 2,141,945
Cash and cash equivalents, beginning of period 150,671 975,400
------------- -------------
Cash and cash equivalents, end of period $ 598,410 $3,117,345
============= ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 88,178 $ -
Income taxes 494,000 339,500
</TABLE>
5
<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 March 31, 1996, the consolidated
statements of income for the three months ending March 31, 1996 and 1995, and
the consolidated statements of cash flows for the three months ending March 31,
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 months ending March 31, 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: 3/31/96 12/31/95
<S> <C> <C>
Raw Materials $ 12,880,160 $ 13,300,407
Work in Process 4,831,030 6,647,963
Finished Goods 6,042,444 4,225,187
-------------- -------------
$ 23,753,634 $ 24,173,557
============== ============
</TABLE>
(3) Subsequent Event
On April 11, 1996, the Company sold 800,000 shares of its Common
Stock in a registered offering on a direct placement basis, realizing proceeds
of $11,900,000 in cash before estimated expenses of $350,000.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Zoom Telephonics, Inc., ("Zoom" or "the Company"), achieved net sales
of $33,245,098 and net income of $2,213,263 for the Company's first quarter
ending March 31, 1996, up 63.5% and 94.1% respectively from the prior year's
first quarter. Earnings per share rose from $0.19 for the first quarter of 1995
to $0.35 for the first quarter of 1996.
Net sales for the quarter ending March 31, 1996 increased $12,906,133
or 63.5% over the first quarter of 1995. This increase was primarily due to
strong growth in OEM sales and in international sales of Zoom brand packaged
products. OEM sales grew to 18% of overall sales from 6% in the quarter ending
March 31, 1995 as the percentage of personal computers shipping with a faxmodem
increased, and as Zoom increased its efforts in the OEM area. International
sales grew to 17% of overall sales from 6% in the first quarter of 1995 due to
significant expansion of the number of products approved for sale outside of
North America, and the expansion of the number of high volume retailers and
distributors selling Zoom products internationally. Sales of Zoom brand packaged
products through North American retailers and distributors also grew, fueled by
demand for V.34 28,800 bps modems.
Gross margin was 23.4% in the first quarter of 1996, only a slight
decrease from 23.6% in the first quarter of 1995 despite a significantly higher
mix of OEM sales, which typically result in lower gross margin and lower
associated selling expense. The lower margin from OEM sales was partially offset
by a changing sales mix to higher margin V.34 28,800 bps modems.
Selling expenses during the first quarter of 1996 increased 34% to
$2,705,588 from $2,018,512 in the first quarter of 1995. The increase was
primarily due to costs related to the Company's increased sales, including
increases in selling commissions, payroll expenses from personnel additions in
sales and customer service, and cooperative advertising allowances. Selling
expenses as a percentage of net sales decreased to 8.1% for the first quarter of
1996 from 9.9% for the first quarter of 1995, primarily due to the higher mix of
OEM sales.
General and administrative expenses increased 59.4% to $828,003 or 2.5%
of net sales during the first quarter of 1996 from $519,463 or 2.6% of net sales
in the first quarter of 1995. The increase was primarily due to increased
personnel expenses to support the Company's growth.
Research and development expenses increased 51.3% to $611,084 or 1.8%
of net sales during the first quarter of 1996 from $403,795 or 2.0% of net sales
in the first quarter of 1995. The increase in expenses was primarily due to the
addition of personnel to support the Company's development efforts.
Operating income increased 96.9% to $3,638,245 or 10.9% of net sales
during the first quarter of 1996 from $1,848,200 or 9.1% of net sales in the
first quarter of 1995. The growth was primarily due to higher sales and the
decrease in selling expenses as a percentage of sales.
7
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Liquidity and Capital Resources
Zoom ended the first quarter of 1996 with a strong balance sheet.
