UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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
Securities Registered Pursuant to Section 12 (b) of the Act: None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES [ ] NO [ X ]
The aggregate market value of the Common Stock, No Par Value, of the registrant
held by non-affiliates of the registrant as of March 26, 1997 (computed by
reference to the closing price of such stock on The Nasdaq National Market) was
$65,383,246
The number of shares outstanding of the registrant's Common Stock, No Par Value,
as of March 26, 1997 was 7,472,371 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Proxy Statement for the registrant's 1997 annual meeting
of stockholders to be filed with the SEC in April 1997 are incorporated by
reference into Part III, Items 10-12 of this Form 10-K.
<PAGE>
PART I
ITEM 1 - BUSINESS
Overview
Zoom Telephonics, Inc. ("Zoom" or the "Company"), a Canadian corporation, is the
parent company of its wholly owned subsidiary, Zoom Telephonics, Inc., a
Delaware corporation with its principal executive offices located at 207 South
Street, Boston, Massachusetts 02111. The discussion of the business of Zoom in
this report refers to the business conducted through the operations of the
United States subsidiary and its subsidiaries.
The Company is a leading designer, producer and marketer of faxmodems and other
personal computer communications products for the home and office. These
products link Personal Computers ("PCs") through the worldwide telephone
network, enabling them to transmit data, fax, voice and video, and to remotely
access on-line services, the Internet, corporate computer networks, and other
computers. The Company offers a broad line of faxmodems with top data
transmission speeds of 33,600 bps, available in internal, external and PCMCIA
models. Zoom expects to soon begin shipping "56K faxmodems," which are able to
download data at speeds up to 56,000 bps. The Company also recently began
shipping its first ISDN (Integrated Services Digital Network) product, which can
transmit and receive simultaneously at up to 128,000 bps, and also has a number
of distinctive voice and fax capabilities.
Zoom's objective is to build upon its position as a leading supplier of
faxmodems and to capitalize on a number of current and emerging trends in
computer connectivity, including Internet access, computer telephony,
simultaneous voice and data transmission, video telephony, and higher data
rates. The Company believes that the Zoom name is widely recognized and
associated with high performance per dollar, breadth of product line and product
innovation.
Industry Background
Demand for PC communications products and services has grown significantly. The
Company believes that this growth has been driven by a variety of factors
including (i) the popularity of the Internet and on-line services such as
America Online, CompuServe and the Microsoft Network, (ii) the growing installed
base of PCs, particularly in the home and mobile settings, (iii) a significant
increase in the use of PCs for remote access to corporate networks, and (iv)
advances in technology, which have improved the functionality of the PC as a
means of transferring, capturing and manipulating data-intensive information,
including graphic images and voice. These trends have resulted in substantial
growth in modem sales for both the installed base of PCs, as upgrades and
first-time purchases, and for new PCs as bundled peripherals. Substantially all
modems sold for PCs are now faxmodems (modems that have the ability to send and
receive faxes), and many faxmodems have enhanced voice capabilities and other
enhanced extra features.
The rapid expansion of on-line services and the Internet has greatly increased
the utility of personal computers by making a multitude of information resources
available to PC users. Modems are commonly used to remotely access these
resources. As the transfer of large text files and data-intensive images (like
those on the World Wide Web) become more pervasive, high data transmission
speeds and other advanced modem features are expected to become increasingly
important to PC users.
Worldwide PC shipments continue to grow, and industry sources estimate that over
200 million PCs are installed worldwide. The Company believes that less than
one-third of the worldwide installed base of PCs has a modem with data
transmission speeds of 28,000 bps or higher. As a result, the Company believes
that a substantial market exists for PC users to upgrade their existing modems,
and that modems will continue to achieve increasing penetration of the PC
installed base as applications requiring data connectivity proliferate.
The growing use of PCs outside the traditional office setting has also increased
the demand for modems which enable users to remotely access corporate networks,
the Internet and other PCs. In addition, notebook computers have become one of
the fastest growing segments of the PC market.
Advances in modem technology and lower modem prices have created rapid growth in
the installed base of modems. As a result, the high-volume segment of the market
has shifted from modems with a maximum transmission speed of 2400 bps in 1987 to
33,600 bps today. Modems with high data transmission speeds require less time to
transmit text files and graphics, thereby reducing phone call costs and
facilitating the use of data-intensive applications like World Wide Web
browsing, video telephony and remote access to corporate networks. Other
technological advances that are increasing the use of modems in personal
computing include new voice-related capabilities and new communications software
features. For example, voice modems can provide answering machine, voice mail
and other voice-related functions by digitizing incoming voice signals for
storage in a computer and by retrieving stored voice and sending it through the
telephone network to a remote person or computer. More advanced voice modems can
be used to transmit voice and data simultaneously (voice over data),
facilitating two-way conversations between computer users working on a project
or playing a computer game in separate locations. Advances in computer software
are also stimulating demand for modems with faster speeds and greater
functionality. For example, Microsoft's Windows 95 includes remote access,
faxing and Internet access capabilities that can only be used with a modem. The
demand for faster transmission speeds and increased modem functionality is
expected to drive sales of new generations of modems in the future, including
56K modems, ISDN and ADSL (Asymmetric Digital Subscriber Line) data devices, and
cable modems, both as upgrades and as peripherals bundled with new PCs.
Zoom Strategy
Zoom focuses on PC communications products tailored to high-volume channels of
distribution. The Company believes that the Zoom name is associated with high
performance per dollar, breadth of product line, broad distribution, and product
innovation. The Company's objective is to build upon its position as a leading
supplier of faxmodems and to capitalize on a number of current and emerging
trends in computer connectivity, including Internet access, remote access to
corporate networks, computer telephony, simultaneous voice and data
transmission, video telephony, and higher data speeds. The Company's strategy
includes the following key elements:
Build Upon and Exploit Brand Equity. Zoom has a widely recognized brand name and
established channels of high-volume retailer, distributor and OEM customers who
buy the Company's products. The Company believes that its success has been due
in part to (i) offering its customers a broad range of products that provide
high performance per dollar, (ii) supporting the installed base of its faxmodems
with multiple technical support options, (iii) promoting its products through
cooperative advertising with its retailer customers, and (iv) designing
attractive and informative packaging for its products. Personal Technology
Research reports that in January 1997 Zoom brand modems have the third most
retail shelf space for modems in North America. The Company intends to continue
to enhance its brand equity by further expanding its marketing channels base and
by broadening its product offerings through its established sales channels.
Introduce Innovative PC Communications Products. Zoom seeks to identify new
high-volume opportunities for PC communications, to develop competitively priced
leading-edge products to address these opportunities, and to build upon and
exploit its brand equity by delivering these products quickly and effectively
through its established sales channels. The Company was one of the first
high-volume producers of faxmodems and voice faxmodems. Zoom will soon begin
shipping internal and external "56K faxmodems," which are able to download data
at speeds up to 56,000 bps; and the Company expects "56K" to be a significant
growth opportunity. The Company recently began shipping its first ISDN product,
and plans to broaden its ISDN product line in 1997 and beyond. The Company
produces remote access products, and expects to broaden its product offerings in
this area.
Outsource Chipset Technology. Zoom pursues a strategy of outsourcing rather than
internally developing its faxmodem chipsets, which are application-specific
integrated circuits that form the technology base for its faxmodems. By
outsourcing the chipset technology, the Company is able to concentrate its
research and development resources on faxmodem system design, leverage the
extensive research and development capabilities of its chipset suppliers and
reduce its development time and associated costs and risks. The Company has
established a strong relationship with Rockwell and is currently purchasing all
of its modem chipsets from Rockwell. Rockwell is the leading chipset
manufacturer and has significant resources for semiconductor design and
fabrication, analog and digital signal processing, and communications firmware
development.
<PAGE>
Maintain Low Costs. Zoom continually seeks ways to improve its product designs
and manufacturing approach in order to reduce its costs. The Company outsources
aspects of its manufacturing to contract assemblers as a means of reducing its
labor costs and capital expenditures, and of providing the Company with
flexibility in its capacity planning.
Expand International Sales. Zoom introduced its first faxmodems in selected
Western European countries in 1993. During 1995 the Company also received
approvals and began shipping its first faxmodems for the Japanese market. The
Company's international sales (excluding sales to OEMs) increased from 8% of net
sales in 1994 to 19% of net sales in 1996. The Company plans to continue to
expand its international product line and distribution network, and is seeking
regulatory approvals for the sale of its products in additional international
markets.
Expand OEM Sales. Zoom has been increasing its original equipment manufacturer
("OEM") sales and support efforts. As a result, the Company's worldwide sales to
OEM customers increased from 8% of net sales in 1994 to 19% of net sales in
1996. The Company intends to continue to target the OEM market as a significant
opportunity for growth and diversification.
Explore Acquisitions. Zoom acquired the products and certain other assets of
Tribe Computer Works ("Tribe") in mid-1996, and Zoom continues to consider
acquisitions of businesses, products or technologies complementary to the
Company's business. The Company believes that appropriate acquisitions can
reduce the development risk associated with new product offerings, and that the
Company can leverage its brand equity and existing sales channels to enhance the
value of these acquisitions. There can be no assurance that any of these
discussions will lead to an acquisition or that any acquisitions, if made, will
be successful.
Products
Zoom's products link personal computers through the worldwide telephone network,
enabling them to remotely access on-line services, the Internet, corporate
computer networks, and other computers. The Company offers a broad line of
faxmodems with top data transmission speeds of 33,600 bps. Zoom expects that it
will soon begin shipping internal and external 56K faxmodems, which are able to
download data at speeds up to 56,000 bps; and Zoom expects to continue to
broaden its line of 56K modems. The Company has also recently begun shipping its
first ISDN product, and the Company expects to continue to introduce new ISDN
products. Starting with its acquisition of Tribe, the Company began shipping
remote access products which connect local area networks to the wide area
network and connected computers and networks including the Internet. The Company
also makes other related products, including a series of multi-line modems and a
hub for AppleTalk networks.
Zoom has a broad line of faxmodems with top data speeds of 33,600 bps, available
in internal, external and PCMCIA models. The internal faxmodems are designed for
installation in IBM PC-compatibles. The external faxmodems are designed to work
with any terminal or computer, including IBM PC-compatibles, the Macintosh and
other computers. The Company's external models include desktop and smaller
"pocket" faxmodems. The PCMCIA faxmodems are designed for use with notebook and
sub-notebook computers as well as PDAs (personal digital assistants) equipped
with standard PCMCIA slots. When sold as packaged retail products, the Company's
faxmodems are shipped complete with third-party software that supports the
hardware capabilities of the faxmodem.
56K faxmodems allow users connected to standard phonelines to download data at
speeds up to 56,000 bps when communicating with compatible central sites
connected to digital lines such as ISDN or T1 lines. Those central sites are
typically online services, Internet Service Providers, or remote LAN access
equipment. 56K is a new technology, and there is no international or U.S.
standard. Instead there are two main competing 56K technologies, K56flextm and
x2tm. Zoom' s first 56K modems will incorporate K56flex, which is backed by
semiconductor manufacturers Rockwell and Lucent, central site equipment
manufacturers Ascend, Cascade, Cisco, Microcom, Shiva, and others; modem
companies Boca, Diamond, Hayes, Motorola, Zoom, and others; Compaq and many
other computer manufacturers, and hundreds of Internet Service Providers and
online services. x2 is backed by U.S. Robotics; semiconductor manufacturers
Texas Instruments and Cirrus Logic, some other modem companies, and a number of
computer manufacturers, Internet Service Providers, and online services. Until
standards are set the market is likely to be confused and fragmented. A U.S.
ANSI 56K standard may emerge in mid to late 1997 or beyond, and an international
56K standard is likely to emerge in 1998 or beyond. Until the standard emerges
56K will be handicapped by lack of standards and also by a number of unusually
complex network-related issues that may impede performance for some users.
Nevertheless 56K is expected to be a high-volume market in 1997 and beyond, and
Zoom plans to have a broad line of 56K products, initially incorporating K56flex
and ultimately incorporating international standards.
<PAGE>
Faxmodem Product Features. The following sets forth some of the key features
incorporated in one or more of the Company's faxmodems:
Voice Mail. Voice mail capability allows a PC to serve as an answering
machine with message storage and local or remote message retrieval.
Advanced options include multiple mailboxes and pager notification.
Full-duplex Speakerphone. This simultaneous two-way speakerphone
capability allows one or more people to talk "hands free" rather than using
a telephone handset or headset. A speakerphone is commonly used for
conference calls or for situations where someone needs hands free for other
purposes, such as controlling a computer's mouse, keyboard, or joystick.
Many office speakerphones are half-duplex, permitting sound to travel in
only one direction at a time, similar to a walkie-talkie. Full-duplex
speakerphones provide more natural two-way communication.
Simultaneous Voice and Data ("SVD"). SVD capability allows PC users to
converse over the phone line at the same time that data is being
transferred, independent of the application software being used. This
capability is useful for applications where two people are working on the
same project, as well as for video telephony, technical support and
interactive computer games.
VoiceView. VoiceView allows two users to switch quickly between voice and
data modes during the same call. This feature is useful for technical
support, interoffice communication, on-line shopping and other interactive
services. For example, a VoiceView user is able to switch between data and
voice modes to review, discuss and edit a remote document during a single
phone call.
Caller ID. Caller ID is a service offered by telephone companies that
provides the incoming caller's phone number, and in some cases the
caller's name, through the incoming ring signal. A faxmodem's Caller ID
capability allows a PC to recognize, display and store this information.
For example, Caller ID information can be tied to a database to display
detailed information about the caller.
Distinctive Ring. Distinctive Ring is a service offered by telephone
companies that assigns more than one phone number to a single phoneline,
with each number ringing differently. This service along with appropriate
modem functionality allows someone to arrange for one phone number to be
answered as a voice line, a second number to be answered as a fax line,
and a third number to be answered as a data line. Zoom has been issued a
US patent related to its distinctive ring technology.
Plug & Play. Microsoft's Windows 95 supports Plug & Play, a standard that
is intended to allow the installation of Plug & Play-compatible peripherals
like faxmodems with limited hardware configuration by the end-user. Zoom
believes that Plug & Play will become an important feature of its faxmodems
as the number of PCs running Windows 95 grows.
Internet Software. Most of the Company's faxmodems include software for
using the Internet for Web browsing, file transfer and electronic mail, as
well as a trial subscription to a number of online services and Internet
service providers.
Cellular-ready PCMCIA Faxmodems. The Company's PCMCIA 14.4C and V.34C
faxmodems include a cellular-ready feature that allows the faxmodem to be
plugged into a cellular phone for wireless communication of fax and data.
The Company has developed a new generation of cellular-ready PCMCIA
faxmodems with MNP10 EC capability, which provides more reliable
connection, better connection rates and higher data transmission rates than
cellular ready faxmodems that do not have MNP10 EC.
Combined Faxmodem/LAN PCMCIA Cards. The PCMCIA slot in a notebook computer
is most often used for either faxmodem or LAN capability. Most notebook
computers have only one or two PCMCIA slots. In early 1997 Zoom began
shipping a PCMCIA card that integrates both faxmodem and LAN functionality
into one card, thereby allowing one PCMCIA slot to serve both functions
concurrently.
<PAGE>
North American Modem Products. The Company's most popular 33,600 bps faxmodems
for the North American market and their key features are summarized below.
- -------------------------------------------------------------------------------
PRODUCT KEY FEATURES
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Zoom/FaxModem V.34I+ o Internal
o Distinctive Ring
o Internet Software
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Zoom/FaxModem V.34X+ o External
o Distinctive Ring
o Internet Software
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Zoom/FaxModem 33.6 SVD o Internal
o Voice Mail
o SVD
o Distinctive Ring
o Plug & Play
o Internet Software
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Zoom/ComStar SVD o Internal
o Voice Mail
o Full-duplex Speakerphone
o SVD
o VoiceView
o Caller ID
o Distinctive Ring
o Plug & Play
o Internet Software
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Zoom/ComStar XT SVD o External
o Voice Mail
o Full-duplex Speakerphone
o SVD
o VoiceView
o Caller ID
o Distinctive Ring
o Plug & Play
o Internet Software
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Zoom/PCMCIA V.34C o PC Card
o Distinctive Ring
o Internet Software
o Cellular-ready
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Zoom/PCCARD LAN/FAXMODEM o PC Card
o Distinctive Ring
o Internet Software
o Cellular-ready
o LAN Interface
- -------------------------------------------------------------------------------
International Faxmodems. Most foreign countries have their own
telecommunications standards and regulatory approval requirements for sales of
communications products such as those offered by Zoom. As a result, the
introduction of new products into international markets can be costly and
time-consuming. In 1993 the Company introduced its first faxmodem approved for
selected Western European countries, and since then the Company has continued to
expand its product offerings internationally. The Company entered the Japanese
market in mid-1995, and the Company now sells a number of products approved for
the Japanese market. The Company has received regulatory approvals for and is
currently selling faxmodems in a number of countries, including Australia,
Austria, Belgium, Denmark, Finland, Germany, Ireland, Italy, Japan, the
Netherlands, Norway, Poland, Portugal, Slovenia, South Africa, Sweden,
Switzerland and the United Kingdom. The Company intends to continue to expand
and enhance its product line for its existing markets and to seek approvals for
the sale of its products in new countries throughout the world.
<PAGE>
ISDN Products. Zoom is developing a family of modems for ISDN communications.
ISDN is an increasingly available telephone service that allows existing phone
lines to be used to transmit data digitally. ISDN service permits much higher
data transmission rates than conventional analog telephone service. Basic ISDN
service typically provides two 64,000 bps channels and one 16,000 bps channel.
The higher rates of data transmission achievable with ISDN can be particularly
attractive for data-intensive applications such as the transmission of graphics
and video images for World Wide Web browsing or video telephony. In February
1997 Zoom shipped its first ISDN product, the Zoom/ISDN Duo, an internal
PC-compatible card that supports use of the ISDN line for analog modem, fax, or
voice communications; and also supports analog modem, fax, or voice
communications over an analog phoneline. Zoom plans to develop other internal
and external ISDN products for the North American and international markets, and
also plans to integrate ISDN capability into some of its new remote access
products.
Multi-line Faxmodems. In 1996 Zoom began shipping a family of multi-line
faxmodems targeted for local area network fax and data server applications,
computer bulleting boards, multi-line voice mail applications, and other
applications. The Zoom/MultiLine products hold up to eight hot-swappable voice
faxmodems in one small external case that includes status indicators for each
faxmodem.
Remote Access Products. Zoom currently ships remote access products that
primarily use technology acquired from Tribe Computer Works. Zoom has a team of
software, hardware, and test engineers working to expand this line in a number
of ways. Zoom plans to integrate analog modem, ISDN and 56 Kbps leased line
options into its remote access products, and to expand the product lines'
software capabilities.
There can be no assurance that the Company will be able to develop new products
on a timely basis and within budget, if at all, or that once developed any of
these products will be commercially successful.
Sales Channels
Zoom sells its products primarily through high-volume retailers and
distributors, and to PC manufacturers and other OEMs. The Company supports its
major accounts in their efforts to discern strategic directions in the market,
to maintain appropriate inventory levels and to offer a balanced selection of
products.
High-volume Retailers. In the United States, Zoom reaches the PC retail market
primarily through high-volume retailers. The Company's extensive United States
retail distribution network includes Best Buy, Circuit City, CompUSA, Computer
City, Office Depot, OfficeMax, and Staples. Personal Technology Research
reported that in January 1997 the Company had the third greatest amount of
retail shelf space for modems in North America.
Distributors. Zoom sells significant quantities of modems through distributors,
who often sell to corporate accounts, value-added resellers and other channels
that are generally not served by the Company's retailer customers. The Company's
North American distributors include Ingram Micro, MicroAge, and Tech Data.
