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 June 30, 1997
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, Massach 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 August 14, 1997 was 7,472,371 shares.
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the Three
Months Ending June 30, 1997 and 1996 4
Consolidated Statements of Operations for the Six
Months Ending June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the Six
Months Ending June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management Discussion and Analysis of
Financial Condition and Results of Operations 8-10
Part II. Other Information
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ZOOM TELEPHONICS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
6/30/97 12/31/96
ASSETS (Unaudited) (Audited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 13,588,090 $ 9,172,186
Accounts receivable, net of reserves
for doubtful accounts, returns and allowances of
$4,046,500 at 6/30/97 and $3,564,101 at 12/31/96 8,186,185 18,970,041
Inventories 13,206,549 19,057,575
Recoverable income taxes 3,444,096 1,219,000
Deferred income taxes 2,031,364 2,032,683
Prepaid expenses and other assets 275,685 532,808
-------------- --------------
Total current assets 40,731,969 50,984,293
Property and equipment, net 4,140,702 4,081,406
Goodwill 1,479,922 1,558,764
Other non-current assets 134,937 157,691
------- --------------
$ 46,487,530 $ 56,782,154
============== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable 3,130,794 8,074,472
Accrued expenses 987,258 1,352,725
-------------- --------------
Total current liabilities 4,118,052 9,427,197
-------------- --------------
Stockholders' equity:
Common stock, no par value 25,000,000 shares authorized;
7,472,371 shares issued and outstanding at June 30, 1997
and 7,446,842 at December 31, 1996 25,173,375 24,890,468
Retained earnings 17,196,103 22,464,489
-------------- --------------
Total stockholders' equity 42,369,478 47,354,957
-------------- --------------
$ 46,487,530 $ 56,782,154
============== ==============
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending June 30,
1997 1996
<S> <C> <C>
Net sales $ 12,037,134 $ 21,131,046
Costs of goods sold 14,486,119 17,389,160
-------------- --------------
Gross profit (2,448,985) 3,741,886
Operating expenses:
Selling 2,172,474 1,951,639
General and administrative 1,373,989 868,914
Research and development 1,197,368 618,819
-------------- --------------
Total operating expenses 4,743,831 3,439,372
-------------- --------------
Income (loss) from operations (7,192,816) 302,514
Other income , net 349,862 109,031
-------------- ---------------
Income (loss) before income taxes (6,842,954) 411,553
Income tax expense (benefit) (2,530,848) 154,700
-------------- --------------
Net income (loss) $ (4,312,106) $ 256,853
============== ==============
Income (loss) per common and common
equivalent share:
Primary $ (.58) $ .04
============== ==============
Fully diluted $ (.58) $ .04
============== ==============
Average common and common equivalent
shares outstanding:
Primary 7,472,371 7,260,203
============== ==============
Fully diluted 7,472,371 7,260,203
============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Operations
(Unaudited)
Six Months Ending June 30,
1997 1996
<S> <C> <C>
Net sales $ 29,987,845 $ 54,376,143
Costs of goods sold 29,178,319 42,851,337
-------------- --------------
Gross profit 809,526 11,524,806
Operating expenses:
Selling 4,978,366 4,657,227
General and administrative 2,430,255 1,696,917
Research and development 2,240,712 1,229,903
-------------- --------------
Total operating expenses 9,649,333 7,584,047
-------------- --------------
Income (loss) from operations (8,839,807) 3,940,759
Other income (expense), net 478,949 (15,943)
-------------- ---------------
Income (loss) before income taxes (8,360,858) 3,924,816
Income tax expense (benefit) (3,092,472) 1,454,700
-------------- --------------
Net income (loss) $ (5,268,386) $ 2,470,116
============== ==============
Income (loss) per common and common
equivalent share:
Primary $ (.71) $ .36
============== ==============
Fully diluted $ (.71) $ .36
============== ==============
Average common and common equivalent
shares outstanding:
Primary 7,465,084 6,783,672
============== ==============
Fully diluted 7,465,084 6,783,672
============== ==============
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ending June 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,268,386) $ 2,470,116
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 437,068 233,472
Deferred income taxes 1,319
Changes in assets and liabilities:
Accounts receivable 10,783,856 10,010,813
Inventories 5,851,026 2,386,858
Refundable income taxes (2,225,096) (1,760,033)
Prepaid expenses and other assets 279,877 (14,906,772)
Accounts payable and accrued expenses (5,309,145) (236,493)
Tax benefit from exercise of non-qualified
stock options 78,675 1,586,362
------------- -------------
Net cash provided by (used in) operating activities 4,629,194 (215,677)
------------- --------------
Cash flows from investing activities:
Additions to property, plant and equipment (417,522) (642,524)
------------- -------------
Cash flows from financing activities:
Net repayments under revolving bank line of credit - (2,500,000)
Proceeds from exercise of stock options 204,232 2,756,655
------------- -------------
Net cash provided by financing activities 204,232 11,853,179
------------- -------------
Net increase (decrease) in cash and cash equivalents 4,415,904 10,913,603
Cash and cash equivalents, beginning of period 9,172,186 150,671
------------- -------------
Cash and cash equivalents, end of period $ 13,588,090 $ 11,064,274
============= ===============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 0 $ 168,138
============= =============
Income taxes 0 1,873,000
============= =============
</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, 1996 included in the Company's 1996 Annual Report on Form 10-K.