Working capital increased $2,597,832 or 10.9% during the quarter to $26,773,069,
with the current ratio improving from 2.08 to 2.23. Cash and cash equivalents
increased $447,739 to $598,410. In addition, the Company has a $10 million line
of credit, of which $6,600,000 was outstanding on March 31, 1996. 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 $11,900,000 before payment
of estimated expenses of $350,000.
Operating activities used $3,806,300 in cash during the first quarter
of 1996. During this period accounts payable and other accrued expenses were
reduced by $5,384,700. Accounts receivable increased $1,635,105 due to a slight
increase in the days sales outstanding during the quarter. These uses of cash
flow were partially offset by the Company's $2,213,263 net income, an increase
in accrued taxes of $652,308, and a decrease in inventories of $419,923.
Zoom's capital expenditures of $213,161 during the first quarter of
1996 reflected continuing renovation of its headquarters and purchases of
computer equipment. Although, the Company does not have any significant capital
commitments, it anticipates that it will continue to invest in equipment and in
improvements to its manufacturing facilities during the year.
During the first quarter of 1996, financing activities provided the
Company with $4,467,200 of cash consisting of a $4,100,000 increase in its
borrowings against the Company's revolving bank line of credit and $367,200 in
proceeds from the exercise of employee and director stock options.
The Company believes that anticipated cash flow from operations, the
available bank line of credit, and the net proceeds from the common stock sale
will be sufficient to fund its cash flow requirements for the next twelve
months.
"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.
8
<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. The Company has forwarded a
copy of this complaint to Rockwell for further action.
ITEM 6 - Exhibits and reports on Form 8-K
(a) Exhibit Description Page
------- -------------------------- ----
11 Statement Recomputation of 11
Per Share Earnings
(b) No reports on Form 8-K were filed by the Company during the
quarter ending March 31, 1996
9
<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: May 10, 1996 By: /s/ Frank Manning
--------------------------
Frank B. Manning, President
Date: May 10, 1996 By: /s/ Steven T. Shedd
----------------------------
Steven T. Shedd, Vice President of Finance
and Chief Financial Officer
Principal Financial and Accounting Officer)
10
<PAGE>
Exhibit 11. Statement recomputation of per share earnings
<TABLE>
<CAPTION>
Three Months Ending March 31,
1996 1995
----------------------------- ---------------------------
Fully Fully
Primary diluted Primary diluted
----------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net income $ 2,213,263 $ 2,213,263 $ 1,140,450 $ 1,140,450
=========== =========== =========== ===========
Weighted average of shares
outstanding 6,221,444 6,221,444 6,014,480 6,014,480
Incremental shares from the assumed
exercise of dilutive stock options 426,277 426,277 553,400 553,400
Common shares assumed to have been
repurchased, treasury stock method (288,434) (288,434) (542,485) (542,485)
------------- -------------- ------------- --------------
Weighted average common and
common equivalent shares
outstanding 6,359,287 6,359,287 6,025,395 6,025,395
============= ============== ============= ==============
Net income per share $ .35 $ .35 $ .19 $ .19
============= ============== ============= ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 598,410
<SECURITIES> 0
<RECEIVABLES> 22,031,419
<ALLOWANCES> 3,378,658
<INVENTORY> 23,753,634
<CURRENT-ASSETS> 2,077,887
<PP&E> 3,235,230
<DEPRECIATION> 1,490,612
<TOTAL-ASSETS> 51,696,580
<CURRENT-LIABILITIES> 21,688,281
<BONDS> 0
0
0
<COMMON> 7,810,469
<OTHER-SE> 22,197,830
<TOTAL-LIABILITY-AND-EQUITY> 51,696,580
<SALES> 36,955,796
<TOTAL-REVENUES> 33,245,098
<CGS> 25,462,178
<TOTAL-COSTS> 4,144,675
<OTHER-EXPENSES> 21,643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146,625
<INCOME-PRETAX> 3,513,263
<INCOME-TAX> 1,300,000
<INCOME-CONTINUING> 2,213,263
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,213,263
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