OEMs. Zoom has been increasing its OEM sales, support, and manufacturing
efforts. As a result, the Company's worldwide sales to OEM customers increased
to 19% of net sales in 1996 from 8% of net sales in 1994. The Company's OEM
customers sell the Company's products under their own name or incorporate the
Company's products as a component of their pre-packaged systems. The Company's
packaging design capability enables the Company to respond to an OEM's need for
customized or generic products and packaging. The Company is responsive to the
needs of personal computer manufacturers including on-time delivery of
high-quality cost-effective products that are supported by strong documentation
of the products and the products' quality.
International Channels. In international markets, Zoom sells its products
primarily through independent distributors and retailers. The Company's European
distributors include Actebis, Criterium, Ingram Micro, Northamber, Redco
Telematica, Softeam, and UMD. The Company's major European retail customers
include Schadt and Vobis. In Japan, the Company distributes its faxmodems
primarily through OEM customers. The Company's international sales (including
sales to OEMs located outside the United States) have grown from 10% in 1994 to
26% in 1996. The Company believes that its continued sales growth outside of the
United States will require substantial additional investments of resources for
product design and testing, regulatory approvals, production, marketing and
tailoring of instruction manuals, packaging and software development for various
foreign languages. The Company's international sales are also subject to risks
generally associated with international sales, including United States and
international regulatory requirements and policy changes, political and economic
instability, currency exchange fluctuations, inventory management, accounts
receivable collection, the management of distributors or representatives, tariff
regulations and seasonality of sales.
<PAGE>
Sales, Marketing and Support
In North America the Company sells its Zoom-brand products primarily through
commissioned independent sales representatives managed and supported by the
Company's own staff. For western Europe, in 1996 the Company performed most
European-based marketing, sales, credit, collections, customer support and
warehousing through an independent organization compensated on a commission
basis. Zoom terminated this relationship in early 1997. The Company recently
established a sales office in Munich, Germany which services accounts in
continental Western Europe. The Company expects to establish another sales
office in the United Kingdom to service the U.K. and Irish markets. Warehousing,
customs clearance, shipping, and invoicing for Europe are now primarily done
under contract with Road Air, a specialist in these services located in the
Netherlands. Technical support for Europe is handled by Zoom's distributors and
under contract with a technical support specialist company in the U.K. For
countries outside North America and Europe, the Company's in-house staff
typically works directly with country-specific distributors. The Company's
worldwide OEM sales are primarily handled by Zoom's Boston-based staff, who are
at times assisted by commissioned sales representatives.
The Company believes that Zoom is a widely recognized brand name. The Company
builds upon its brand equity in a variety of ways, including cooperative
advertising, product packaging, trade shows and public relations. The Company
generally provides its high-volume retailers with an allowance to advertise the
Company's products in conjunction with the customers' general advertising. The
Company believes that such advertising serves to both efficiently and
effectively target the end-user market for its products.
Zoom seeks to develop quality products that are user-friendly and require
minimal support. The Company supports its claims of quality with warranties of
one to seven years, depending upon the product. To address the needs of those
end-users of the Company's products who require assistance, the Company has an
in-house staff of technical specialists who provide telephone support six days a
week. These specialists also maintain a bulletin board and a home page on the
World Wide Web, forums on America Online and CompuServe, and a fax-back service.
Research and Development
The Company's research and development efforts are focused on developing new
products for PC communications markets, further enhancing the capabilities of
existing products and reducing production costs. The Company has developed close
collaborative relationships with certain of its OEM customers and component
suppliers, who work with the Company to identify and respond to emerging
technologies and market trends by developing products that address these trends.
In addition, the Company purchases modem chipsets from Rockwell that incorporate
sophisticated modem technology, thereby eliminating the need for the Company to
develop this technology in-house. As of February 5, 1997, the Company had 40
employees engaged primarily in research and development. This research and
development team performs electronics hardware design and layout, mechanical
design, prototype construction and testing, component specification, firmware
development, product testing, foreign and domestic regulatory approval efforts,
end-user and internal documentation, and third-party software selection and
testing. During 1996, 1995 and 1994, the Company expended $2.9 million, $1.8
million and $1.2 million, respectively, on research and development activities.
Manufacturing and Suppliers
The Company's products are currently designed for high-volume automated assembly
in North America to help assure low cost, rapid market entry, short lead times
and reliability. The Company supplies large kits of parts to one of several
automated contract assemblers in Mexico, India, and the Northeast United States.
The contract assemblers insert most parts automatically by machine, solder the
circuit board, and in-circuit test the completed assemblies. These assemblies
are then typically shipped to the Company, which completes the manufacturing
process and performs a computerized functional test for further quality control.
Completed boards are typically then packaged by the Company, allowing the
Company to tailor the packaging and its contents for its customers immediately
before shipping. Circuit design, circuit board layout and component sourcing are
currently performed by the Company.
Zoom typically uses only one contract assembler for a given design, although in
some cases production tooling is in place for high-volume products at a back-up
facility. These assemblers are normally adequate to meet reasonable and properly
planned production needs, but a fire, natural calamity, strike, or other
significant event at an assembler's facility could adversely affect the
Company's shipments and revenues. The Company's products include a large number
of parts, most of which are available from multiple sources with varying lead
<PAGE>
times. However, there are only a limited number of suppliers of modem chipsets,
the most critical component of the Company's faxmodems. Currently Rockwell is
the Company's only modem chipset supplier. Due to capacity constraints of
Rockwell, the Company has experienced delays in receiving shipments of chipsets
in the past, and the Company may experience such delays in the future. The
Company believes its relationship with Rockwell is good. However, there can be
no assurance that Rockwell will, in the future, sell chipsets to the Company in
quantities sufficient to meet the Company's needs. An interruption in Rockwell's
ability to deliver chipsets, a failure of Rockwell to produce chipset
enhancements or new chipsets on a timely basis and at competitive prices, a
material increase in the price of Rockwell's chipsets or any other adverse
change in the Company's relationship with Rockwell would have a material adverse
effect on the Company's results of operations.
Competition
The PC communications products industry is intensely competitive and
characterized by rapid technological advances and emerging industry standards,
resulting in constant pricing pressures. These changes result in frequent
introductions of new products with added capabilities and features, and
continuous improvements in the relative functionality and price of faxmodems and
other PC communications products. The failure of the Company to keep pace with
technological advances would adversely affect the Company's competitive position
and results of operations.
The Company's primary competitors include Boca Research, Diamond Multimedia,
GVC, Global Village, Hayes Microcomputer Products, Motorola and U.S. Robotics.
Many of the Company's competitors and potential competitors have more extensive
financial, engineering, product development, manufacturing and marketing
resources than the Company.
The Company's products compete on the basis of product features, price, quality,
reliability, brand name recognition, product breadth and shelf space, developed
sales channels, product documentation, product warranties and technical support
and service. The Company believes that it is competitive in each of these areas.
However, there can be no assurance that competitors will not introduce
comparable or superior products incorporating more advanced technology at lower
prices, or that other changes in market conditions or technology will not
adversely affect the Company's ability to compete successfully in the future.
Products recently introduced by certain other companies include ADSL and cable
modems that can transmit data and other information at significantly faster
speeds than analog modems such as those sold by the Company. These products,
however, are generally more expensive than analog modems and cannot be used with
conventional telephone service. In addition, the use of ADSL and cable modems is
currently impeded by a lack of widely accepted standards and a number of
technical and infrastructure limitations. It is likely that if these types of
modems reach the high market volume suited to Zoom's business and marketing
channels, that the Company will seek to introduce appropriate modems. There can
be no assurance that the Company will develop these modems on a timely basis, if
at all, or that once developed, these modems will compete effectively.
Intellectual Property Rights
Zoom relies primarily on a combination of copyrights, trademarks, trade secrets
and patents to protect its proprietary rights. The Company has trademarks and
copyrights for its firmware (software on a chip), printed circuit board artwork,
instructions, packaging and literature. The Company also has three patents and
one pending patent application in the United States. The patents, which expire
in 2011, 2013 and 2013, respectively, generally relate to faxmodem distinctive
ring, use of a faxmodem as a scanner, and modified ringback answering
capabilities. There can be no assurance that any patent application will be
granted or that any patent obtained will provide protection or be of commercial
benefit to the Company, or that the validity of a patent will not be challenged.
Moreover, there can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop comparable or superior technologies.
Zoom licenses certain technologies used in its products, typically bundled
software, on a nonexclusive basis. In addition the Company purchases modem
chipsets that incorporate sophisticated modem technology from Rockwell.
Zoom has received, and may receive in the future, infringement claims from third
parties relating to the Company's products and technologies. The Company
investigates the validity of these claims and, if it believes the claims have
merit, responds through licensing or other appropriate actions. Certain of these
claims have related to technology included in Rockwell and other chipsets. The
Company forwards these claims to the appropriate vendor. If the Company or its
<PAGE>
component manufacturers were unable to license necessary technology on a cost-
effective basis, the Company could be prohibited from marketing products
containing that technology, incur substantial costs in redesigning products
incorporating that technology, or incur substantial costs defending any legal
action taken against it. See Item 3 - LEGAL PROCEEDINGS.
Government Regulation
All of the Company's North American products are required to meet United States
and Canadian government regulations, including regulations of the United States
Federal Communication Commission ("FCC") and Industry Canada, which regulate
equipment, such as modems, that connects to the public telephone network. The
FCC also regulates electromagnetic radiation emissions. For each of the
Company's products sold in most foreign countries, specific regulatory approvals
must be obtained for such matters as electrical safety, manufacturing standards,
country-specific telecommunications equipment requirements and electromagnetic
radiation and susceptibility requirements. The Company has received regulatory
approvals for certain faxmodems in Australia, Austria, Belgium, Denmark,
Finland, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Poland,
Portugal, Slovenia, South Africa, Sweden, Switzerland and the United Kingdom.
The Company expects to continue to seek and receive approvals for new products
in a large number of countries throughout the world. The regulatory process can
be time-consuming and can require the expenditure of substantial resources. In
many foreign countries, obtaining required regulatory approvals may take
significantly longer than in the United States. There can be no assurance that
the FCC or foreign regulatory agencies will grant the requisite approvals for
any of the Company's products on a timely basis, if at all. United States and
foreign regulations regarding the manufacture and sale of telecommunications
devices are subject to future change. The Company cannot predict what impact, if
any, such changes may have upon its business.
Backlog
The Company's backlog at January 31, 1997 and January 31, 1996 was $4.4 million
and $5.1 million, respectively, most of which was for delivery within 120 days
or less. Orders included in backlog generally may be canceled or rescheduled by
customers without significant penalty. Backlog as of any particular date should
not be relied upon as indicative of the Company's net sales for any future
period.
Employees
As of February 5, 1997, Zoom had 324 full-time employees (excluding employees
hired on a temporary basis). Of this total, 40 were engaged in research and
development, 189 were involved in purchasing, assembly, packaging, shipping and
quality control, 58 were engaged in sales, marketing and technical support, and
the remaining 37 performed accounting, administrative and executive functions.
The Company also hires employees on a temporary basis. This group comprised 30
individuals at February 5, 1997. Most of these temporary employees were employed
in manufacturing. The Company considers its relationship with its employees to
be good. None of the Company's employees is represented by a labor union.
Executive Officers
The names of the current executive officers of Zoom and certain biographical
information furnished by them, are set forth below:
Name Age Position with Zoom
- --------------------------------------------------------------------------------
Frank B. Manning 48 Chief Executive Officer, President and Director
Peter R. Kramer 45 Executive Vice President and Director
Eugene Chang 42 Vice President of Strategic Business Development
Terry J. Manning 45 Vice President of Sales and Marketing
Dean N. Panagopoulos 39 Vice President of Information Systems
Deena Randall 43 Vice President of Operations
Steven T. Shedd 44 Vice President of Finance and Chief Financial Officer
Dana Whitney 34 Vice President of Engineering
Frank B. Manning is a co-founder of the Company and has been President, Chief
Executive Officer and a Director of the Company since May 1977, and Chairman of
the Board since 1986. He earned his BS, MS and PhD degrees in Electrical
Engineering from the Massachusetts Institute of Technology, where he was a
National Science Foundation Fellow. Since 1993 Mr. Manning has been a director
of MicroTouch Systems, a NASDAQ-listed leader in touchscreen technology.
Peter R. Kramer is a co-founder of the Company and has been Executive Vice
President and a Director of the Company since May 1977. He earned his BA degree
in 1973 from SUNY Stony Brook and his MFA degree from C.W. Post College in 1975.
Eugene Chang joined Zoom in December 1995. In 1990 Mr. Chang founded Extension
Technology, Inc., a venture-funded ISDN company specializing in high-speed
remote access devices, and served as its president and chief executive officer
until it was sold to Microcom in 1995. After the sale, Mr. Chang became Vice
President of ISDN Technology at Microcom. Mr. Chang earned his BS and MS
degrees in Computer Science and Electrical Engineering from the Massachusetts
Institute of Technology.
Terry J. Manning joined Zoom in 1984 and served as corporate communications
director from 1984 until 1989 when he became the director of the Company's sales
and marketing. Terry Manning is Frank Manning's brother. Terry Manning earned
his BA degree from Washington University in St. Louis in 1974 and his MPPA
degree from the University of Missouri at St. Louis in 1977.
Dean N. Panagopoulos joined Zoom in February of 1995 as Director of Information
Systems. For three years prior to joining Zoom, Mr. Panagopoulos served as
Director of Technical Services for Ziff Information Services, a major outsourcer
of computing services. Prior to that, Mr. Panagopoulos worked for General
Electric's Aircraft Engines Division, where he was responsible for the
development and implementation of advanced manufacturing systems for automated
facilities. He earned his BS degree in Information Systems from Northeastern
University.
Deena Randall joined Zoom in 1977 as its first employee. Ms. Randall has served
in various senior positions within the Company and has directed the Company's
operations since 1989. Ms. Randall earned her BA degree from Eastern Nazarene
College in 1975.
Steven T. Shedd joined Zoom in March 1996 as Vice President of Finance and Chief
Financial Officer. From April 1995 until joining the Company, Mr. Shedd served
as the Corporate Vice President, Finance and Chief Financial Officer of Versyss
Incorporated, a computer support and service company. From 1992 to April 1995,
Mr. Shedd served in various capacities with TSI Corporation, a contract research
organization providing job testing services to the pharmaceutical and
biotechnology industries, including as a Vice President and the Chief Financial
Officer from 1993 to 1995, and as Corporate Controller from 1992 to 1993. From
1989 to 1992, Mr. Shedd served in various capacities at Millipore Corporation, a
manufacturer of purification and analytical products, including as the Director
of Accounting from 1990 to 1992 and as a Division Controller from 1989 to 1990.
Mr. Shedd earned his BA degree from Brandeis University in 1974 and his MBA from
Boston University in 1978.
Dana Whitney joined Zoom in 1994 as director of engineering. From 1991 to 1994,
Mr. Whitney served in various capacities with Motorola Codex, a data
communications company, including as a senior design engineer from 1990 to 1991,
and as an engineering manager from 1991 to 1994. As engineering manager he was
responsible for the design and development of digital data communications
products. Mr. Whitney earned his BSEE from the University of Massachusetts at
Dartmouth in 1984 and his MBA degree from Bryant College in 1993.
ITEM 2 - PROPERTIES
Zoom currently occupies approximately 57,000 square feet of two adjacent
buildings with a total of approximately 72,000 square feet at 201 and 207 South
Street, Boston, Massachusetts. These buildings were purchased by the Company in
April 1993 and currently serve as the corporate headquarters. In August 1996,
the Company entered into a five year lease for a 77,428 square foot
manufacturing and warehousing facility at 655 Summer Street, Boston, MA. At the
end of the initial lease term, the Company has an option to extend the lease for
an additional five year term. Under the lease agreement, the Company has the
right to cancel the lease at any time after 24 months of the initial lease term.
During the first half of 1996, the Company periodically leased up to 20,000
square feet off-site warehouse space on a month-to-month basis. This practice
was terminated when the new facility on Summer Street was leased. In July 1996
the Company entered into a two year lease for a 5,276 square foot facility in
<PAGE>
Alameda, California in connection with the Company's acquisition of a product
line from Tribe Computer Works. The facility has been closed by the Company and
is currently being sublet to another corporation. The Company remains obligated
for the lease through June 1998. The Company also leases co-op office space in
Dallas, Texas.
ITEM 3 - 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matter was submitted to a vote of securities holders during the fourth
quarter of the fiscal year covered in this report.
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "ZOOM." The following table sets forth, for the periods indicated, the
high and low sale prices per share of Common Stock, as reported by the Nasdaq
National Market.
Fiscal Year Ending December 31, 1995 High Low
---- ---
First Quarter........................... $10.25 $ 7.00
Second Quarter.......................... 9.13 6.88
Third Quarter........................... 17.25 6.75
Fourth Quarter.......................... 20.75 13.63
Fiscal Year Ending December 31, 1996
First Quarter........................... $20.875 $13.75
Second Quarter.......................... 27.00 13.375
Third Quarter........................... 16.125 7.50
Fourth Quarter.......................... 13.125 8.25
As of March 25, 1997, there were approximately 382 holders of record of the
Company's Common Stock.
Recent Sales of Unregistered Securities
On June 24, 1996 the Company issued 102,641 shares of Common Stock to Tribe
Computer Works, Inc. to acquire certain assets, including inventory and property
and equipment. The shares of Common Stock so issued were not registered under
the Securities Act of 1933 in reliance upon the exemption from registration set
forth in Section 4 (2) under said Act.
Dividend Policy
The Company has never declared or paid cash dividends on its capital stock and
does not plan to pay any cash dividends in the foreseeable future. The Company's
current policy is to retain all of its earnings to finance future growth. The
Company's bank credit facility restricts the payment of cash dividends.
Limitations Affecting Holders of Common Stock
An investment in Common Stock which results in a change of control of the
Company may be subject to review and approval under the Investment Canada Act
(Canada) (the "ICA"), if the person acquiring control is not a Canadian person;
provided, however, that if the person acquiring control is a national of a World
Trade Organization member country (which includes the United States), then such
investment shall not be subject to review under the ICA so long as the gross
assets of the Company have an aggregate value of less than $160 million
Canadian. This process may have the effect of delaying or preventing the change
in control of the Company. Under the Canada Business Corporations Act, not less
than one-third of the members of the Board of Directors and any committees
thereof must be resident Canadians (and not less than one-half if the Company's
sales in Canada exceed 5% of net sales).
Certain Income Tax Considerations
The following summary is based on the tax laws of the United States and Canada
as in effect on the date of this Report, and is subject to changes in United
States and Canadian law, including changes that could have retroactive effect.
The summary is further based on the Convention between Canada and the United
States of America with respect to Taxes on Income and on Capital, as amended
(the "Convention"), the published administrative practices of Revenue Canada,
Taxation and the Internal Revenue Service and judicial decisions, all of which
are subject to change. The discussion summarizes certain tax considerations
relevant to individual and corporate holders of Common Stock who, for income tax
purposes, are resident in the United States and not in Canada, hold Common Stock
as capital assets, and do not use or hold the Common Stock in carrying on
<PAGE>
business through a permanent establishment or in connection with a fixed base in
Canada (collectively, "Unconnected US Shareholders"). The tax consequences of
holding the Common Stock by individuals or corporations who are not Unconnected
US Shareholders may differ substantially from the tax consequences discussed
herein. The summary does not take into account the tax laws of the various
provinces or territories of Canada or the tax laws of the various state and
local jurisdictions in the United States.
The summary is intended to be a general description of the Canadian and United
States tax considerations. It does not take into account the individual
circumstances of any particular holder of Common Stock. Therefore, Stockholders
should consult their own tax advisors with respect to the tax consequences of
holding Common Stock.
Canadian Federal Income Tax Considerations
Any dividends on the Common Stock paid or credited, or deemed to be paid or
credited to Unconnected US Shareholders generally will be subject to Canadian
withholding tax. Under the Convention, the rate of withholding tax generally
applicable to Unconnected US Shareholders is 15%. In the case of a United States
corporate shareholder owning 10% or more of the voting shares of the Company,
the applicable withholding tax is 6% for dividends paid or credited in 1996 and
5% thereafter.