The consolidated balance sheet as of June 30, 1997, the consolidated
statements of operations for the three months and six months ending June 30,
1997 and 1996, and the consolidated statements of cash flows for the six months
ending June 30, 1997 and 1996 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 six months ending June 30, 1997 are
not necessarily indicative of the results to be expected for the entire fiscal
year ending December 31, 1997.
(2) Inventories
<TABLE>
<CAPTION>
Inventories consist of the following: 6/30/97 12/31/96
<S> <C> <C>
Raw materials $ 7,839,216 $ 11,778,311
Work in process 1,701,394 2,968,064
Finished goods 3,665,939 4,311,200
-------------- -------------
$ 13,206,549 $ 19,057,575
============== ============
</TABLE>
(3) 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 six months ending June 30, 1997, options with respect
to 25,529 shares were exercised and such exercises resulted in a tax benefit to
the Company of $78,675.
<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") recorded net sales
of $12,037,134 and a net loss of $4,312,106 for the Company's second quarter
ending June 30, 1997. Earnings per share declined from a profit of $0.04 for the
second quarter of 1996 to a loss of $0.58 for the second quarter of 1997. Zoom's
net sales for the six months ending June 30, 1997 were $29,987,845, with a net
loss of $5,268,386 or $.71 per share.
Net sales for the quarter ending June 30, 1997 decreased $9,093,912
or 43% from the second quarter of 1996. Net sales for the six months ending June
30, 1997 decreased $24,388,298 or 45% from the first six months of 1996. The
decreases for both periods were primarily due to a decrease in average selling
prices of faxmodems and a decrease in units shipped. The majority of sales came
from V.34 faxmodems, which suffered from severe price competition and reduced
demand, partly due to customer awareness of new 56K modem technology. Zoom began
shipping 56K modem products in March 1997, but demand was low due to delays in
deployment of K56flex(TM) central site equipment by Internet Service Providers.
The Company expects 56K modem sales to increase significantly in the
second half of 1997, since the number of K56flex(TM) compatible Internet Service
Providers is expected to dramatically increase.
Gross margin declined to a negative 20.3% in the second quarter of 1997
from 17.7% in the second quarter of 1996, reflecting increased price competition
which caused decreases in selling prices and continued high credits for channel
price protection. These decreases in margins also reflected writedowns for modem
chipset price drops and increased reserves for obsolescence. For the six months
of 1997, gross margin declined to 2.7% from 21.2% in the first six months of
1996. The major contribution to this decline occurred in the second quarter.
Selling expenses during the second quarter of 1997 increased 11.4% to
$2,172,474 or 18.0% of net sales from $1,951,639 or 9.2% of net sales in the
second quarter of 1996. Selling expenses during the first six months of 1997
increased 6.9% to $4,978,366 or 16.6% of net sales from $4,657,227 or 8.6% of
net sales in the first six months of 1996. Cooperative advertising allowances
and personnel costs increased in the second quarter and first six months of 1997
compared to the second quarter and first six months of 1996. These increases
were partially offset by a decrease in commissions paid as a result of lower
sales.