Capital gains realized on the disposition of Common Stock by Unconnected US
Shareholders will not be subject to tax under the Income Tax Act (Canada) (the
"Tax Act") unless such Common Stock is taxable Canadian property within the
meaning of the Tax Act. Common Stock will generally not be taxable Canadian
property to a holder unless, at any time during the five year period immediately
preceding a disposition, the holder, or persons with whom the holder did not
deal at arm's length, or any combination thereof, owned 25% or more of the
issued shares of any class or series of the Company. If the Common Stock is
considered taxable Canadian property to a holder, the Convention will generally
exempt Unconnected US Shareholders from tax under the Tax Act in respect of a
disposition of Common Stock provided the value of the shares of the Company is
not derived principally from real property situated in Canada. Neither Canada
nor any province thereof currently imposes any estate taxes or succession
duties.
United States Federal Income Tax Considerations
Unconnected US Shareholders generally will treat the gross amount of any cash
dividends paid by the Company, without reduction for the Canadian withholding
tax, as dividend income for United States federal income tax purposes to the
extent of the Company's current or accumulated earnings and profits. If the
dividend distribution is paid in Canadian dollars, the dividend will be
includable in income when received in an amount equal to the United States
dollar value, on the date of distribution, of the amount so distributed; any
gain or loss on the conversion of the distribution into US dollars will be
ordinary in nature. Subject to the limitations set forth in Section 904 of the
Internal Revenue Code of 1986, as amended (the "Code") (which limits the extent
to which a United States taxpayer may credit against its United States federal
income tax liability any taxes paid by it to a foreign country), the Canadian
tax withheld or paid with respect to distributions on the Common Stock generally
may be credited against the United States federal income tax liability of an
Unconnected US Shareholder if such holder makes an appropriate election for the
taxable year in which such taxes are paid or accrued; alternatively, a
shareholder who does not elect to credit any foreign taxes paid during the
taxable year may deduct such taxes in such taxable year. In addition, an
Unconnected US Shareholder that is a domestic corporation that owns 10% or more
of the Common Stock and receives a dividend and elects to credit foreign taxes
is deemed to have received (and to have paid as a foreign tax eligible for the
foreign tax credit, subject to the limitations of Section 904) a portion of the
foreign taxes paid by the Company. Because the foreign tax credit provisions of
the Code are complex, investors should consult their own tax advisors when
claiming foreign tax credits. Dividends paid on the Common Stock will generally
not be eligible for the dividends received deduction otherwise allowed to United
States corporate shareholders.
The sale of Common Stock generally will result in the recognition of gain or
loss to an Unconnected US Shareholder in an amount equal to the difference
between the amount realized and the holder's adjusted basis in the Common Stock.
Gain or loss upon the sale of Common Stock will be short-term or long-term
capital gain or loss, depending on whether the shares have been held for more
than one year.
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
The following table contains certain selected consolidated financial data of the
Company and is qualified in its entirety by the more detailed Consolidated
Financial Statements and Notes thereto included elsewhere in this report. The
statement of operations data for the years ending December 31, 1994, 1995 and
1996 and the balance sheet data as of December 31, 1995 and 1996 have been
derived from the Consolidated Financial Statements of the Company, which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants,
and are included elsewhere in this report. The statement of operations data of
the Company for the years ending December 31, 1992 and 1993 and the balance
sheet data as of December 31, 1992, 1993 and 1994 have been derived from
consolidated financial statements of the Company, which have been audited by
KPMG Peat Marwick LLP and are not included in this report. This data should be
read in conjunction with the Consolidated Financial Statements and related Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
Years Ending December 31,
1992 1993 1994 1995 1996
---- ---- ---- ----- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales................................... $41,896 $55,230 $68,180 $96,997 $100,195
Cost of goods sold.......................... 30,341 42,324 53,875 73,402 79,803
------ ------ ------ ------- ------
Gross profit........................... 11,555 12,906 14,305 23,595 20,392
Operating expenses:
Selling.............................. 3,286 4,562 6,573 9,023 10,216
General and administrative........... 1,739 1,204 1,776 2,840 3,674
Research and development............. 646 1,101 1,250 1,835 2,940
------- ------- ------- ------- --------
Total operating expenses........... 5,671 6,867 9,599 13,698 16,830
--------- -------- -------- -------- --------
Income from operations................. 5,884 6,039 4,706 9,897 3,562
Interest income (expense) net .............. 28 90 (75) (33) 293
----------- ----------- ---------- ------------ ----------
Income before income taxes............. 5,912 6,129 4,631 9,864 3,855
Income tax expense.......................... 2,326 2,342 1,817 3,800 1,375
--------- --------- --------- ---------- ---------
Net income............................. $ 3,586 $ 3,787 $ 2,814 $ 6,064 $ 2,480
======== ========= ======== ========= ========
Income per common and common equivalent share:
Primary................................ $ 0.62 $ 0.63 $ 0.47 $ 0.99 $ 0.35
========== ========== ========== ========== =========
Fully diluted.......................... $ 0.62 $ 0.63 $ 0.47 $ 0.98 $ 0.35
========== ========== ========== ========== =========
Weighted average common and common equivalent shares:
Primary................................ 5,777 6,010 6,010 6,126 7,162
Fully diluted.......................... 5,815 6,010 6,014 6,173 7,162
December 31,
1992 1993 1994 1995 1996
---- ---- ---- ----- ----
(In thousands)
Balance Sheet Data:
Working capital $11,263 $14,618 $17,146 $24,135 $41,557
Total assets 14,347 23,993 26,816 49,595 56,782
Long-term debt -- -- -- -- --
Total stockholders' equity 11,524 16,199 19,303 27,274 47,355
</TABLE>
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" contained in the Company's registration statement on Form S-3, as
amended, as filed with the Securities and Exchange Commission on February 16,
1996 (the "Registration Statement").
Overview
Zoom was established in 1977, and initially produced and marketed speed dialers
and other specialty telephone accessories. The Company shipped its first modem
in 1983 and its first faxmodem in 1990. Faxmodems and related products now
comprise substantially all of the Company's revenues. The Company sells its
products both domestically and internationally through high-volume retailers and
distributors, and to PC manufacturers and other OEMs.
In 1996 the Company's net sales grew by 3.3% to $100.2 million. In 1996 as
compared to 1995, the Company's sales to retailers and distributors in the
United States decreased by 12% to $61.0 million, the Company's worldwide sales
to OEM customers increased by 57% to $19.0 million, and the Company's
international sales (excluding sales to OEMs) increased by 28% to $18.7 million.
The Company's results of operations have been and may continue to be subject to
significant quarterly fluctuations. The results for a particular quarter may
vary due to a number of factors, including the overall state of the PC and PC
communications markets, pricing and other competitive conditions, the timing of
orders, market acceptance of the Company's or its OEM customers' products, the
timing of the announcement and introduction of new products by the Company and
its competitors, variations in the Company's product mix and component costs,
variations in the proportion of sales made to retailers, distributors and OEMs,
the financial health and inventory levels of the Company's customers, seasonal
promotions by the Company, its customers and competitors, the timing of
expenditures in anticipation of future sales, the timing of product development
costs, the availability of materials and labor necessary to produce the
Company's products and general economic conditions. The Company also believes
that its sales are seasonal, with increased sales generally occurring in the
fourth quarter reflecting holiday sales. The Company expects that its quarterly
operating results will continue to fluctuate in the future as a result of these
and other factors.
The Company continually seeks to improve its product designs and manufacturing
approach in order to reduce its costs. The Company pursues a strategy of
outsourcing rather than internally developing its faxmodem chipsets, which are
application-specific integrated circuits that form the technology base for its
faxmodems. By outsourcing the chipset technology, the Company is able to
concentrate its research and development resources on faxmodem system design,
leverage the extensive research and development capabilities of its chipset
suppliers, and reduce its development time and associated costs and risks. As a
result of this approach, the Company is able to quickly develop new and
innovative products while maintaining a relatively low level of research and
development expense as a percentage of sales. The Company also outsources
aspects of its manufacturing to contract assemblers as a means of reducing its
fixed labor costs and capital expenditures, and to provide the Company with
greater flexibility in its capacity planning.
The Company's gross margins were 20.3%, 24.3% and 21.0% in 1996, 1995 and 1994,
respectively. The Company's gross margins are typically significantly higher for
its branded product sales to retailers and distributors, both in the United
States and internationally, than for sales to OEMs. However, the increased
margins for sales to retailers and distributors are generally offset by higher
operating expenses associated with those sales than for sales to OEMs. These
increased operating expenses typically include costs for cooperative
advertising, technical support and sales commissions.
The market for faxmodems has been characterized by rapid technological change,
frequent product introductions, evolving industry requirements and short product
life cycles. When component costs drop and competitive and enhanced products
become available, the Company's products are susceptible to price decreases. The
Company has a policy of offering price protection to certain of its retailer and
distributor customers for some or all of their inventory, whereby when the
Company reduces its prices for a product, the customer receives a credit for the
difference between the original purchase price and the Company's reduced price.
In 1994, 1995 and 1996 the Company's results of operations were adversely
affected by reductions in prices which resulted in relatively high charges for
price protection. The impact of price reductions is mitigated by the Company's
introduction of new products, the adoption of lower-cost technologies and
product designs, and the implementation of other measures to reduce its
manufacturing and other costs.
Results of Operations
The following table sets forth certain financial data for the periods indicated
as a percentage of net sales:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C> <C> <C>
1994 1995 1996
---- ---- ----
Net sales....................................................... 100.0% 100.0% 100.0%
Cost of goods sold.............................................. 79.0 75.7 79.7
-------- ------ ------
Gross profit............................................... 21.0 24.3 20.3
Operating expenses:
Selling..................................................... 9.7 9.3 10.2
General and administration.................................. 2.6 2.9 3.7
Research and development.................................... 1.8 1.9 2.9
------- ------- -------
Total operating expenses............................... 14.1 14.1 16.8
------ ------ ------
Operating income................................................ 6.9 10.2 3.5
Interest income (expense), net............................. (0.1) (0.0) 0.3
------ ------- -------
Income before income taxes...................................... 6.8 10.2 3.8
Income tax expense......................................... 2.7 3.9 1.3
------- ------ ------
Net income...................................................... 4.1% 6.3% 2.5%
======= ====== ======
</TABLE>
Year Ending December 31, 1996 Compared to Year Ending December 31, 1995
Net Sales. Net sales increased 3% to $100.2 million in 1996 from $97.0 million
in 1995. Unit volumes declined as significant increases in V.34 28,800 and
33,600 bps shipments did not fully offset dramatic declines in shipments of
14,400 bps faxmodems. Average selling prices for V.34 faxmodems dropped 21% from
1995 to 1996, due to severe price competition and lower prices for modem
chipsets. However, overall average selling price of the Company's faxmodems rose
as the product mix shifted to V.34 faxmodems, which typically have higher prices
than 14,400 faxmodems. The Company experienced increases in net sales in its
worldwide OEM and international (excluding sales to OEMs) sales channels during
1996 compared to 1995 as worldwide OEM sales increased 57% to $19.0 million and
international sales (excluding sales to OEMs) increased by 28% to $18.7 million.
Sales to retailers and distributors in the United States decreased 12% to $61.0
million in 1996 compared to 1995.
Gross Profit. Gross profit as a percentage of net sales declined to 20.3% in
1996 from 24.3% in 1995. This decline in gross margin was primarily due to
increased price protection afforded certain retailers and inventory reserves
against slower speed modems recognized during the year. In addition, the Company
increased its percentage of sales to OEM customers, which typically carry lower
gross margins. These decreases were partially offset by declining parts costs
for most faxmodem models.
Selling Expenses. Selling expenses increased 13% to $10.2 million or 10.2% of
net sales in 1996 from $9.0 million or 9.3% of net sales in 1995. The increase
was primarily due to added costs associated with the sales and marketing of
products acquired from Tribe Computer Works and to increased payroll expenses
for sales, technical support and customer service personnel. These increases
were partially offset by lower selling costs associated with the Company's
increased percentage of OEM sales, which generally require a lower level of
selling expense than other sales.
General and Administrative Expenses. General and administrative expenses
increased 29% to $3.7 million or 3.7% of net sales in 1996 from $2.8 million or
2.9% of net sales in 1995. This increase was primarily due to increased payroll
expense for management information systems and new business development, to
enhance infrastructure and explore new areas for growth.
Research and Development Expenses. Research and development expenses increased
60% to $2.9 million or 2.9% of net sales in 1996 from $1.8 million or 1.9% of
net sales in 1995. The increase was primarily due to the addition of personnel
to support the Company's development efforts in a number of new areas, including
the remote access and ISDN areas, and to costs associated with domestic and
international regulatory approvals.
<PAGE>
Interest Income, Net. Net interest income increased to $293,000 in 1996 from an
expense of $33,000 in 1995. The increase was the result of the Company's higher
average cash balances during the last three quarters of 1996 compared to 1995.
The Company completed a secondary offering in April of 1996 which raised a net
$11,573,218. These funds were used to pay off the line of credit which was used
during 1995 as well as to fund future operations. Any remaining funds were
invested in various financial instruments generating interest income.
Provision for Income Taxes. The Company's effective tax rate decreased to 35.7%
in 1996 from 38.5% in 1995 due to the benefit of increased foreign sales through
the Company's Foreign Sales Corporation ("FSC") and a decrease in the effective
state income tax rate.
Year Ending December 31, 1995 Compared to Year Ending December 31, 1994
Net Sales. Net sales increased 42% to $97.0 million in 1995 from $68.2 million
in 1994. This increase was primarily attributable to increased unit sales, and
to a small increase in the average selling price of the Company's products as a
result of a change in product mix. During 1995 sales of the Company's higher
priced V.34 faxmodems (products with 28,800 bps data transmission speeds)
increased as a percentage of net sales throughout the year. The effect of this
change in sales mix was partially offset by price reductions. However, the price
declines in most product categories were more modest than in prior years. The
Company believes that this relative price stability was due in part to a
widespread shortage of modem chipsets during the year. The Company experienced
increases in net sales in all of its major sales channels during 1995 compared
to 1994. The Company's sales in the United States (excluding sales to OEMs) grew
18% to $66.8 million in 1995 compared to 1994, international sales (excluding
sales to OEMs) grew 217% to $17.3 million, with Western Europe and Japan leading
the growth, and worldwide OEM sales grew 118% to $12.1 million.
Gross Profit. Gross profit as a percentage of net sales improved to 24.3% in
1995 from 21.0% in 1994. This improvement in gross margin was primarily
attributable to the increased percentage of net sales of the higher priced V.34
faxmodems, increased production efficiencies related to the higher volume of
sales and decreased raw materials costs for certain of the Company's products.
These increases were partially offset by lower margins received on increased
sales to OEMs, price reductions for certain of its products, and the Company's
additions to inventory reserves reflecting its increased inventory levels at the
end of the year. In 1994 the Company's gross margin of 21.0% was partially
attributable to unusually rapid price declines during the year, which resulted
in significant charges for price protection.
Selling Expenses. Selling expenses increased 37% to $9.0 million or 9.3% of net
sales in 1995 from $6.6 million or 9.7% of net sales in 1994. The increase was
primarily attributable to costs related to the Company's increased sales,
including an increase in selling commissions, increased cooperative advertising
allowances to the Company's high-volume retailer customers in North America, and
increased payroll expenses attributable to personnel additions in sales,
technical support and customer service. The decrease in selling expenses as a
percentage of net sales was primarily attributable to the Company's increased
percentage of OEM sales, which generally require a lower level of selling
expense than other sales.
General and Administrative Expenses. General and administrative expenses
increased 60% to $2.8 million or 2.9% of net sales in 1995 from $1.8 million or
2.6% of net sales in 1994. The increase was primarily attributable to increased
expenses incurred to support the Company's increased sales, including the
addition of personnel, and the increase in the Company's reserve for doubtful
accounts.
Research and Development Expenses. Research and development expenses increased
47% to $1.8 million or 1.9% of net sales in 1995 from $1.2 million or 1.8% of
net sales in 1994. The increase was primarily attributable to the addition of
personnel to support the Company's development efforts, including the hiring of
specialists in ISDN technology, and to costs associated with international
regulatory approvals, reflecting the Company's international expansion.
Interest Expense, Net. Net interest expense declined to $33,000 in 1995 from
$75,000 in 1994. The decrease was the result of the Company's higher average
cash balances during the first three quarters of 1995 compared to 1994, which
partially offset a higher net interest expense in the fourth quarter of 1995,
reflecting the Company's borrowings to support its higher inventory and accounts
receivable levels.
<PAGE>
Provision for Income Taxes. The Company's effective tax rate decreased to 38.5%
in 1995 from 39.2% in 1994 due to the benefit of increased foreign sales through
the Company's Foreign Sales Corporation ("FSC"). The effective tax rates are
lower than statutory rates because of research and development tax credits and
FSC tax credits.
Liquidity and Capital Resources
On December 31, 1996 the Company had working capital of $41.6 million, including
$9,172,186 in cash and cash equivalents, an increase in working capital of 73%
from $24.1 million on December 31, 1995. In addition, the Company had a
commitment from a bank to renew a $10.0 million revolving bank line of credit
which expired on May 31, 1996 of which $2.5 million was outstanding at December
31, 1995. The renewed line of credit agreement was consummated in January 1997
and expires August 30, 1997. This line of credit bears interest at the bank's
prime rate (8.25% on December 31, 1996). At the Company's option, it may elect
to borrow funds at the London Interbank Borrowing Rate (LIBOR) plus 1.5%. (7.03%
on December 31, 1996). The line of credit is unsecured and contains certain
financial and other covenants. On April 11, 1996, the Company completed a
secondary offering of 800,000 shares of its Common Stock. The offering raised
net proceeds of $11,573,218. The Company used the net proceeds to repay
$2,500,000 outstanding under its line of credit and for general corporate
purposes, including working capital, new product development, expansion of
facilities, expansion of the Company's presence in international markets and
potential acquisitions. Any amounts repaid under the Company's line of credit
may be reborrowed by the Company.
In 1996 the Company's net cash used in operating activities was approximately
$1.4 million. During that period inventory and accounts receivable decreased by
$5.2 million and $1.9 million respectively. The decrease in inventory was
primarily due to the Company's efforts to reduce inventory levels, particularly
with respect to lower speed faxmodems. The Company designs its faxmodems to
accommodate last-minute insertion of the high-cost chipsets and unexpected
delays in the delivery of these chipsets can result in increased raw materials
and work-in-process inventory. Increased levels of inventory may adversely
affect the Company's liquidity and increase the risk of inventory obsolescence
or a decline in the market value of such inventory. The decrease in accounts
receivable was primarily attributable to lower fourth quarter sales in 1996 as
compared to fourth quarter sales in 1995. These sources of cash flow were offset
by reduction of accounts payable and accrued expenses of $10.2 million. An
additional source of funds was the Company's $2.5 million net income. An
additional use of funds was the increase in prepaid and other assets of $1.2
million.
The Company's capital expenditures in 1996 of approximately $1.4 million
consisted primarily of the Company's purchase of leasehold improvements to the
new manufacturing facility occupied in the third quarter, computer hardware and
software, continued renovations to its headquarters, and purchases of other
equipment and tooling. 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 $1.7 million was
allocated to goodwill that is being amortized over 10 years.
During 1996 financing activities provided the Company $11.9 million of cash. The
Company realized net proceeds of $11.6 million from the sale of 800,000 shares
of its common stock in a registered offering on a direct placement basis, and
proceeds of $2.8 million from the exercise of stock options. These proceeds were
offset by $2.5 million 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>
Other
A portion of the Company's revenues are subject to the risks associated with
international sales. Although most of the Company's product prices are
denominated in the United States currency, customers in foreign countries
generally evaluate purchases of products such as those sold by the Company on
the purchase price expressed in the customer's currency. Therefore, changes in
foreign currency exchange rates may adversely affect the demand for the
Company's products.
The company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"). As permitted by SFAS
123, the Commpany measures compensation cost in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees". Therefore, the adoption of SFAS 123 was not material to the
Company's financial condition or results of operations; however, the proforma
impact on earnings and earnings per share have been disclosed in the Notes to
the Consolidated Financial Statements as required by SFAS 123 for companies that
continue to account for stock options under APB25
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ZOOM TELEPHONICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
<TABLE>
<S> <C>
Page
Index to Consolidated Financial Statements 26
Independent Auditors' Report 27
Consolidated Balance Sheets as of December 31, 1995 and 1996 28
Consolidated Statements of Income for the years ending December 31, 1994, 1995 and 1996 29
Consolidated Statements of Stockholders' Equity for the years ending December 31, 1994, 1995 and 1996 30
Consolidated Statements of Cash Flows for the years ending December 31, 1994, 1995 and 1996 31
Notes to Consolidated Financial Statements 32
Schedule II: Valuation and Qualifying Accounts Fiscal Years Ending December 31, 1994, 1995 and 1996
</TABLE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting or
financial disclosure during the period covered by this report.
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item appears under the caption "Executive Officers"
in Part 1, Item 1 -- Business, and under the captions "Election of Directors"
and "Compliance With Section 16(a) of the Securities Exchange Act" in the
Company's definitive proxy statement for its 1997 annual meeting which will be
filed with the SEC in April 1997 pursuant to Regulation 14A, and is incorporated
herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information required by this item appears under the captions "Executive
Compensation," "Directors Compensation" and "Proposal No. 2", in the Company's
definitive proxy statement for its 1996 annual meeting which will be filed with
the SEC in April, 1997, pursuant to Regulation 14A, and is incorporated herein
by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item appears under the captions "Election of
Directors" and "Security Ownership of Certain Beneficial Owners and Management"
in the Company's definitive proxy statement for its 1997 annual meeting which
will be filed with the SEC in April, 1997, pursuant to Regulation 14A, and is
incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S><C> <C> <C>
(a) Financial Statements, Schedules and Exhibits:
(1),(2) The financial statements and required schedules are indexed under
Item 8.
(3) Exhibits required by the Exhibit Table of Item 601 of SEC Regulation S-K. (Exhibit numbers refer to numbers in
the Exhibit Table of Item 601.)
3.1 Articles of Continuance, filed as Exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 (the "1991 Form 10-K"). *
3.2 By-Law No. 1 of Zoom Telephonics, Inc., filed as Exhibit 3.2 to the 1991 Form 10-K. *
3.3 By-Law No. 2 of Zoom Telephonics, Inc., filed as Exhibit 3.3 to the 1991 Form 10-K. *
**10.1 1991 Stock Option Plan, as amended, of Zoom Telephonics, Inc.,
filed as Exhibit 10.1 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 (the "1994 Form 10-K"). *
**10.2 1991 Director Stock Option Plan, of Zoom Telephonics, Inc., filed as Exhibit 10.2 to the 1994 Form 10-K. *
10.3 Commercial Revolving Line of Credit Agreement by and between Zoom Telephonics, Inc. and Shawmut Bank,
N.A., filed as Exhibit 10.3 to the 1995 Form 10-K. *
10.4 Commercial Revolving Line of Credit Promissory Note of Zoom Telephonics, Inc. in favor of Shawmut Bank,
N.A. , filed as Exhibit 10.4 to the 1995 Form 10-K. *
10.5 Lease between Zoom Telephonics and "E" Street Associates, filed as
Exhibit 10.5 to the June 1996 Form 10-Q*
10.6 Form of Indemnification Agreement, filed as Exhibit 10.6 to the June 1996 Form 10-Q. *
10.7 Revolving Credit Facility Provided by Fleet National Bank for Zoom Telephonics, Inc..
11. Statement re computation of per share earnings.
21. Subsidiaries.
23. Consent of KPMG Peat Marwick LLP.
27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last quarter for
the period covered by this report.
(c) Exhibits - See Item 14(a)(3) above for a list of Exhibits incorporated herein by reference orfiled with this
Report.
(d) Schedules - Schedule II: Valuation and Qualifying Accounts. Schedules other than those listed above have been
omitted since they are either inapplicable or not required
</TABLE>
- -------------
* In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents previously
filed with the Securities and Exchange Commission, which documents
are hereby incorporated by reference.
** Compensation Plan or Arrangement.
<PAGE>
- -------------------------------------------------------------------------------
SIGNATURES
- -------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ZOOM TELEPHONICS, INC.
(Registrant)
By: /s/ Frank B. Manning
Frank B. Manning, President
Date: March 28 , 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
Signature Title(s) Date
/s/ Frank B. Manning Principal Executive Officer and Director
- --------------------------- March 28, 1997
Frank B. Manning
/s/ Steven T. Shedd Principal Financial and Accounting Officer
- --------------------------- March 28, 1997
Steven T. Shedd
/s/ Peter R. Kramer Director
- --------------------------- March 28, 1997
Peter R. Kramer
/s/ Bernard Furman Director
- --------------------------- March 28, 1997
Bernard Furman
/s/ L. Lamont Gordon Director
- --------------------------- March 28, 1997
L. Lamont Gordon
/s/ J. Ronald Woods Director
- --------------------------- March 28, 1997
J. Ronald Woods
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report 27
Consolidated Balance Sheets as of December 31, 1995 and 1996 28
Consolidated Statements of Income for the years ending December 31, 1994, 1995 and 1996 29
Consolidated Statements of Stockholders' Equity for the years ending December 31, 1994, 1995 and 1996 30
Consolidated Statements of Cash Flows for the years ending December 31, 1994, 1995 and 1996 31
Notes to Consolidated Financial Statements 32
Schedule II: Valuation and Qualifying Accounts Fiscal Year Ending December 31, 1994, 1995 and 1996 41
</TABLE>
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Zoom Telephonics, Inc.:
We have audited the consolidated financial statements of Zoom Telephonics, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zoom Telephonics,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 18, 1997
<PAGE>
ZOOM TELEPHONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
Assets 1995 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 150,671 9,172,186
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of $2,717,463
in 1995 and $3,564,101 in 1996 (notes 9 and 10) 20,396,314 18,970,041
Inventories (note 3) 24,173,557 19,057,575
Recoverable income taxes - 1,219,000
Deferred tax assets (note 8) 1,513,461 2,032,683
Prepaid expenses and other assets 221,907 532,808
-------------- --------------
Total current assets 46,455,910 50,984,293
-------------- --------------
Property, plant and equipment, net (note 4) 3,138,907 4,081,406
Goodwill, net of accumulated amortization of $76,149 - 1,558,764
Other assets - 157,691
-------------- --------------
$ 49,594,817 56,782,154
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Credit line payable (note 5) $ 2,500,000 -
Accounts payable 18,635,269 8,074,472
Accrued expenses 948,911 1,352,725
Income tax payable 236,493 -
-------------- --------------
Total current liabilities 22,320,673 9,427,197
-------------- --------------
Commitments and contingencies (note 4)
Stockholders' equity (notes 6 and 7):
Common stock, no par value. Authorized 25,000,000 shares;
issued and outstanding 6,200,930 shares at December 31,
1995 and 7,446,842 shares at December 31, 1996 7,289,577 24,890,468
Retained earnings 19,984,567 22,464,489
-------------- --------------
Total stockholders' equity 27,274,144 47,354,957
-------------- --------------
$ 49,594,817 56,782,154
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales (note 9) $ 68,179,619 96,997,313 100,195,021
Cost of goods sold 53,875,107 73,401,620 79,803,297
-------------- -------------- --------------
Gross profit 14,304,512 23,595,693 20,391,724
-------------- -------------- --------------
Operating expenses:
Selling 6,573,150 9,023,443 10,215,528
General and administrative 1,775,853 2,839,775 3,674,134
Research and development 1,249,819 1,835,482 2,940,152
-------------- -------------- --------------
9,598,822 13,698,700 16,829,814
-------------- -------------- --------------
Operating income 4,705,690 9,896,993 3,561,909
Interest income 6,905 81,893 461,762
Interest expense (81,632) (115,206) (169,248)
-------------- -------------- --------------
Interest income (expense), net (74,727) (33,313) 292,514
--------------- -------------- --------------
Income before income taxes 4,630,963 9,863,680 3,854,423
Income tax expense (note 8) 1,817,385 3,800,000 1,374,501
-------------- -------------- --------------
Net income $ 2,813,578 6,063,680 2,479,922
============== ============== ==============
Income per common and common equivalent share (note 2):
Primary $ .47 .99 .35
===== === =====
Fully diluted $ .47 .98 .35
===== === =====
Weighted average common and common equivalent shares:
Primary 6,010,282 6,126,203 7,162,391
============== ============== ==============
Fully diluted 6,013,668 6,173,265 7,162,391
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common stock Retained stockholders'
Shares Amount earnings equity
<S> <C> <C> <C> <C>
Balance at December 31, 1993 5,989,430 5,091,835 11,107,309 16,199,144
Net income - - 2,813,578 2,813,578
Exercise of stock options 25,050 275,549 - 275,549
Tax benefit from exercise of nonqualified stock
options (note 7) - 14,750 - 14,750
--------- --------- --------- ----------
Balance at December 31, 1994 6,014,480 5,382,134 13,920,887 19,303,021
Net income - - 6,063,680 6,063,680
Exercise of stock options 186,450 1,570,350 - 1,570,350
Tax benefit from exercise of nonqualified stock
options (note 7) - 337,093 - 337,093
--------- --------- --------- ----------
Balance at December 31, 1995 6,200,930 7,289,577 19,984,567 27,274,144
Net income - - 2,479,922 2,479,922
Proceeds from stock offering (note 6) 800,000 11,573,218 - 11,573,218
Stock issuance for product line acquisition 102,641 1,590,929 - 1,590,929
Exercise of stock options 343,271 2,825,543 - 2,825,543
Tax benefit from exercise of nonqualified stock
options (note 7) - 1,611,201 - 1,611,201
--------- ---------- --------- ----------
Balance at December 31, 1996 7,446,842 $ 24,890,468 $ 22,464,489 $ 47,354,957
========= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 2,813,578 6,063,680 2,479,922
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 193,697 252,400 674,162
Deferred income taxes (558,277) (416,789) (519,222)
Changes in assets and liabilities:
Accounts receivable (4,263,435) (7,609,226) 1,426,273
Inventories 1,705,332 (14,624,140) 5,211,667
Prepaid expenses and other assets 135,607 28,553 (715,728)
Recoverable income taxes 72,915 - (1,219,000)
Accounts payable and accrued expenses (232,872) 12,280,557 (10,156,983)
Income tax payable 209,241 27,252 (236,493)
Tax benefit upon exercise of nonqualified
stock options 14,750 337,093 1,611,201
------------- -------------- --------------
Net cash provided by (used in)
operating activities 90,536 (3,660,620) (1,444,201)
------------- -------------- ---------------
Cash flows from investing activities:
Purchase of certain assets of a business product line - - (81,375)
Additions to property, plant and equipment (769,077) (1,234,459) (1,351,670)
------------- -------------- --------------
Net cash used in investing activities (769,077) (1,234,459) (1,433,045)
-------------- --------------- ---------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving
bank line of credit - 2,500,000 (2,500,000)
Proceeds from the issuance of common stock - - 11,573,218
Exercise of nonqualified stock options 275,549 1,570,350 2,825,543
------------- ------------- -------------
Net cash provided by financing
activities 275,549 4,070,350 11,898,761
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (402,992) (824,729) 9,021,515
Cash and cash equivalents at beginning of year 1,378,392 975,400 150,671
------------- ------------- -------------
Cash and cash equivalents at end of year $ 975,400 150,671 9,172,186
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
December 31, 1995 and 1996
(1) Incorporation and Nature of Operations
Zoom Telephonics, Inc. (the "Company") is incorporated under the
federal laws of Canada (Canada Business Corporations Act). Its
principal business activity, the design, production, and marketing
of faxmodems and other communication peripherals, is conducted through
its wholly-owned subsidiary, Zoom Telephonics, Inc. ("Zoom US"), a
Delaware corporation based in Boston, Massachusetts.
(2) Significant Accounting Policies
(a) Basis of Presentation
Theconsolidated financial statements are prepared in accordance with
United States generally accepted accounting principles and are stated
in US dollars. Any differences between US and Canadian generally
accepted accounting principles would have an insignificant impact on
the consolidated financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results may
differ from estimates.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Zoom US, and its
wholly-owned subsidiaries, Zoom Foreign Sales Corporation, Zoom
Telephonics, Ltd. (a United Kingdom Corporation) and Tribe
Acquisition Corporation. All intercompany balances and transactions
have been eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all investments having original maturities of less
than 90 days to be cash equivalents.
(d) Inventories
Inventories are carried at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(e) Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation of
property, plant and equipment is provided by using the straight-line
method at rates sufficient to amortize the costs of the fixed assets
over their estimated useful lives. In accordance with Financial
Accounting Standards Board statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," the Company reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If it is
determined that the carrying amount of an asset cannot be fully
recovered, an impairment loss is recognized.
(Continued)
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(f) Goodwill
Goodwill results from the excess of cost over fair value of net assets
acquired for the purchase of a product line in June 1996 is
amortized on a straight-line basis over 10 years. The Company
evaluates the recoverability and remaining life of its goodwill and
determines whether the goodwill should be completely or partially
written off or the amortization period accelerated. The Company will
recognize an impairment of goodwill if undiscounted estimated future
operating cash flows of the acquired product line are determined to
be less than the carrying amount of goodwill. If the Company
determines that the goodwill has been impaired, the measurement of
the impairment will be equal to the excess of the carrying amount of
the goodwill over the amount of the undiscounted estimated future
estimated cash flows. If an impairment of goodwill were to occur,
the Company would reflect the impairment through a reduction in the
carrying value of goodwill.
(g) Income Taxes
TheCompany accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differencs are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(h) Income Per Common Share
Primary and fully diluted earnings per share are based on the weighted
average number of common shares outstanding, including the dilutive
effect of stock options.
(i) Revenue Recognition
Sales are recognized upon shipment of products to customers.
(j) Financial Instruments
Financial instruments of the Company consist of cash and cash
equivalents, accounts receivable, accounts payable and accrued
expenses. The carrying amount of these financial instruments
approximates fair value.
(k) Stock Based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"). As
permitted by SFAS 123, the Company measures compensation cost in
accordance with Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees". Therefore, the adoption
of SFAS 123 was not material to the Company's financial condition or
results of operations; however, the proforma impact on earnings and
earnings per share have been disclosed in the Notes to the
Consolidated Financial Statements as required by SFAS 123 for
companies that continue to account for stock options under APB25.
(l) Reclassifications
Certain reclassifications to the 1994 and 1995 financial statements have
been made to conform to the 1996 presentation. These
reclassifications were not material.
(Continued)
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(3) Inventories
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Raw materials $ 14,612,670 11,778,311
Work in process 5,582,922 2,968,064
Finished goods 3,977,965 4,311,200
------------- ---------
$ 24,173,557 19,057,575
============= ==========
</TABLE>
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
Estimated
1995 1996 useful lives
---- ---- ------------
<S> <C> <C> <C>
Land $ 309,637 309,637 -
Buildings and improvements 1,808,814 1,939,071 31.5 years
Leasehold improvements - 469,583 5 years
Machinery and equipment 1,398,919 2,093,361 5 years
Molds, tools and dies 645,978 807,573 5 years
Office furniture and fixtures 349,333 433,968 5 years
------------ ---------
4,512,681 6,053,193
Less accumulated depreciation 1,373,774 1,971,787
------------ ---------
$ 3,138,907 4,081,406
============ =========
</TABLE>
In August 1996, the Company entered into a five-year lease for a
manufacturing and warehousing facility in Boston, Massachusetts. At
the end of the initial lease term, the Company has an option to
extend the lease for an additional five years. In July 1996, the
Company entered into a two-year lease for an office facility in
Alameda, California. The Company also leases office space in Dallas,
Texas and off-site storage facilities in Boston, Massachusetts. Rent
expense was $39,211, $46,897 and $275,673 for the years ending
December 31, 1994, 1995 and 1996, respectively. Minimum rental
payments, excluding executory costs required under these operating
leases for the next five years are as follows: $342,008 in 1997;
$336,978 in 1998; $337,134 in 1999; $348,426 in 2000 and $203,249 in
2001.
(Continued)
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(5) Available Credit
At December 31, 1995, the Company had available a revolving bank line of
credit of $10,000,000 which expired on May 31, 1996. Interest on the
note was payable at the bank's prime rate of interest (8.25 and 8.5%
at December 31, 1996 and 1995). No amounts were outstanding under
this line of credit as of December 31, 1996. There was $2,500,000
outstanding under this line of credit as of December 31, 1995. The
Company has a commitment by the bank to renew the line again through
August 30, 1997. This agreement was consummated in January 1997. This
revolving line of credit is unsecured and contains certain financial
and other covenants.
(6) 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
and to fund future growth.
(7) Stock Option Plans
Employee Stock Option Plan
The Stock Option Plan is for officers and certain full-time and
part-time employees of the Company. Non-employee directors of the
Company are not entitled to participate under this plan. The Stock
Option Plan provides for the availability of 1,500,000 shares of
common stock for the granting of employee stock options. Under this
plan stock options shall be granted at the discretion of the Stock
Option Committee of the Board of Directors at an option price not
less than the fair market value of the stock. The options are
exercisable in accordance with terms specified by the Stock Option
Committee not to exceed ten years from the date of grant. Options
outstanding under this plan are as follows:
<TABLE>
<CAPTION>
Number of shares Option price
under option per share
<S> <C> <C>
Balance at December 31, 1993 389,900 9.54
Granted 460,500 8.00
Exercised (25,050) 11.00
Expired (382,550) 11.85
----------- --------------
Balance at December 31, 1994 442,800 8.00
Granted 229,950 11.13
Exercised (150,450) 8.00
Expired (56,100) 8.00
----------- --------------
Balance at December 31, 1995 466,200 9.54
Granted 972,850 12.44
Exercised (343,271) 8.23
Expired (526,562) 16.37
----------- --------------
Balance at December 31, 1996 569,217 $ 8.29
=========== ===============
</TABLE>
(Continued)
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
There were 57,000 options exercisable under this plan at December 31,
1996.
The Company recognized a tax benefit of $14,750, $337,093 and $1,611,201
in 1994, 1995 and 1996, respectively, upon the exercise of
nonqualified stock options under the aforementioned employee stock
option plan. These benefits have been recorded to common stock.
1991 Directors Stock Option Plan
In 1991, the Company established the Directors Stock Option Plan. Shares
of common stock were registered for issuance under this plan in
accordance with the Securities Act of 1933. This plan was established
for all directors of the Company except for any director who is a
full-time employee or full-time officer of the Company. Under the
plan, each eligible director shall automatically be granted an option
to purchase 6,000 shares of common stock on each July 10 and January
10 of each year beginning July 10, 1991. The option price shall be
the fair market value of the stock on the date the option is granted.
Each option shall expire two years from the grant date. There were 0,
36,000 and 0 options exercised in 1994, 1995 and 1996, respectively.
At December 31, 1996 there were 54,000 options outstanding, of which
36,000 were exercisable, at exercise prices ranging from $7.00 to
$17.19 per share.
At December 31, 1996, there were 326,762 additional shares available
for grant under both Plans. The per share weighted-average fair
value of stock options granted during 1996 and 1995 was $4.03 and
$3.58, respectively on the date of grant using the Black Scholes
option-pricing model with the following weighted-average
assumptions: 1996 - expected dividend yield 0.0%, risk-free interest
rate of 5.05%, volatility 70% and an expected life of two to four
years; 1995 - expected dividend yield 0.0%, risk-free interest rate
of 5.07, volatility 70% and and expected life of two years.