General and administrative expenses were $1,373,989 or 11.4%
of net sales during the second quarter of 1997 compared to $868,914 or 4.1% of
net sales in the second quarter of 1996. General and administrative expenses
were $2,430,255 or 8.1% of net sales during the first six months of 1997
compared to $1,696,917 or 3.1% of net sales in the first six months of 1996. The
increase was primarily due to increased personnel related expenses, foreign
exchange losses and bad debt expenses.
Research and development expenses increased 93.5% to $1,197,368 or 9.9%
of net sales during the second quarter of 1997 from $618,819 or 2.9% of net
sales in the second quarter of 1996. Research and development expenses increased
82.2% to $2,240,712 or 7.5% of net sales during the first six months of 1997
from $1,229,903 or 2.3% of net sales in the first six months of 1996. The
increase in expenses was primarily due to the addition of personnel and the use
of outside consultants to accelerate the Company's new product development
efforts, particularly for 56K, ISDN and remote access products.
<PAGE>
The Company experienced a loss of $4,312,106 or 35.8% of net sales
during the second quarter of 1997 compared to income of $256,853 or 1.2% of net
sales in the second quarter of 1996. For the six month period of 1997, the
Company lost $5,268,386 or 17.6% of net sales compared to income of $2,470,116
or 4.5% of net sales in the first six months of 1996. The decline was primarily
due to lower sales, the reduction in gross margin including the swing from
positive to negative gross margin in the second quarter, and higher operating
expenses.
Liquidity and Capital Resources
Zoom ended the second quarter of 1997 with a strong balance sheet.
Working capital declined during the first six months to $36,613,917 from
$41,557,096 at December 31, 1996 while the current ratio improved to 9.9 from
5.4. Cash and cash equivalents increased to $13,588,090 from $9,172,186,
particularly due to a reduction in inventory and accounts receivable. (In
addition, the Company has an unused $10 million line of credit which expires
August 31,1997, and is currently in negotiation for renewal).
Operating activities provided $4,629,194 in cash during the first six
months of 1997. During this period, accounts receivable and inventories
decreased $16,634,882. The $10,783,856 decline in accounts receivable was due
primarily to the lower sales volume. The $5,851,026 reduction in inventory
resulted from modem chipset writedowns, increased obsolescence reserves and the
Company's actions to reduce the level of inventories. This source of cash was
offset by the net loss of $5,268,386, a reduction of accounts payable and other
accrued expenses by $5,309,145, and an increase in refundable income taxes of
$2,225,096.
Zoom's capital expenditures of $417,522 during the first six months of
1997 reflected purchases of computer equipment($206,058) and continuing
renovation of its headquarters($118,959). Although the Company does not have any
significant capital commitments, it anticipates that it will continue with
modest investments in equipment and in improvements to its facilities during the
year. The Company also anticipates that it will use significant cash to fund its
working capital requirements during the next six months.
During the first six months of 1997, financing activities provided the
Company with $204,232 of cash proceeds from the exercise of employee and
director stock options.
The Company believes that it's existing cash, together with funds
generated from operations and available sources of financing, will be sufficient
to meet normal working capital requirements.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS 128
establishes a different method of computing net income per share that is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS 128, the Company will be required to present both basic net
income per share and diluted net income per share. Basic net income per share is
expected to be higher than the currently presented net income per share as the
effect of dilutive stock options will not be considered in computing basic net
income per share. The impact on diluted net income per share is not expected to
be material.
The Company plans to adopt SFAS No. 128 in its fiscal quarter ending December
31, 1997 and at that time all historical net income per share data presented
will be restated to conform to the provisions of SFAS No. 128.
"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 and the expected
increased sales of 56k modems, 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: overall product demand for 56K modems or the Company's
K56flex(TM) modems, the renewal of the Company's line of credit, 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
No material developments
ITEM 4 - Submission of Matters to a Vote of Security Holders
Zoom held its Annual Meeting of Shareholders on June 25, 1997. At the
meeting, the shareholders approved (a) the re-election of the Board of Directors
of Zoom Telephonics, Inc. and (b) the appointment of KPMG Peat Marwick LLP as
Zoom's independent auditors for the year ending December 31, 1997.