The company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
options under SFAS No. 123, the Company's net income and net income
per common and common equivalent share would have been reduced to the
pro forma amounts indicated below.
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net income As reported $ 6,063,680 2,479,922
Pro forma $ 5,929,829 2,100,665
Earnings per share As reported $ 0.99 0.35
Pro forma $ 0.97 0.29
</TABLE>
Proforma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected
over the options' vesting period of 18 months to four years and
compensation cost for options granted prior to January 1, 1995 is not
considered.
(Continued)
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(8) Income Taxes
Income tax expense (benefit) attributable to income from operations
consists of:
<TABLE>
<CAPTION>
Current Deferred Total
Year ending December 31, 1994:
<S> <C> <C> <C>
US federal $ 1,821,548 (430,566) 1,390,982
State and local 554,114 (127,711) 426,403
----------- ----------- ------------
$ 2,375,662 (558,277) 1,817,385
=========== =========== ============
<CAPTION>
Year ending December 31, 1995:
<S> <C> <C> <C>
US federal $ 3,299,680 (343,359) 2,956,321
State and local 917,109 (73,430) 843,679
------------ ----------- ------------
$ 4,216,789 (416,789) 3,800,000
============ =========== ============
<CAPTION>
Year ending December 31, 1996:
<S> <C> <C> <C>
US federal $ 1,632,391 (428,502) 1,203,889
State and local 261,332 (90,720) 170,612
------------ ----------- ------------
$ 1,893,723 (519,222) 1,374,501
============ =========== ============
</TABLE>
Income tax expense was $1,817,385, $3,800,000, and $1,374,501 for the
years ending December 31, 1994, 1995 and 1996, respectively, and
differed from the amounts computed by applying the US federal income
tax rate of 34% to pretax income from continuing operations as a
result of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" US tax expense $ 1,574,527 3,353,651 1,310,504
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit 281,426 556,829 112,604
Tax benefit from foreign sales corp (22,950) (116,382) (66,271)
General business credits (14,400) - -
Other, net (1,218) 5,902 17,664
------------ ------------ ------------
$ 1,817,385 3,800,000 1,374,501
============ ============ ============
</TABLE>
(Continued)
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<S> <C> <C> <C>
Income from operations 1,817,385 3,800,000 1,374,501
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial statement purposes (14,750) (337,093) (1,611,201)
------------- ------------- ---------------
1,802,635 3,462,907 (236,700)
============ ============ ===============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities for
the years ended December 31, 1995 and 1996 are presented below:
<TABLE>
<CAPTION>
1995 1996
---- ----
Deferred tax assets:
<S> <C> <C>
Allowance for bad debt $ 335,119 421,298
Sales returns reserve 284,437 280,029
Price protection reserve 116,460 160,281
Other accounts receivable reserves 37,836 43,896
Uniform capitalization 197,390 236,007
Inventory reserve 497,100 816,690
Vacation accrual 54,867 81,073
Warranty reserve 73,140 6,035
Other - 40,597
------------ ------------
Total current gross deferred tax assets 1,596,349 2,085,906
Canadian net operating loss carryforwards 40,200 -
------------ ------------
Total gross deferred tax assets 1,636,549 2,085,906
Less: valuation allowance (40,200) -
------------- ------------
Total deferred tax assets 1,596,349 2,085,906
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation (82,888) (53,223)
--------------- -------------
Net deferred tax assets $ 1,513,461 2,032,683
============ =========
</TABLE>
In assessing the realizability of deferred tax assets, the Company
considered whether it is more likely than not that some portion or
all of the deferred tax asset will be realized. Due to the fact that
the Company has sufficient taxable income in the federal carryback
periods and anticipates future taxable income over periods in which
the deductible temporary differences are deductible, the ultimate
realizability of deferred tax assets for federal and state tax
purposes appears more likely than not. Federal taxable income for
1994 and 1995 equaled approximately $5,310,000 and $9,018,000,
respectively.
(Continued)
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(9) Significant Customers
Two customers accounted for 24% of total sales revenue for the year
ending December 31, 1994. One customer accounted for approximately
19% of total sales revenue for the year ending December 31, 1995 and
15% of total sales revenue for the year ending December 31, 1996.
Individually, each of these customers comprised 10% or more of total
sales revenue during the specified period. At December 31, 1996, two
customers comprised approximately 40% of net accounts receivable. At
December 31, 1995, one customer comprised approximately 23% of net
accounts receivable.
(10) Financial Instruments
The Company generates a portion of its revenues in international
markets, which subjects its operations to the exposure of foreign
currency fluctuations. The impact of currency fluctuations can be
positive or negative in any given period.
To minimize the adverse impact of foreign currency fluctuations on its
foreign currency-denominated net assets, the Company may use certain
financial instruments, primarily forward exchange contracts, in its
management of foreign currency exposure. These contracts require the
Company to sell certain foreign currencies for US dollars at
contractual rates. The Company does not hold any forward exchange
contracts for trading purposes.
Realized and unrealized foreign exchange gains and losses are recognized
in operating income and offset foreign gains and losses on the
underlying exposures. During the years ending December 31, 1995 and
1996, foreign currency gains and losses were not material. The
Company's forward exchange contracts are revalued at the balance
sheet date and the carrying amount approximates the fair value of the
instruments. At December 31, 1996, the Company's foreign
currency-denominated net assets not covered by forward exchange
contracts were not material. Other than the forward exchange
contracts described above, the Company has no other involvement with
derivative financial instruments.
(11) 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 $1,634,913 was allocated to goodwill and is
being amortized over 10 years.
(Continued)
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(12) Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for interest $ 81,632 115,206 169,248
====== ======= =======
Cash paid during the year for income taxes $1,995,674 3,516,000 1,873,000
========= ========= =========
</TABLE>
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 common stock and an increase in
refundable income taxes of $1,611,201. These noncash transactions
have been excluded from the statements of cash flows.
(13) Dependence on a Single Supplier
The Company produces its products using components or subassemblies
purchased from third-party suppliers. Certain of these components are
available only from a single or limited sources. In 1995 and 1996 the
Company purchased substantially all of its integrated circuits from
only one supplier. An interruption in the delivery of these
components could have a material adverse effect on the Company's
results of operations.
(14) Geographic Information
The Company's net sales for 1996 were comprised of $73,085,475 in North
America, $18,227,729 in Europe and $8,881,827 in other locations.
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
3.1 Articles of Continuance, filed as Exhibit 3.1 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 (the "1991 Form 10-K"). *
3.2 By-Law No. 1 of Zoom Telephonics, Inc., filed as Exhibit 3.2 to the 1991 Form 10-K. *
3.3 By-Law No. 2 of Zoom Telephonics, Inc., filed as Exhibit 3.3 to the 1991 Form 10-K. *
**10.1 1991 Stock Option Plan, as amended, of Zoom
Telephonics, Inc., filed as Exhibit 10.1 to the
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (the "1994 Form 10-K"). *
**10.2 1991 Director Stock Option Plan, of Zoom Telephonics, Inc., filed as Exhibit 10.2 to the
1994 Form 10-K. *
10.3 Commercial Revolving Line of Credit Agreement by and between Zoom Telephonics, Inc. and
Shawmut Bank, N.A. filed as Exhibit 10.3 to the 1995 Form 10-K. *
10.4 Commercial Revolving Line of Credit Promissory Note of Zoom Telephonics, Inc. in favor of
Shawmut Bank, N.A. filed as Exhibit 10.4 to the 1995 Form 10-K. *
10.5 Lease between Zoom Telephonics and "E" Street Associates, filed as Exhibit 10.5 to the
June 1996 Form 10-Q. *
10.6 Form of Indemnification Agreement, filed as Exhibit 10.6 to the June 1996 Form 10-Q. *
10.7 Revolving Credit Facility Provided by Fleet National Bank for Zoom Telephonics, Inc..
11. Statement re computation of per share earnings.
21. Subsidiaries.
23. Consent of KPMG Peat Marwick LLP.
27. Financial Data Schedule
</TABLE>
- ----------------
* In accordance with Rule 12b-32 under the Securities Exchange Act of
1934, as amended, reference is made to the documents previously filed
with the Securities and Exchange Commission, which documents are
hereby incorporated by reference.
** Compensation Plan or Arrangement.
PROMISSORY NOTE
$10,000,000.00 Boston, Massachusetts
January 17, 1997
FOR VALUE RECEIVED, the undersigned Zoom Telephonics, Inc., a Delaware
corporation (the "Borrower") hereby promises to pay to the order of FLEET
NATIONAL BANK (the "Bank") the principal amount of Ten Million and 00/100
($10,000,000.00) Dollars or such portion thereof as may be advanced by the Bank
pursuant to ss.1.1 of that certain letter agreement of even date herewith
between the Bank and the Borrower (the "Letter Agreement") and remains
outstanding from time to time hereunder ("Principal"), with interest, at the
rate hereinafter set forth, on the daily balance of all unpaid Principal, from
the date hereof until payment in full of all Principal and interest hereunder.
Interest on all unpaid Principal shall be due and payable monthly in
arrears, on the first day of each month, commencing on the first such date after
the advance of any Principal and continuing on the first day of each month
thereafter and on the date of payment of this note in full, at a fluctuating
rate per annum (computed on the basis of a year of three hundred sixty (360)
days for the actual number of days elapsed) which shall at all times be equal to
the Prime Rate, as in effect from time to time (but in no event in excess of the
maximum rate permitted by then applicable law), with a change in the aforesaid
rate of interest to become effective on the same day on which any change in the
Prime Rate is effective; provided, however, that if a Eurodollar Interest Rate
(as defined in the Letter Agreement) shall have become applicable to all or any
portion of the outstanding Principal for any Interest Period (as defined in the
Letter Agreement), then interest on such Principal or portion thereof shall
accrue at said applicable Eurodollar Interest Rate for such Interest Period and
shall be payable on the Interest Payment Date(s) (as defined in the Letter
Agreement) applicable to such Interest Period. Overdue Principal and, to the
extent permitted by law, overdue interest shall bear interest at a fluctuating
rate per annum which at all times shall be equal to the sum of (i) two (2%)
percent per annum plus (ii) the per annum rate otherwise payable under this note
with respect to the Principal which is overdue (or as to which such interest is
overdue) (but in no event in excess of the maximum rate permitted by then
applicable law), payable on demand. As used herein, "Prime Rate" means that rate
of interest per annum announced by the Bank from time to time as its prime rate,
it being understood that such rate is merely a reference rate, not necessarily
the lowest, which serves as the basis upon which effective rates of interest are
calculated for obligations making reference thereto. If the entire amount of any
required Principal and/or interest is not paid within ten (10) days after the
same is due, the Borrower shall pay to the Bank a late fee equal to five percent
(5%) of the required payment, provided that such late fee shall be reduced to
three percent (3%) of any required Principal and interest that is not paid
within fifteen (15) days of the date it is due if this note is secured by a
mortgage on an owner-occupied residence of 1-4 units.
All outstanding Principal and all interest accrued thereon shall be due
and payable in full on the first to occur of: (i) an acceleration under ss.5.2
of the Letter Agreement or (ii) August 31, 1997. The Borrower may at any time
and from time to time prepay all or any portion of any Revolving Loans (as
defined in the Letter Agreement), but, as to LIBOR Loans (as defined in the
Letter Agreement), only at the times and in the manner, and (under certain
circumstances) with the additional payments, provided for in the Letter
Agreement. Any prepayment of Principal, in whole or in part, will be without
premium or penalty (but, in the case of LIBOR Loans, may require payment of
additional amounts, as provided for in the Letter Agreement). Under certain
circumstances set forth in the Letter Agreement, prepayments of Principal may be
required.
Payments of both Principal and interest shall be made, in immediately
available funds, at the office of the Bank located at 75 State Street, Boston,
Massachusetts 02109, or at such other address as the Bank may from time to time
designate.
The undersigned Borrower irrevocably authorizes the Bank to make or
cause to be made, on a schedule attached to this note or on the books of the
Bank, at or following the time of making any Revolving Loan (as defined in the
Letter Agreement) and of receiving any payment of Principal, an appropriate
notation reflecting such transaction (including date, amount and maturity) and
the then aggregate unpaid balance of Principal. Failure of the Bank to make any
such notation shall not, however, affect any obligation of the Borrower
hereunder or under the Letter Agreement. The unpaid Principal amount of this
note, as recorded by the Bank from time to time on such schedule or on such
books, shall, in the absence of manifest error, constitute presumptive evidence
of the aggregate unpaid principal amount of the Revolving Loans.
The Borrower hereby (a) waives notice of and consents to any and all
advances, settlements, compromises, favors and indulgences (including, without
limitation, any extension or postponement of the time for payment), any and all
receipts, substitutions, additions, exchanges and releases of collateral, and
any and all additions, substitutions and releases of any person primarily or
secondarily liable, (b) waives presentment, demand, notice, protest and all
other demands and notices generally in connection with the delivery, acceptance,
performance, default or enforcement of or under this note, and (c) agrees to
pay, to the extent permitted by law, all actual costs and expenses, including,
without limitation, reasonable attorneys' fees, incurred or paid by the Bank in
enforcing this note and any collateral or security therefor, all whether or not
litigation is commenced.
This note is the Revolving Note referred to in the Letter Agreement.
This note is subject to prepayment as set forth in the Letter Agreement. The
maturity of this note may be accelerated upon the occurrence of an Event of
Default, as provided in the Letter Agreement.
Executed, as an instrument under seal, as of the day and year first
above written.
CORPORATE SEAL ZOOM TELEPHONICS, INC.
ATTEST:
____________________________ By:__________________________
Secretary Name:
Title:
By:__________________________
Name:
Title:
<PAGE>
ZOOM TELEPHONICS, INC.
207 South Street
Boston, MA 02111
January 17, 1997
Fleet National Bank
75 State Street
Boston, MA 02109
Gentlemen:
This letter agreement will set forth certain understandings between
Zoom Telephonics, Inc., a Delaware corporation (the "Borrower") and Fleet
National Bank (the "Bank") with respect to Revolving Loans (hereinafter defined)
to be made by the Bank to the Borrower and with respect to letters of credit
which may hereafter be issued by the Bank for the account of the Borrower. In
consideration of the mutual promises contained herein and in the other documents
referred to below, and for other good and valuable consideration, receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as
follows:
I. AMOUNTS AND TERMS
1.1. The Borrowing; Revolving Note. Subject to the terms and conditions
hereinafter set forth, the Bank will make loans ("Revolving Loans") to the
Borrower, in such amounts as the Borrower may request, on any Business Day prior
to the first to occur of (i) the Expiration Date, or (ii) the earlier
termination of the within-described revolving financing arrangements pursuant to
ss.5.2 or ss.6.6; provided, however, that (1) the aggregate principal amount of
Revolving Loans outstanding shall at no time exceed the Maximum Revolving Amount
(hereinafter defined) and (2) the Aggregate Bank Liabilities (hereinafter
defined) shall at no time exceed the Borrowing Base (hereinafter defined).
Without limitation of the foregoing, no Revolving Loan will be made by the Bank
hereunder if, after giving effect to such Revolving Loan, the Aggregate Bank
Liabilities would exceed $10,000,000. Within the foregoing limits, and subject
to the terms and conditions hereof, the Borrower may obtain Revolving Loans,
repay Revolving Loans and obtain Revolving Loans again on one or more occasions.
The Revolving Loans shall be evidenced by that certain $10,000,000 face amount
promissory note of even date herewith (the "Revolving Note") made by the
Borrower and payable to the order of the Bank. The Borrower hereby irrevocably
authorizes the Bank to make or cause to be made, on a schedule attached to the
Revolving Note or on the books of the Bank, at or following the time of making
each Revolving Loan and of receiving any payment of principal, an appropriate
notation reflecting such transaction and the then aggregate unpaid principal
balance of the Revolving Loans. The amount so noted shall constitute presumptive
evidence as to the amount owed by the Borrower with respect to principal of the
Revolving Loans. Failure of the Bank to make any such notation shall not,
however, affect any obligation of the Borrower or any right of the Bank
hereunder or under the Revolving Note.
<PAGE>
1.2. Interest Rate. Except as provided below in this ss.1.2, interest on
the Revolving Loans will be payable at a fluctuating rate per annum (the
"Floating Rate") which shall at all times be equal to the Prime Rate as in
effect from time to time (but in no event in excess of the maximum rate
permitted by then applicable law), with a change in such rate of interest to
become effective on each day when a change in the Prime Rate becomes effective.
Subject to the conditions set forth herein, the Borrower may elect that any
Revolving Loan to be made under ss.1.1 will be made as a LIBOR Loan. Such
election shall be made by the Borrower giving to the Bank a written or
telephonic notice received by the Bank within the time period and containing the
information described in the next following sentence (a "Fixed Rate Borrowing
Notice"). The Fixed Rate Borrowing Notice must be received by the Bank no later
than 10:00 a.m. (Boston time) on that day which is two Business Days prior to
the date of the proposed borrowing and must specify the amount of the LIBOR Loan
requested (which shall be $500,000 or an integral multiple thereof), whether the
Interest Period is proposed to be one month, two months, three months or six
months and the proposed commencement date of the relevant Interest Period.
Notwithstanding anything provided elsewhere in this letter agreement, the
Borrower may not select an Interest Period for any LIBOR Loan which would end
after the Expiration Date. Any Fixed Rate Borrowing Notice shall, upon receipt
by the Bank, become irrevocable and binding on the Borrower, and the Borrower
shall, upon demand and receipt of a Bank Certificate with respect thereto,
forthwith indemnify the Bank against any actual loss or expense incurred by the
Bank as a result of any failure by the Borrower to obtain (other than due to the
failure of the Bank to fund in violation of the Bank's obligations under this
letter agreement) or maintain any requested LIBOR Loan, including, without
limitation, any loss or expense incurred by reason of the liquidation or
redeployment of deposits or other funds acquired by the Bank to fund or maintain
such LIBOR Loan. Each LIBOR Loan will be due and payable in full (if not
required to be repaid earlier pursuant to the terms of this letter agreement) on
the last day of the Interest Period applicable thereto. The principal amount of
any such LIBOR Loan so repaid may be reborrowed as a new LIBOR Loan to the
extent and on the terms and conditions contained in this letter agreement by
delivery to the Bank of a new Fixed Rate Borrowing Notice conforming to the
requirements set forth above in this ss.1.2 (and any LIBOR Loan not so repaid
and not so reborrowed as a new LIBOR Loan will be deemed to have been reborrowed
as a Floating Rate Loan). Notwithstanding any other provision of this letter
agreement, the Bank need not make any LIBOR Loan at any time when there exists
any Event of Default (as hereinafter defined) or any event or circumstance
which, with the giving of notice or the passage of time or both, could become an
Event of Default.
1.3. Repayment; Renewal. The Borrower shall repay in full all Revolving
Loans and all interest thereon upon the first to occur of: (i) the Expiration
Date, or (ii) an acceleration under ss.5.2(a) following an Event of Default. In
addition, if at any time the Borrowing Base is in an amount which is less than
the then outstanding Aggregate Bank Liabilities, the Borrower will forthwith
prepay so much of the Revolving Loans as may be required (or arrange for
termination of such letters of credit as may be required) so that the Aggregate
Bank Liabilities will not exceed the Borrowing Base. The Borrower may prepay, at
any time, without penalty or premium, the whole or any portion of any Revolving
Loan which is a Floating Rate Loan. The Borrower may prepay the whole or any
portion of any Revolving Loan which is a LIBOR Loan; provided that (i) the
Borrower gives the Bank not less than two (2) Business Days' prior written
<PAGE>
notice of its intent so to prepay, (ii) the Borrower pays all interest on the
LIBOR Loan (or portion thereof) so prepaid accrued to the date of such
prepayment, (iii) any voluntary prepayment shall be in a principal amount of
$1,000,000 or an integral multiple thereof and (iv) if the Borrower for any
reason makes any prepayment of a LIBOR Loan prior to the last day of the
Interest Period applicable thereto, the Borrower shall forthwith pay all amounts
owing to the Bank pursuant to the provisions of ss.1.6 with respect to such
LIBOR Loan. The Bank may, at its sole discretion, renew the financing
arrangements described in this letter agreement by extending the Expiration Date
in a writing signed by the Bank and accepted by the Borrower. Neither the
inclusion in this letter agreement or elsewhere of covenants relating to periods
of time after the Expiration Date, nor any other provision hereof, nor any
action (except a written extension pursuant to the immediately preceding
sentence), non-action or course of dealing on the part of the Bank will be
deemed an extension of, or agreement on the part of the Bank to extend, the
Expiration Date.
1.4. Interest Payments. The Borrower will pay interest on the principal
amount of the Revolving Loans outstanding from time to time, from the date
hereof until payment of the Revolving Loans and the Revolving Note in full and
the termination of this letter agreement. Interest on Floating Rate Loans will
be payable monthly in arrears on the first day of each month. Interest on each
LIBOR Loan will be paid in arrears on the applicable Interest Payment Date or
Dates. In any event, interest shall also be paid on the date of payment of the
Revolving Loans in full. Interest on Floating Rate Loans shall be payable at the
Floating Rate. The rate of interest payable on any LIBOR Loan will be the
Eurodollar Interest Rate applicable thereto. In any event, overdue principal of
any Revolving Loan and, to the extent permitted by law, overdue interest on any
Revolving Loan shall bear interest at a rate per annum which at all times shall
be equal to the sum of (i) two (2%) percent per annum plus (ii) the rate
otherwise applicable to such overdue principal (or to the principal amount as to
which such interest is overdue) under the Revolving Note, payable on demand. All
interest payable hereunder and/or under the Revolving Note will be calculated on
the basis of a 360-day year for the actual number of days elapsed.
1.5. Rate Determination Protection. In the event that:
(i) the Bank shall determine that, by reason of circumstances
affecting the London interbank market or otherwise, adequate
and reasonable methods do not exist for ascertaining the
Eurodollar Interest Rate which would otherwise be applicable
during any Interest Period, or
(ii) the Bank shall determine that:
(A) the making or continuation of any LIBOR Loan has
been made impracticable or unlawful by (1) the
occurrence of any contingency that materially and
adversely affects the London interbank market or (2)
compliance by the Bank in good faith with any
applicable law or governmental regulation, guideline
or order or interpretation or change thereof by any
governmental authority charged with the
interpretation or administration thereof or with any
request or directive of any such governmental
authority (whether or not having the force of law);
or
<PAGE>
(B) LIBOR will not, in the reasonable determination of
the Bank, adequately and fairly reflect the cost to
the Bank of funding the LIBOR Loans for such Interest
Period
then the Bank shall forthwith give notice of such
determination (which shall be conclusive and binding on the
Borrower) to the Borrower. In such event the obligations of
the Bank to make LIBOR Loans shall be suspended until the Bank
determines that the circumstances giving rise to such
suspension no longer exist, whereupon the Bank shall notify
the Borrower.
1.6. Prepayment of LIBOR Loans. The following provisions of this ss.1.6
shall be effective only with respect to LIBOR Loans: If, due to acceleration of
the Revolving Note or due to voluntary prepayment or due to any other reason,
the Bank receives payment of any principal of a LIBOR Loan on any date prior to
the last day of the relevant Interest Period, the Borrower shall, upon demand
and receipt of a Bank Certificate from the Bank with respect thereto, pay
forthwith to the Bank all amounts required to compensate the Bank for losses,
costs or expenses which it may have reasonably incurred and may reasonably incur
as a result of such payment, including, without limitation, any loss or expense
incurred by reason of the liquidation or redeployment of funds acquired by the
Bank to fund or maintain such LIBOR Loan. This provision shall apply, without
limitation, to any prepayment required under the second sentence of ss.1.3.
1.7. Increased Costs; Capital Adequacy.
(i) If the adoption, effectiveness or phase-in, after the date
hereof, of any applicable law, rule or regulation, or any
change therein, or any change in the interpretation or
administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Bank with any
request or directive (whether or not having the force of law)
of any such authority, central bank or comparable agency:
(A) shall subject the Bank to any Imposition or other
charge with respect to any LIBOR Loan, the Revolving
Note or the Bank's agreement to make LIBOR Loans, or
shall change the basis of taxation of payments to the
Bank of the principal of or interest on any LIBOR
Loan or any other amounts due under this letter
agreement in respect of the LIBOR Loans or the Bank's
agreement to make LIBOR Loans (except for changes in
the rate of tax on the over-all net income of the
Bank); or
(B) shall impose, modify or deem applicable any
reserve, special deposit, deposit insurance or
similar requirement (including, without limitation,
any such requirement imposed by the Board of
Governors of the Federal Reserve System, but
excluding, with respect to any LIBOR Loan, any such
requirement already included in the applicable
<PAGE>
Reserve Rate) against assets of, deposits with or for
the account of, or credit extended by, the Bank or
shall impose on the Bank or on the London interbank
market any other condition affecting any LIBOR Loans,
the Revolving Note or the Bank's agreement to make
LIBOR Loans
and the result of any of the foregoing is to increase the cost
to the Bank of making or maintaining any LIBOR Loan or to
reduce the amount of any sum received or receivable by the
Bank under this letter agreement or under the Revolving Note
with respect to any LIBOR Loan by an amount deemed by the Bank
to be material, then, upon demand by the Bank and receipt of a
Bank Certificate from the Bank with respect thereto, the
Borrower shall pay to the Bank such additional amount or
amounts as the Bank certifies to be necessary to compensate
the Bank for such increased cost or reduction in amount
received or receivable.
(ii) If the Bank shall have determined in good faith that the
adoption, effectiveness or phase-in after the date hereof of
any applicable law, rule or regulation regarding capital
requirements for banks or bank holding companies, or any
change therein after the date hereof, or any change after the
date hereof in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof, or
compliance by the Bank with any request or directive of such
entity regarding capital adequacy (whether or not having the
force of law) has or would have the effect of reducing the
return on the Bank's capital with respect to its agreement
hereunder to make Revolving Loans or with respect to any
Revolving Loan (whether or not then subject to any Eurodollar
Interest Rate) to a level below that which the Bank could have
achieved (taking into consideration the Bank's policies with
respect to capital adequacy immediately before such adoption,
effectiveness, phase-in, change or compliance and assuming
that the Bank's capital was then fully utilized) by any amount
deemed by the Bank in good faith to be material: (A) the Bank
shall promptly after its determination of such occurrence give
notice thereof to the Borrower; and (B) the Borrower shall pay
to the Bank as an additional fee from time to time on demand
such amount as the Bank certifies to be the amount that will
compensate it for such reduction. A Bank Certificate of the
Bank claiming compensation under this ss.1.7 shall be
presumptively conclusive in the absence of manifest error.
Such certificate shall set forth the nature of the occurrence
giving rise to such compensation, the additional amount or
amounts to be paid to the Bank hereunder and the method by
which such amounts are determined. In determining any such
amount, the Bank may use any reasonable averaging and
attribution methods.
(iii) No failure on the part of the Bank to demand
compensation on any one occasion shall constitute a waiver of
its right to demand such compensation on any other occasion
and no failure on the part of the Bank to deliver any Bank
Certificate in a timely manner shall in any way reduce any
obligation of the Borrower to the Bank under this ss.1.7.
<PAGE>
1.8. Illegality or Impossibility. Notwithstanding any other provision of
this letter agreement, if the introduction of or any change in or in the
interpretation or administration of any law or regulation applicable to the Bank
or the Bank's good faith activities in the London interbank market shall make it
unlawful, or any central bank or other governmental authority having
jurisdiction over the Bank or the Bank's good faith activities in the London
interbank market shall assert that it is unlawful, or otherwise make it
impossible, for the Bank to perform its obligations hereunder to make LIBOR
Loans or to continue to fund or maintain LIBOR Loans, then on notice thereof and
demand therefor by the Bank in good faith to the Borrower, (i) the obligation of
the Bank to fund LIBOR Loans shall terminate and (ii) the Borrower shall prepay
in full all affected LIBOR Loans on or prior to the last day on which such LIBOR
Loans may legally remain outstanding.
1.9. Advances and Payments. The proceeds of all Revolving Loans shall
be credited by the Bank to a general deposit account maintained by the Borrower
with the Bank. The proceeds of each Revolving Loan will be used by the Borrower
solely for working capital purposes.
The Bank may charge any general deposit account of the Borrower at the
Bank with the amount of all payments of interest, principal and other sums due,
from time to time, under this letter agreement and/or the Revolving Note and/or
with respect to any letter of credit; and will thereafter notify the Borrower of
the amount so charged. The failure of the Bank so to charge any account or to
give any such notice shall not affect the obligation of the Borrower to pay
interest, principal or other sums as provided herein or in the Revolving Note or
with respect to any letter of credit.
Whenever any payment to be made to the Bank hereunder or under the
Revolving Note or with respect to any letter of credit shall be stated to be due
on a day which is not a Business Day, such payment may be made on the next
succeeding Business Day, and interest payable on each such date shall include
the amount thereof which shall accrue during the period of such extension of
time. All payments by the Borrower hereunder and/or in respect of the Revolving
Note and/or with respect to any letter of credit shall be made net of any
Impositions or taxes and without deduction, set-off or counterclaim,
notwithstanding any claim which the Borrower may now or at any time hereafter
have against the Bank. All payments of interest, principal and any other sum
payable hereunder and/or under the Revolving Note shall be made to the Bank, in
immediately available funds, at its office at 75 State Street, Boston, MA 02109
or to such other address as the Bank may from time to time direct. All payments
received by the Bank after 2:00 p.m. on any day shall be deemed received as of
the next succeeding Business Day. All monies received by the Bank shall be
applied first to fees, charges, costs and expenses payable to the Bank under
this letter agreement, the Revolving Note and/or any of the other Loan
Documents, next to interest then accrued on account of any Revolving Loans or
letter of credit reimbursement obligations and only thereafter to principal of
the Revolving Loans and letter of credit reimbursement obligations. All interest
and fees payable hereunder and/or under the Revolving Note shall be calculated
on the basis of a 360-day year for the actual number of days elapsed.
<PAGE>
1.10. Letters of Credit. At the Borrower's request, the Bank may, from
time to time, in its discretion, issue one or more letters of credit for the
account of the Borrower; provided that at the time of such issuance and after
giving effect thereto the Aggregate Bank Liabilities will in no event exceed the
lesser of (i) $10,000,000 or (ii) the then effective Borrowing Base. Any such
letter of credit will be issued for such fee and upon such terms and conditions
as may be agreed to by the Bank and the Borrower at the time of issuance. The
Borrower hereby authorizes the Bank, without further request from the Borrower,
to cause the Borrower's liability to the Bank for reimbursement of funds drawn
under any such letter of credit to be repaid from the proceeds of a Revolving
Loan to be made hereunder. The Borrower hereby irrevocably requests that such
Revolving Loans be made.
1.11. Conditions to Advance. Prior to the making of the initial
Revolving Loan or the issuance of any letter of credit hereunder, the Borrower
shall deliver to the Bank duly executed copies of this letter agreement, the
Revolving Note and the documents and other items listed on the Closing Agenda
delivered herewith by the Bank to the Borrower, all of which, as well as all
legal matters incident to the transactions contemplated hereby, shall be
satisfactory in form and substance to the Bank and its counsel in good faith.
Without limiting the foregoing, any Revolving Loan or letter of credit
issuance (including the initial Revolving Loan or letter of credit issuance) is
subject to the further conditions precedent that on the date on which such
Revolving Loan is made or such letter of credit is issued (and after giving
effect thereto):
(a) All statements, representations and warranties of the Borrower made
in this letter agreement and/or in the Security Agreement shall continue to be
correct in all material respects as of the date of such Revolving Loan or the
date of issuance of such letter of credit, as the case may be, other than any
such statements, representations and warranties which by their terms refer only
to the date of this letter agreement.
(b) All covenants and agreements of the Borrower contained herein
and/or in any of the other Loan Documents shall have been complied with in all
material respects on and as of the date of such Revolving Loan or the date of
issuance of such letter of credit, as the case may be.
(c) No event which constitutes, or which with notice or lapse of time
or both could constitute, an Event of Default shall have occurred and be
continuing.
(d) No material adverse change shall have occurred in the financial
condition of the Borrower from that disclosed in the financial statements then
most recently furnished to the Bank.
Each request by the Borrower for any Revolving Loan or for the issuance
of any letter of credit, and each acceptance by the Borrower of the proceeds of
any Revolving Loan or delivery of a letter of credit, will be deemed a
representation and warranty by the Borrower that at the date of such Revolving
Loan or the date of issuance of such letter of credit, as the case may be, and
after giving effect thereto all of the conditions set forth in the foregoing
clauses (a)-(d) of this ss.1.11 will be satisfied. Each request for a Revolving
<PAGE>
Loan or letter of credit issuance will be accompanied by a borrowing base
certificate on a form satisfactory to the Bank, executed by the chief financial
officer of the Borrower, unless such a certificate shall have been previously
furnished setting forth the Borrowing Base as at a date not more than 30 days
prior to the date of the requested borrowing or the requested letter of credit
issuance, as the case may be.
II. REPRESENTATIONS AND WARRANTIES
2.1.Representations and Warranties. In order to induce the Bank to enter
into this letter agreement and to make Revolving Loans hereunder and/or issue
letters of credit hereunder, the Borrower warrants and represents to the Bank as
follows:
(a) The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of Delaware. The Borrower has full corporate
power to own its property and conduct its business as now conducted and as
proposed to be conducted and to enter into and perform this letter agreement and
the other Loan Documents. The Borrower is duly qualified to do business and in
good standing in Massachusetts and is also duly qualified to do business and in
good standing in each other jurisdiction where the failure so to qualify could
(singly or in the aggregate with all other such failures) have a material
adverse effect on the financial condition, business or prospects of the
Borrower, all such jurisdictions being listed on item 2.1(a) of the attached
Disclosure Schedule. At the date hereof, the Borrower has no Subsidiaries,
except as shown on said item 2.1(a) of the attached Disclosure Schedule. The
Borrower is not a member of any partnership or joint venture. Each of FSC, Zoom
UK and Tribe is a wholly-owned Subsidiary of the Borrower which has no
Indebtedness for borrowed money (except to the Borrower) and conducts no
business other than acting as a distributor of the Borrower's products.
(b) At the date of this letter agreement, all of the outstanding
capital stock of the Borrower is owned, of record and beneficially, by the
Parent.
(c) The execution, delivery and performance by the Borrower of this
letter agreement and each of the other Loan Documents have been duly authorized
by all necessary corporate and other action and do not and will not:
(i) violate any provision of, or require as a prerequisite to
effectiveness any filing, registration, consent or approval under, any
law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to the
Borrower;
(ii) violate any provision of the charter or by-laws of the
Borrower, or result in a breach of or constitute a default or require
any waiver or consent under any indenture or loan or credit agreement
or any other material agreement, lease or instrument to which the
Borrower is a party or by which the Borrower or any of its properties
may be bound or affected or require any other consent of any Person; or
<PAGE>
(iii) result in, or require, the creation or imposition of any
lien, security interest or other encumbrance (other than in favor of
the Bank), upon or with respect to any of the properties now owned or
hereafter acquired by the Borrower.
(d) This letter agreement and each of the other Loan Documents
delivered herewith has been duly executed and delivered by the Borrower and each
is a legal, valid and binding obligation of the Borrower, enforceable against
the Borrower in accordance with its respective terms.
(e) Except as described on item 2.1(e) of the attached Disclosure
Schedule, there are no actions, suits or proceedings pending or, to the
knowledge of the Borrower, threatened by or against the Borrower or any
Subsidiary (nor, to the knowledge of the Borrower, is there any pending or
threatened investigation of the Borrower or any Subsidiary) before any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which could hinder or prevent the consummation of the
transactions contemplated hereby or call into question the validity of this
letter agreement or any of the other Loan Documents or any action taken or to be
taken in connection with the transactions contemplated hereby or thereby or
which in any single case or in the aggregate is reasonably likely to have
resulted in or is reasonably expected to result in any material adverse change
in the business, prospects, condition, affairs or operations of the Borrower or
any Subsidiary.
(f) The Borrower is not in violation of any term of its charter or
by-laws as now in effect. Neither the Borrower nor any Subsidiary of the
Borrower is in material violation of any term of any mortgage, indenture or
judgment, decree or order, or any other material instrument, contract or
agreement to which it is a party or by which any of its property is bound.
(g) The Borrower has filed (and has caused each of its Subsidiaries to
file) all federal, foreign, state and local tax returns, reports and estimates
required to be filed by the Borrower and/or by any such Subsidiary. All such
filed returns, reports and estimates are proper and accurate and the Borrower or
the relevant Subsidiary has paid all taxes, assessments, impositions, fees and
other governmental charges required to be paid in respect of the periods covered
by such returns, reports or estimates. No deficiencies for any tax, assessment
or governmental charge have been asserted or assessed, and the Borrower knows of
no material tax liability or basis therefor.
(h) The Borrower is in compliance (and each Subsidiary of the Borrower
is in compliance) with all requirements of law, federal, foreign, state and
local, and all requirements of all governmental bodies or agencies having
jurisdiction over it, the conduct of its business, the use of its properties and
assets, and all premises occupied by it, failure to comply with any of which
could (singly or in the aggregate with all other such failures) have a material
adverse effect upon the assets, business, financial condition or prospects of
the Borrower or any such Subsidiary. Without limiting the foregoing, the
Borrower has all the material franchises, licenses, leases, permits,
certificates and authorizations needed for the conduct of its business and the
use of its properties and all premises occupied by it, as now conducted, owned
and used and as proposed to be conducted, owned and used.
<PAGE>
(i) The audited consolidated financial statements of the Parent and the
Parent's Subsidiaries as at December 31, 1995 and the management-generated
statements of the Parent and the Parent's Subsidiaries as at September 30, 1996,
each heretofore delivered to the Bank, are complete and accurate and fairly
present the financial condition of the Parent and the Parent's Subsidiaries as
at the respective dates thereof and for the periods covered thereby, except that
the management-generated statements do not have footnotes and thus do not
present the information which would normally be contained in the footnotes to
financial statements and subject to normal year-end adjustments, which shall not
be material. Neither the Parent nor any of the Parent's Subsidiaries has any
liability, contingent or otherwise, not disclosed in the aforesaid financial
statements or in any notes thereto that could materially affect the financial
condition of the Parent and the Parent's Subsidiaries. Since December 31, 1995,
there has been no material adverse development in the business, condition or
prospects of the Parent and the Parent's Subsidiaries, and neither the Parent
nor any of the Parent's Subsidiaries has entered into any material transaction
other than in the ordinary course.
(j) The principal place of business and chief executive offices of the
Borrower are located at 207 South Street, Boston, MA 02111.
(k) To the best knowledge of the Borrower, the Borrower owns or has a
valid right to use all of the material patents, copyrights, trademarks and trade
names now being used to conduct its business. To the best knowledge of the
Borrower, the conduct of the Borrower's business as now operated does not
conflict with valid patents, copyrights, trademarks or trade names of others in
any manner that could materially adversely affect the business, prospects,
assets or condition, financial or otherwise, of the Borrower.
(l) To the best knowledge of the Borrower, none of the executive
officers or key employees of the Borrower is subject to any agreement in favor
of anyone other than the Borrower which materially limits or restricts that
person's right to engage in the type of business activity conducted or proposed
to be conducted by the Borrower or which grants to anyone other than the
Borrower any rights in any inventions or other ideas susceptible to legal
protection developed or conceived by any such officer or key employee.
(m) The Borrower is not a party to any contract or agreement which now
has or, as far as can be foreseen by the Borrower at the date hereof, may have a
material adverse effect on the financial condition, business, prospects or
properties of the Borrower.