(a) Election of Directors:
<TABLE>
<S> <C> <C> <C>
Nominee For Against Abstain
----------- ---- ---------- ----------
Frank B. Manning 5,178,172 0 96,395
Peter R. Kramer 5,178,172 0 96,395
Bernard Furman 5,177,272 0 97,295
J. Ronald Woods 5,177,672 0 96,895
L. Lamont Gordon 5,178,172, 0 96,395
<CAPTION>
(b) Approval of the appointment of KPMG Peat
Marwick LLP as independent auditors for the
year ending December 31, 1997:
<S> <C> <C> <C>
For Against Abstain
---- --------- ----------
Approval 5,228,297 2,000 12,420
</TABLE>
ITEM 6 - Exhibits and reports on Form 8-K
(a) Exhibit Description Page
------- --------------------------- ----
11 Statement Re: Computation of 13
Per Share Earnings
(b) No reports on Form 8-K were filed by the Company during the
quarter ending June 30, 1997
<PAGE>
ZOOM TELEPHONICS, INC.
FINANCIAL INFORMATION NOT AUDITED
The preceding financial information, with the exception of the consolidated
balance sheet at December 31, 1996, 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: August 14, 1997 By: /s/ Frank Manning
--------------------------
Frank B. Manning, President
Date: August 14, 1997 By: /s/ Robert A. Crist
--------------------------
Robert A. Crist Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 11. Statement re: computation of per share earnings
<TABLE>
<CAPTION>
Three Months Ending June 30,
1997 1996
----------------------------- ----------------------------
Fully Fully
Primary diluted Primary diluted
<S> <C> <C> <C> <C>
Net income (loss) $ (4,312,106) $ (4,312,106) $ 256,853 $ 256,853
============== ============== ========= =========
Weighted average of shares
outstanding 7,472,371 7,472,371 7,155,321 7,155,321
Incremental shares from the assumed
exercise of dilutive stock options 12,000 28,000 274,794 274,794
Common shares assumed to have been
repurchased, treasury stock method (12,000) (28,000) (169,912) (169,912)
------------- -------------- ------------- --------------
Weighted average common and
common equivalent shares
outstanding 7,472,371 7,472,371 7,260,203 7,260,203
============= ============== ============= ==============
Net income (loss) per share $ (.58) $ (.58) $ .04 $ .04
===================================================================
<CAPTION>
Six Months Ending June 30,
1997 1996
----------------------------- ----------------
Fully Fully
Primary diluted Primary diluted
<S> <C> <C> <C> <C>
Net income (loss) $ (5,268,386) $ (5,268,386) $ 2,470,116 $ 2,470,116
============== ============== =========== ===========
Weighted average of shares
outstanding 7,465,084 7,465,084 6,688,382 6,688,382
Incremental shares from the assumed
exercise of dilutive stock options 35,023 35,023 429,610 429,610
Common shares assumed to have been
repurchased, treasury stock method (35,023) (35,023) (334,320) (334,320)
------------- -------------- ------------- --------------
Weighted average common and
common equivalent shares
outstanding 7,465,084 7,465,084 6,783,672 6,783,672
============= ============== ============= ==============
Net income (loss) per share $ (.71 $ (.71) $ .36 $ .36
===================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<MULTIPLIER> 1
<CURRENCY> USD
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Jun-30-1997
<EXCHANGE-RATE> 1
<CASH> 13,588,090
<SECURITIES> 0
<RECEIVABLES> 8,186,185
<ALLOWANCES> 4,046,500
<INVENTORY> 13,206,549
<CURRENT-ASSETS> 40,731,969
<PP&E> 4,140,702
<DEPRECIATION> 358,227
<TOTAL-ASSETS> 46,487,530
<CURRENT-LIABILITIES> 4,118,052
<BONDS> 0
0
0
<COMMON> 25,173,375
<OTHER-SE> 17,196,103
<TOTAL-LIABILITY-AND-EQUITY> 46,487,530
<SALES> 37,607,263
<TOTAL-REVENUES> 29,987,845
<CGS> 29,178,319
<TOTAL-COSTS> 9,649,333
<OTHER-EXPENSES> (478,949)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,360,858)
<INCOME-TAX> (3,092,472)
<INCOME-CONTINUING> (5,268,386)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,268,386)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)
</TABLE>