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
Without limitation of any other covenants and agreements contained
herein or elsewhere, the Borrower agrees that so long as the financing
arrangements contemplated hereby are in effect or any Revolving Loan or any of
the other Obligations shall be outstanding or any letter of credit issued
hereunder shall be outstanding:
<PAGE>
3.1. Legal Existence; Qualification; Compliance. The Borrower will
maintain (and will cause each Subsidiary of the Borrower to maintain) its
corporate existence and good standing in the jurisdiction of its incorporation.
The Borrower will remain qualified to do business and in good standing in
Massachusetts and the Borrower will qualify to do business and will remain
qualified and in good standing (and the Borrower will cause each Subsidiary of
the Borrower to qualify and remain qualified and in good standing) in each other
jurisdiction where the failure so to qualify could (singly or in the aggregate
with all other such failures) have a material adverse effect on the financial
condition, business or prospects of the Borrower or any such Subsidiary. The
Borrower will comply (and will cause each Subsidiary of the Borrower to comply)
with its charter documents and by-laws. The Borrower will comply with (and will
cause each Subsidiary of the Borrower to comply with) all applicable laws, rules
and regulations (including, without limitation, ERISA and those relating to
environmental protection) other than (i) laws, rules or regulations the validity
or applicability of which the Borrower or such Subsidiary shall be contesting in
good faith by proceedings which serve as a matter of law to stay the enforcement
thereof and (ii) those laws, rules and regulations the failure to comply with
any of which could not (singly or in the aggregate) have a material adverse
effect on the financial condition, business or prospects of the Borrower or any
such Subsidiary.
3.2. Maintenance of Property; Insurance. The Borrower will maintain and
preserve (and will cause each Subsidiary of the Borrower to maintain and
preserve) all of its fixed assets used in its business in good working order and
condition, making all necessary repairs thereto and replacements thereof. The
Borrower will maintain, with financially sound and reputable insurers, insurance
with respect to its property and business against such liabilities, casualties
and contingencies and of such types and in such amounts as shall be reasonably
satisfactory to the Bank from time to time and in any event all such insurance
as may from time to time be customary for companies conducting a business
similar to that of the Borrower in similar locales.
3.3. Payment of Taxes and Charges. The Borrower will pay and discharge
(and will cause each Subsidiary of the Borrower to pay and discharge) all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property, including, without limitation, taxes, assessments, charges
or levies relating to real and personal property, franchises, income,
unemployment, old age benefits, withholding, or sales or use, prior to the date
on which penalties would attach thereto, and all lawful claims (whether for any
of the foregoing or otherwise) which, if unpaid, might give rise to a lien upon
any property of the Borrower or any such Subsidiary, except any of the foregoing
which is being contested in good faith and by appropriate proceedings which
serve as a matter of law to stay the enforcement thereof and for which the
Borrower has established and is maintaining adequate reserves. The Borrower will
pay, and will cause each of its Subsidiaries to pay, in a timely manner, all
material lease obligations, material trade debt, material purchase money
obligations and material equipment lease obligations. The Borrower will perform
and fulfill all material covenants and agreements under any material leases of
real estate, material agreements relating to purchase money debt, material
equipment leases and other material contracts. The Borrower will maintain in
full force and effect, and comply with the terms and conditions of, all material
permits, permissions and licenses necessary or desirable for its business.
<PAGE>
3.4. Accounts. The Borrower will maintain its principal depository and
operating accounts with the Bank.
3.5. Conduct of Business. The Borrower will conduct, in the ordinary
course, the business in which it is presently engaged. The Borrower will not,
without the prior written consent of the Bank (such consent not to be
unreasonably withheld), directly or indirectly (itself or through any
Subsidiary) enter into any other unrelated lines of business, businesses or
ventures.
3.6. Reporting Requirements. The Borrower will furnish to the Bank (or
cause to be furnished to the Bank):
(i) Within 90 days after the end of each fiscal year of the
Parent, a copy of the consolidated annual audit report for such fiscal
year for the Parent and the Parent's Subsidiaries, including therein
consolidated and consolidating balance sheets of the Parent and the
Parent's Subsidiaries as at the end of such fiscal year and related
consolidated and consolidating statements of income, stockholders'
equity and cash flow for the fiscal year then ended. Said consolidating
statements will include schedules showing the financial results of the
Borrower separately, certified as accurate by the Borrower's chief
financial officer. The annual consolidated financial statements shall
be certified by independent public accountants selected by the Parent
and reasonably acceptable to the Bank, such certification to be in such
form as is generally recognized as "unqualified". The Borrower will
also deliver to the Bank, within 90 days after the end of each fiscal
year, projections of sales, income and expenses of the Borrower for the
succeeding fiscal year, prepared by the Borrower's management, such
projections to be in such detail as is reasonably satisfactory to the
Bank.
(ii) Within 45 days after the end of each fiscal quarter of
the Borrower, a copy of the Parent and the Parent's Subsidiaries
consolidated Quarterly Report on Form 10-Q, as filed with the
Securities and Exchange Commission ("SEC"). If, for any reason, the
Parent is not required to file such Quarterly Report on Form 10-Q with
the SEC within 45 days after the end of any fiscal quarter, then within
such 45-day period after the end of such fiscal quarter the Borrower
will deliver (or cause to be delivered) to the Bank consolidated and
consolidating balance sheets of the Parent and the Parent's
Subsidiaries and related consolidated and consolidating statements of
income and cash flow, unaudited but complete and accurate (except with
regard to year-end FSC-related adjustments) and prepared in accordance
with generally accepted accounting principles consistently applied
fairly presenting the financial condition of the Parent and the
Parent's Subsidiaries as at the dates thereof and for the periods
covered thereby (except that such quarterly statements need not contain
footnotes) and certified as accurate (except with regard to year-end
FSC-related adjustments) by the chief financial officer of the Parent,
such balance sheets to be as at the end of such fiscal quarter and such
statements of income and cash flow to be for such fiscal quarter and
for the year to date. The above-described Form 10-Q or other quarterly
financial statements will include or be accompanied by schedules
showing the financial results of the Borrower separately, certified as
accurate by the Borrower's chief financial officer. In any event, the
<PAGE>
Borrower will also deliver to the Bank on a quarterly basis, within 45
days after the end of each fiscal quarter, an accounts receivable aging
report in such form and in such detail as is reasonably satisfactory to
the Bank, which report shall include, without limitation, detail as to
foreign Receivables and a summary list of the Borrower's top ten
customers.
(iii) At the time of delivery of each annual or quarterly
report or financial statement of the Parent and the Parent's
Subsidiaries or of the Borrower, a certificate executed by the chief
financial officer of the Borrower stating that he or she has reviewed
this letter agreement and the other Loan Documents and has no knowledge
of any default by the Borrower in the performance or observance of any
of the provisions of this letter agreement or of any of the other Loan
Documents or, if he or she has such knowledge, specifying each such
default and the nature thereof. Each financial statement given as at
the end of any fiscal quarter of the Borrower will also set forth the
calculations necessary to evidence compliance with ss.ss.3.7-3.10.
(iv) Monthly, within 20 days after the end of each month, (A)
an aging report in form satisfactory to the Bank covering all
Receivables of the Borrower outstanding as at the end of such month,
and (B) a certificate of the chief financial officer of the Borrower
setting forth the Borrowing Base as at the end of such month, all in
form reasonably satisfactory to the Bank.
(v) Promptly after receipt, a copy of all audits or reports
submitted to the Parent and/or any of the Parent's Subsidiaries by
independent public accountants in connection with any annual, special
or interim audits of the books of the Parent and/or any of the Parent's
Subsidiaries and any letter of comments directed by such accountants to
the management of the Parent and/or any of the Parent's Subsidiaries.
(vi) As soon as possible and in any event within five days
after the occurrence of any Event of Default or any event which, with
the giving of notice or passage of time or both, would constitute an
Event of Default, the statement of the Borrower setting forth details
of each such Event of Default or event and the action which the
Borrower proposes to take with respect thereto, provided, however, that
the Borrower need not furnish such statements with respect to the
covenants contained in any of Sections 3.7, 3.8, 3.9 and/or 3.10 as to
any fiscal period until the earlier of (i) the closing of the
Borrower's fiscal books for the relevant fiscal period or (ii) 20 days
after the end of the relevant fiscal period.
(vii) Promptly after the commencement thereof, notice of all
actions, suits and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality,
domestic or foreign, to which the Borrower or any Subsidiary of the
Borrower is a party.
(viii) As long as the Parent and/or any of the Parent's
Subsidiaries has a class of securities which is publicly traded, a copy
<PAGE>
of each periodic or current report of the Parent and/or any of the
Parent's Subsidiaries filed with the SEC or any successor agency and
each annual report, proxy statement and other communication sent by the
Parent and/or any of the Parent's Subsidiaries to shareholders or other
securityholders generally, such copy to be provided to the Bank
promptly upon such filing with the SEC or such communication with
shareholders or securityholders, as the case may be.
(ix) Promptly after the Borrower has knowledge thereof,
written notice of any development or circumstance which may reasonably
be expected to have a material adverse effect on the Borrower or its
business, properties, assets, Subsidiaries or condition, financial or
otherwise.
(x) Promptly upon request, such other information respecting
the financial condition, operations, Receivables, inventory, machinery
or equipment of the Borrower or any Subsidiary as the Bank may from
time to time reasonably request.
3.7. Debt to Worth. The Borrower will maintain as at the end of each
fiscal quarter (commencing with its results as at September 30, 1996) on a
consolidated basis a Leverage Ratio of not more than 1.0 to 1. As used herein,
"Leverage Ratio" means, as at any date when same is to be determined, the ratio
of (x) the total consolidated Senior Debt of the Borrower and/or its
Subsidiaries then outstanding to (y) the then consolidated Capital Base of the
Borrower and its Subsidiaries.
3.8. Capital Base. The Borrower will maintain as at the end of each
fiscal quarter (commencing with its results as at September 30, 1996) a
consolidated Capital Base of not less than the then-effective Capital Base
Requirement. As used herein, the "Capital Base Requirement" will be deemed to
have been $40,000,000 for June 30, 1996; and as at the last day of each fiscal
quarter thereafter (commencing with September 30, 1996) (each, a "Determination
Date"), the Capital Base Requirement will be deemed to become an amount equal to
the sum of: (i) that Capital Base Requirement which was in effect at the last
day of the immediately preceding fiscal quarter, plus (ii) 50% of the
consolidated Net Income of the Borrower and Subsidiaries during the fiscal
quarter ending at such Determination Date (but without giving effect to any Net
Income which is less than zero for any fiscal quarter).
3.9. Profitability. The Borrower will not incur a consolidated
quarterly Net Loss of $2,500,000 or more in any fiscal quarter (commencing with
its results for the fiscal quarter ended September 30, 1996). Further, if the
Borrower incurs any consolidated quarterly Net Loss in any fiscal quarter
(commencing with its results for the fiscal quarter ending September 30, 1996),
then the Borrower will achieve a consolidated quarterly Net Income of at least
$1.00 for the immediately following fiscal quarter.
3.10. Liquidity. The Borrower will maintain as at the end of eachfiscal
quarter of Borrower (commencing with its results as at September 30, 1996) a
ratio of Net Quick Assets to Current Liabilities, which ratio shall be not less
than 1.5 to 1.
<PAGE>
3.11. Books and Records. The Borrower will maintain (and will cause the
Parent and the Parent's Subsidiaries and each of the Borrower's Subsidiaries to
maintain) complete and accurate books, records and accounts which will at all
times accurately and fairly reflect all of its transactions in accordance with
generally accepted accounting principles consistently applied. The Borrower
will, at any reasonable time and from time to time upon reasonable notice and
during normal business hours (and at any time and without any necessity for
notice following the occurrence of an Event of Default), permit the Bank, and
any agents or representatives thereof, to examine and make copies of and take
abstracts from the records and books of account of, and visit the properties of
the Borrower and any of its Subsidiaries, and to discuss its affairs, finances
and accounts with its officers, directors and/or independent accountants, all of
whom are hereby authorized and directed to cooperate with the Bank in carrying
out the intent of this ss.3.11. Each financial statement of the Borrower
hereafter delivered pursuant to this letter agreement will be complete and
accurate and will fairly present the financial condition of the Borrower as at
the date thereof and for the periods covered thereby, subject (as to interim
financial statements) to normal year-end audit adjustments.
IV. NEGATIVE COVENANTS
Without limitation of any other covenants and agreements contained
herein or elsewhere, the Borrower agrees that so long as the financing
arrangements contemplated hereby are in effect or any Revolving Loan or any of
the other Obligations shall be outstanding or any letter of credit issued
hereunder shall be outstanding:
4.1. Indebtedness. The Borrower will not create, incur, assume or
suffer to exist any Indebtedness (nor allow any of its Subsidiaries to create,
incur, assume or suffer to exist any Indebtedness), except for:
(i) Indebtedness owed to the Bank (or its assigns), including,
without limitation, the Indebtedness represented by the Revolving Note
and any Indebtedness in respect of letters of credit issued by the
Bank;
(ii) Subject always to the satisfaction of the requirements of
clause (vi) of ss.4.6 below, (A) Indebtedness of Subsidiaries of the
Borrower owed to the Borrower, (B) Indebtedness of the Borrower owed to
any Subsidiary of the Borrower and (C) Indebtedness of any Subsidiary
of the Borrower owed to any other Subsidiary of the Borrower;
(iii) Indebtedness of the Borrower or any Subsidiary for taxes,
assessments and governmental charges or levies not yet due and payable;
(iv) Indebtedness under or in respect of currency exchange
contracts or interest rate protection obligations incurred in the
ordinary course of business; provided that the aggregate of the
notional amounts of all such contracts and obligations will not exceed
$1,000,000;
<PAGE>
(v) Indebtedness in connection with performance bonds or letters
of credit obtained and issued in the ordinary course of business;
including letters of credit related to insurance associated with claims
for work-related injuries;
(vi) Subordinated Debt; provided that the Bank has consented to
the economic terms, amount and subordination provisions of all such
Subordinated Debt;
(vii) unsecured current liabilities of the Borrower or any
Subsidiary (other than for money borrowed or for purchase money
Indebtedness with respect to fixed assets) incurred upon customary
terms in the ordinary course of business;
(viii) purchase money Indebtedness (including, without limitation,
Indebtedness in respect of capitalized equipment leases) owed to
equipment vendors and/or lessors for equipment purchased or leased by
the Borrower for use in the Borrower's business, provided that the
total of Indebtedness permitted under this clause (viii) plus
presently-existing equipment financing permitted under clause (ix) of
this ss.4.1 will not exceed $2,000,000 in the aggregate outstanding at
any one time;
(ix) other Indebtedness (not described in any of clauses
(i)-(viii) above) existing at the date hereof, but only to the extent
set forth on item 4.1 of the attached Disclosure Schedule; and
(x) any guaranties or other contingent liabilities expressly
permitted pursuant to ss.4.3.
4.2. Liens. The Borrower will not create, incur, assume or suffer to
exist (nor allow any of its Subsidiaries to create, incur, assume or suffer to
exist) any mortgage, deed of trust, pledge, lien, security interest, or other
charge or encumbrance (including the lien or retained security title of a
conditional vendor) of any nature (collectively, "Liens"), upon or with respect
to any of its property or assets, now owned or hereafter acquired, except that
the foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or levies
on property of the Borrower or any of its Subsidiaries if the same
shall not at the time be delinquent or thereafter can be paid without
interest or penalty or are being contested in good faith and by
appropriate proceedings which serve as a matter of law to stay any
enforcement thereof and as to which adequate reserves are maintained;
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar Liens arising in the ordinary course
of business for sums not yet due or which are being contested in good
faith and by appropriate proceedings which serve as a matter of law to
stay the enforcement thereof and as to which adequate reserves are
maintained;
<PAGE>
(iii) pledges or deposits under workmen's compensation laws,
unemployment insurance, social security, retirement benefits or similar
legislation;
(iv) Liens in favor of the Bank;
(v) Liens in favor of equipment vendors and/or lessors securing
purchase money Indebtedness to the extent permitted by clause (viii) of
ss.4.1; provided that no such Lien will extend to any property of the
Borrower other than the specific items of equipment financed; or
(vi) other Liens existing at the date hereof, but only to the
extent and with the relative priorities set forth on item 4.2 of the
attached Disclosure Schedule.
Without limitation of the foregoing, the Borrower covenants and agrees
that it will not enter into (and represents and warrants that it is not now a
party to or subject to) any agreement or understanding with any Person other
than the Bank which could prohibit or restrict in any manner the right of the
Borrower to grant Liens on its assets to the Bank.
4.3. Guaranties. The Borrower will not, without the prior written
consent of the Bank, assume, guarantee, endorse or otherwise become directly or
contingently liable (including, without limitation, liable by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, to supply
funds to or otherwise invest in any debtor or otherwise to assure any creditor
against loss) (and will not permit any of its Subsidiaries so to assume,
guaranty or become directly or contingently liable) in connection with any
indebtedness of any other Person, except (i) guaranties by endorsement for
deposit or collection in the ordinary course of business, (ii) guaranties in the
ordinary course connected with the sale of the products or services, and (iii)
guaranties existing at the date hereof and described on item 4.3 of the attached
Disclosure Schedule.
4.4. Dividends. The Borrower will not, without the prior written consent
of the Bank, make any distributions to its shareholders, pay any dividends
(other than dividends payable solely in capital stock of the Borrower) or
redeem, purchase or otherwise acquire, directly or indirectly any of its capital
stock.
4.5. Loans and Advances. The Borrower will not make (and will not permit
any Subsidiary to make) any loans or advances to any Person, including, without
limitation, the Borrower's directors, officers and employees, except advances to
such directors, officers or employees with respect to expenses incurred by them
in the ordinary course of their duties and advances against salary, all of which
loans and advances will not exceed, in the aggregate, $500,000 outstanding at
any one time.
4.6. Investments. The Borrower will not, without the Bank's prior
written consent (which consent shall not be unreasonably withheld), invest in,
hold or purchase any stock or securities of any Person (nor will the Borrower
permit any of its Subsidiaries to invest in, purchase or hold any such stock or
securities) except: (i) readily marketable direct obligations of, or obligations
<PAGE>
guarantied by, the United States of America or any agency thereof; (ii) other
investment grade debt securities; (iii) mutual funds, the assets of which are
primarily invested in items of the kind described in the foregoing clauses (i)
and (ii) of this ss.4.6; (iv) deposits with or certificates of deposit issued by
the Bank and any other obligations of the Bank or the Bank's parent; (v)
deposits in any other bank organized in the United States having capital in
excess of $100,000,000; and (vi) investments in any Subsidiaries now existing or
hereafter created by the Borrower pursuant to ss.4.7 below; provided that in any
event the Tangible Net Worth of the Borrower alone (exclusive of its investment
in Subsidiaries and any debt owed by any Subsidiary to the Borrower) will not be
less than 90% of the consolidated Tangible Net Worth of the Borrower and
Subsidiaries.
4.7. Subsidiaries; Acquisitions. The Borrower will not, without the
prior written consent of the Bank, form or acquire any Subsidiary or make any
other acquisition of the stock of any other Person or of all or substantially
all of the assets of any other Person. The Borrower will not become a partner
in any partnership.
4.8. Merger. The Borrower will not, without the prior written consent of
the Bank, merge or consolidate with any Person, or sell, lease, transfer or
otherwise dispose of any material portion of its assets (whether in one or more
transactions), other than sale of inventory in the ordinary course.
4.9. Affiliate Transactions. The Borrower will not, without prior
written consent of the Bank, enter into any transaction, including, without
limitation, the purchase, sale or exchange of any property or the rendering of
any service, with any affiliate of the Borrower, except in the ordinary course
of and pursuant to the reasonable requirements of the Borrower's business and
upon fair and reasonable terms no less favorable to the Borrower than would be
obtained in a comparable arms'-length transaction with any Person not an
affiliate; provided that nothing in this ss.4.9 shall be deemed to restrict the
payment of salary or other similar payments to any officer or director of the
Borrower, nor to restrict the hiring of additional officers. For the purposes of
this letter agreement, "affiliate" means any Person which, directly or
indirectly, controls or is controlled by or is under common control with the
Borrower; any officer or director or former officer or director of the Borrower;
any Person owning of record or beneficially, directly or indirectly, 5% or more
of any class of capital stock of the Borrower or 5% or more of any class of
capital stock or other equity interest having voting power (under ordinary
circumstances) of any of the other Persons described above; and any member of
the immediate family of any of the foregoing. "Control" means possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of any Person, whether through ownership of voting
equity, by contract or otherwise.
4.10. Change of Address, etc. The Borrower will not change its
corporate name, nor will the Borrower change its chief executive offices or
principal place of business from the address described in ss.2.1(j) above,
unless the Borrower gives prompt written notice to the Bank of each such change.
The Borrower will not change its fiscal year or methods of financial reporting
unless, in each instance, prior written notice of such change is given to the
Bank and prior to such change the Borrower enters into amendments to this letter
<PAGE>
agreement in form and substance reasonably satisfactory to the Bank in order to
preserve unimpaired the rights of the Bank and the obligations of the Borrower
hereunder.
4.11. Hazardous Waste. Except as provided below, the Borrower will not
dispose of or suffer or permit to exist any hazardous material or oil on any
site or vessel owned, occupied or operated by the Borrower or any Subsidiary of
the Borrower, nor shall the Borrower store (or permit any Subsidiary to store)
on any site or vessel owned, occupied or operated by the Borrower or any such
Subsidiary, or transport or arrange the transport of, any hazardous material or
oil (the terms "hazardous material", "oil", "site" and "vessel", respectively,
being used herein with the meanings given those terms in Mass. Gen. Laws, Ch.
21E or any comparable terms in any comparable statute in effect in any other
relevant jurisdiction). The Borrower shall provide the Bank with written notice
of (i) the intended storage or transport of any hazardous material or oil by the
Borrower or any Subsidiary of the Borrower, (ii) any known release or known
threat of release of any hazardous material or oil at or from any site or vessel
owned, occupied or operated by the Borrower or any Subsidiary of the Borrower,
and (iii) any incurrence of any expense or loss by any government or
governmental authority in connection with the assessment, containment or removal
of any hazardous material or oil for which expense or loss the Borrower or any
Subsidiary of the Borrower may be liable. Notwithstanding the foregoing, the
Borrower and its Subsidiaries may use, store and transport, and need not notify
the Bank of the use, storage or transportation of, (x) oil in reasonable
quantities, as fuel for heating of their respective facilities or for vehicles
or machinery used in the ordinary course of their respective businesses and (y)
hazardous materials that are solvents, cleaning agents or other materials used
in the ordinary course of the respective business operations of the Borrower and
its Subsidiaries, in reasonable quantities, as long as in any case the Borrower
or the Subsidiary concerned (as the case may be) has obtained and maintains in
effect any necessary governmental permits, licenses and approvals, complies with
all requirements of applicable federal, state and local law relating to such
use, storage or transportation, follows the protective and safety procedures
that a prudent businessperson conducting a business the same as or similar to
that of the Borrower or such Subsidiary (as the case may be) would follow, and
disposes of such materials (not consumed in the ordinary course) only through
licensed providers of hazardous waste removal services.
4.12. No Margin Stock. No proceeds of any Revolving Loan shall be
used directly or indirectly to purchase or carry any margin security.
4.13. Subordinated Debt. The Borrower will not directly or indirectly
make any optional or voluntary prepayment or purchase of Subordinated Debt or
modify, alter or add any provisions with respect to payment of Subordinated
Debt. In any event, the Borrower will not make any payment of any principal of
or interest on any Subordinated Debt at any time when there exists, or if there
would result therefrom, any Event of Default hereunder.
V. DEFAULT AND REMEDIES
5.1. Events of Default. The occurrence of any one of the following
events shall constitute an Event of Default hereunder:
<PAGE>
(a) The Borrower shall fail to make any payment of principal of or
interest on the Revolving Note on or before the date when due; or the Borrower
shall fail to pay when due any amount owed to the Bank in respect of any letter
of credit now or hereafter issued by the Bank; or
(b) Any representation or warranty of the Borrower contained herein
shall at any time prove to have been incorrect in any material respect when made
or any representation or warranty made by the Borrower in connection with any
Revolving Loan or letter of credit shall at any time prove to have been
incorrect in any material respect when made; or
(c) The Borrower shall default in the performance or observance of
any agreement or obligation under any of ss.ss.3.6, 3.7, 3.8, 3.9 or 3.10 or
Article IV; or
(d) The Borrower shall default in the performance or observance of any
agreement or obligation under either ss.3.1 or ss.3.3 and such default shall
continue unremedied for 30 days after the Borrower knows of, or reasonably
should have known of, the facts or circumstances constituting such default; or
(e) The Borrower shall default in the performance of any other term,
covenant or agreement contained in this letter agreement and such default shall
continue unremedied for 30 days after notice thereof shall have been given to
the Borrower; or
(f) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the expiration
of any applicable notice and/or grace period, under any other contract,
agreement or undertaking now existing or hereafter entered into with or for the
benefit of the Bank (or any affiliate of the Bank); or
(g) Any default shall exist and remain unwaived or uncured with respect
to any Subordinated Debt of the Borrower or with respect to any instrument
evidencing, guaranteeing or otherwise relating to any such Subordinated Debt, or
any such Subordinated Debt shall not have been paid when due, whether by
acceleration or otherwise, or shall have been declared to be due and payable
prior to its stated maturity, or any event or circumstance shall occur which
permits, or with the lapse of time or the giving of notice or both would permit,
the acceleration of the maturity of any Subordinated Debt by the holder or
holders thereof; or
(h) Any default shall exist and remain unwaived or uncured with respect
to any other Indebtedness for borrowed money of the Borrower or any Subsidiary
of the Borrower in excess of $500,000 in aggregate principal amount or with
respect to any instrument evidencing, guaranteeing, securing or otherwise
relating to any such Indebtedness for borrowed money, or any such Indebtedness
in excess of $500,000 in aggregate principal amount shall not have been paid
when due, whether by acceleration or otherwise, or shall have been declared to
be due and payable prior to its stated maturity, or any event or circumstance
shall occur which permits, or with the lapse of time or the giving of notice or
both would permit, the acceleration of the maturity of any such Indebtedness by
the holder of holders thereof; or
<PAGE>
(i) The Borrower shall be dissolved, or the Borrower or any Subsidiary
of the Borrower shall become insolvent or bankrupt or shall cease paying its
debts as they mature or shall make an assignment for the benefit of creditors,
or a trustee, receiver or liquidator shall be appointed for the Borrower or any
Subsidiary of the Borrower or for a substantial part of the property of the
Borrower or any such Subsidiary, or bankruptcy, reorganization, arrangement,
insolvency or similar proceedings shall be instituted by or against the Borrower
or any such Subsidiary under the laws of any jurisdiction (except for an
involuntary proceeding filed against the Borrower or any Subsidiary of the
Borrower which is dismissed within 60 days following the institution thereof);
or
(j) Any attachment, execution or similar process shall be issued or
levied against any material item of the property of the Borrower or any
Subsidiary and such attachment, execution or similar process shall not be paid,
stayed, released, vacated or fully bonded within 10 days after its issue or
levy; or
(k) Any final uninsured judgment in excess of $500,000 shall be entered
against the Borrower or any Subsidiary of the Borrower by any court of competent
jurisdiction and shall remain unpaid and unstayed for more than 30 days after
the date of such entry; or
(l) The Borrower or any Subsidiary of the Borrower shall fail to meet
its minimum funding requirements under ERISA with respect to any employee
benefit plan (or other class of benefit which the PBGC has elected to insure) or
any such plan shall be the subject of termination proceedings (whether voluntary
or involuntary) and there shall result from such termination proceedings a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which,
in each case, in the reasonable opinion of the Bank may have a material adverse
effect upon the financial condition of the Borrower or any such Subsidiary; or
(m) At any time, the Borrower shall not be a wholly-owned subsidiary of
the Parent; or
(n) There shall occur any other material adverse change in the
condition (financial or otherwise), operations, properties, assets, liabilities
or earnings of the Borrower.
5.2. Rights and Remedies on Default. Upon the occurrence of any Event
of Default, in addition to any other rights and remedies available to the Bank
hereunder or otherwise, the Bank may exercise any one or more of the following
rights and remedies (all of which shall be cumulative):
(a) Declare the entire unpaid principal amount of the Revolving Note
then outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this letter agreement, and all other Indebtedness of the Borrower
to the Bank, to be forthwith due and payable, whereupon the same shall become
forthwith due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived by the Borrower.
<PAGE>
(b) Terminate the revolving financing arrangements provided for by this
letter agreement.
(c) Exercise all rights and remedies hereunder, under the Revolving
Note and under each and any other agreement with the Bank; and exercise all
other rights and remedies which the Bank may have under applicable law.
5.3. Set-off. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, the Bank is hereby authorized at any time or
from time to time, without presentment, demand, protest or other notice of any
kind to the Borrower or to any other Person, all of which are hereby expressly
waived, to set off and to appropriate and apply any and all deposits and any
other Indebtedness at any time held or owing by the Bank or any affiliate
thereof to or for the credit or the account of the Borrower against and on
account of the obligations and liabilities of the Borrower to the Bank under
this letter agreement or otherwise, irrespective of whether or not the Bank
shall have made any demand hereunder and although said obligations, liabilities
or claims, or any of them, may then be contingent or unmatured and without
regard for the availability or adequacy of other collateral. As security for the
Obligations, the Borrower grants to the Bank a security interest with respect to
all its deposits and all securities or other property in the possession of the
Bank or any affiliate of the Bank from time to time, and, upon the occurrence of
any Event of Default, the Bank may exercise all rights and remedies of a secured
party under the Uniform Commercial Code.
5.4. Letters of Credit. Without limitation of any other right or remedy
of the Bank, (i) if an Event of Default shall have occurred and the Bank shall
have accelerated the Revolving Loans or (ii) if this letter agreement and/or the
revolving financing arrangements described herein shall have expired or shall
have been earlier terminated by either the Bank or the Borrower for any reason,
the Borrower will forthwith deposit with the Bank in cash a sum equal to the
total of all then undrawn amounts of all outstanding letters of credit issued by
the Bank for the account of the Borrower.
VI. MISCELLANEOUS
6.1. Costs and Expenses. The Borrower agrees to pay, on demand and
delivery of a Bank Certificate therefor, all costs and expenses (including,
without limitation, reasonable legal fees) of the Bank in connection with the
preparation, execution and delivery of this letter agreement, the Revolving Note
and all other instruments and documents to be delivered in connection with any
Revolving Loan or any letter of credit issued hereunder and any amendments or
modifications of any of the foregoing, as well as the costs and expenses
(including, without limitation, the reasonable fees and expenses of legal
counsel) incurred by the Bank in connection with preserving, enforcing or
exercising, upon default, any rights or remedies under this letter agreement,
the Revolving Note and all other instruments and documents delivered or to be
delivered hereunder or in connection herewith, all whether or not legal action
is instituted. In addition, the Borrower shall be obligated to pay any and all
stamp and other taxes payable or determined to be payable in connection with the
<PAGE>
execution and delivery of this letter agreement, the Revolving Note and all
other instruments and documents to be delivered in connection with any
Obligation. Any fees, expenses or other charges which the Bank is entitled to
receive from the Borrower under this Section shall bear interest from the date
of any demand therefor until the date when paid at a rate per annum equal to 2%
per annum the highest per annum rate otherwise payable under the Revolving Note
(but in no event in excess of the maximum rate permitted by then applicable
law).
6.2. Facility Fees. The Borrower will pay to the Bank, on the last day
of each calendar quarter (commencing with March 31, 1997) and on the Expiration
Date, a facility fee equal to 0.20% per annum (appropriately pro-rated for any
partial calendar quarter) based on the average daily Unused Portion during such
calendar quarter. As used herein, the "Unused Portion" on any day means that
amount by which (x) $10,000,000 exceeds (y) the Aggregate Bank Liabilities
outstanding on that day, whether such excess results from a failure by the
Borrower to borrow (or obtain letters of credit) up to $10,000,000 or from a
repayment of Revolving Loans or reduction of outstanding letter of credit
liabilities or due to any other reason. In addition, if the within-described
revolving financing arrangements are terminated by the Borrower for any reason
or by the Bank as the result of the Borrower's default, the Borrower shall
forthwith upon such termination pay to the Bank a sum equal to all of the
facility fees which would have become due (absent such termination) pursuant to
the immediately preceding sentence during the period from the date of such
termination through the Expiration Date, assuming for this purpose that no
Aggregate Bank Liabilities would have been outstanding during such period. The
fees described in this Section are in addition to any balances and fees required
by the Bank or any of its affiliates in connection with any other services now
or hereafter made available to the Borrower.
6.3. Other Agreements. The provisions of this letter agreement are not
in derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank. No inconsistency in default provisions between this
letter agreement and any of the other Loan Documents or any such other agreement
will be deemed to create any additional grace period or otherwise derogate from
the express terms of each such default provision. No covenant, agreement or
obligation of the Borrower contained herein, nor any right or remedy of the Bank
contained herein, shall in any respect be limited by or be deemed in limitation
of any inconsistent or additional provisions contained in any of the other Loan
Documents or any such other agreement.
6.4. Governing Law. This letter agreement and the Revolving Note shall
be governed by, and construed and enforced in accordance with, the laws of The
Commonwealth of Massachusetts.
6.5. Addresses for Notices, etc. All notices, requests, demands and
other communications provided for hereunder shall be in writing and shall be
mailed or delivered to the applicable party at the address indicated below:
<PAGE>
If to the Borrower:
Zoom Telephonics, Inc.
207 South Street
Boston, MA 02111
Attention: Steven T. Shedd, Chief Financial Officer
with a copy to:
Brown, Rudnick, Freed & Gesmer, P.C.
One Financial Center
Boston, MA 02111
Attention: Lawrence M. Levy, Esq.
If to the Bank:
Fleet National Bank
High Technology Group
75 State Street
Boston, MA 02109
Attention: Kimberly Martone, Vice President
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be deemed delivered on the earlier of (i) the date received
or (ii) the date of delivery, refusal or non-delivery indicated on the return
receipt if deposited in the United States mails, sent postage prepaid, certified
or registered mail, return receipt requested, addressed as aforesaid.
6.6. Binding Effect; Assignment; Termination. This letter agreement
shall be binding upon the Borrower, its successors and assigns and shall inure
to the benefit of the Borrower and the Bank and their respective permitted
successors and assigns. The Borrower may not assign this letter agreement or any
rights hereunder without the express written consent of the Bank. The Bank may,
in accordance with applicable law and with prior written notice to the Borrower
(except that, in the case of an assignment to a Federal Reserve Bank as security
for a borrowing by the Bank, such notice shall not be required), from time to
time assign or grant participation in this letter agreement, the Revolving
Loans, the Revolving Note and/or the letters of credit issued hereunder. The
Borrower may terminate this letter agreement and the financing arrangements made
herein by giving written notice of such termination to the Bank together with
payment of the sum described in the second sentence of ss.6.2; provided that no
such termination will release or waive any of the Bank's rights or remedies or
any of the Borrower's obligations under this letter agreement or any of the
other Loan Documents unless and until the Borrower has paid in full the
Revolving Loans and all interest thereon and all fees and charges payable in
connection therewith and all letters of credit issued hereunder have been
terminated.
<PAGE>
6.7. Consent to Jurisdiction. The Borrower irrevocably submits to the
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or the
Revolving Note. The Borrower irrevocably waives, to the fullest extent permitted
by law, any objection which it may now or hereafter have to the laying of venue
of any such suit, action or proceeding brought in such a court and any claim
that any such suit, action or proceeding has been brought in an inconvenient
forum. The Borrower agrees that final judgment in any such suit, action or
proceeding brought in such a court shall be enforced in any court of proper
jurisdiction by a suit upon such judgment, provided that service of process in
such action, suit or proceeding shall have been effected upon the Borrower in
one of the manners specified in the following paragraph of this ss.6.7 or as
otherwise permitted by law.
The Borrower hereby consents to process being served in any suit,
action or proceeding of the nature referred to in the preceding paragraph of
this ss.6.7 either (i) by mailing a copy thereof by registered or certified
mail, postage prepaid, return receipt requested, to it at its address set forth
in ss.6.5 (as such address may be changed from time to time pursuant to said
ss.6.5) or (ii) by serving a copy thereof upon it at its address set forth in
ss.6.5 (as such address may be changed from time to time pursuant to said
ss.6.5).
6.8. Severability. In the event that any provision of this letter
agreement or the application thereof to any Person, property or circumstances
shall be held to any extent to be invalid or unenforceable, the remainder of
this letter agreement, and the application of such provision to Persons,
properties or circumstances other than those as to which it has been held
invalid and unenforceable, shall not be affected thereby, and each provision of
this letter agreement shall be valid and enforced to the fullest extent
permitted by law.
VII. DEFINED TERMS
7.1. Definitions. In addition to terms defined elsewhere in this letter
agreement, as used in this letter agreement, the following terms have the
following respective meanings:
"Aggregate Bank Liabilities" - At any time, the sum of (i) the
principal amount of all Revolving Loans then outstanding, plus (ii) all then
undrawn amounts of letters of credit issued by the Bank for the account of the
Borrower, plus (iii) all amounts then drawn on any such letter of credit which
at said date shall not have been reimbursed to the Bank by the Borrower.
"Bank Certificate" - A certificate signed by an officer of the Bank
setting forth any additional amount required to be paid by the Borrower to the
Bank pursuant to ss.1.2, ss.1.6, ss.1.7 or ss.6.1 of this letter agreement,
which certificate shall be submitted by the Bank to the Borrower in connection
with each demand made at any time by the Bank upon the Borrower with respect to
any such additional amount, and each such certificate shall, save for manifest
error, constitute presumptive evidence of the additional amount required to be
paid by the Borrower to the Bank upon each demand. A claim by the Bank for all
or any part of any additional amount required to be paid by the Borrower may be
made before and/or after the end of the Interest Period to which such claim
relates or during which such claim has arisen and before and/or after any
<PAGE>
payment hereunder to which such claim relates. Each Bank Certificate shall set
forth in reasonable detail the basis for and the calculation of the claim to
which it relates.
"Borrowing Base" - As determined at any date, the sum of (i) 80% of the
aggregate principal amount of the Qualified Domestic Receivables of the Borrower
then outstanding, plus (ii) 80% of the aggregate principal amount of the
Qualified Foreign Receivables of the Borrower then outstanding, plus (iii) 50%
of the aggregate principal amount of the Other Acceptable Foreign Receivables of
the Borrower then outstanding; provided, however, that the total amount which
may be contributed to Borrowing Base by Other Acceptable Foreign Receivables
pursuant to this clause (iii) will not at any time exceed 10% of the
then-effective total Borrowing Base.
"Business Day" - Any day which is not a Saturday, nor a Sunday nor a
public holiday under the laws of the United States of America or The
Commonwealth of Massachusetts applicable to a national bank; provided however
that if the applicable provision relates to a LIBOR Loan, then the term
"Business Day" shall not include any day on which dealings are not carried on in
the London interbank market or on which banks are not open for business in
London.
"Capital Base" - At any time, the sum of (i) the consolidated Tangible
Net Worth of the Borrower and Subsidiaries then existing, plus (ii) the
principal amount of Subordinated Debt of the Borrower then outstanding (nothing
contained herein being deemed to authorize the incurrence of any such
Subordinated Debt).
"Current Liabilities" - All liabilities of the Borrower and/or any
Subsidiary of the Borrower which are properly shown as current liabilities on a
consolidated balance sheet of the Borrower prepared in accordance with generally
accepted accounting principles consistently applied. Further, "Current
Liabilities" will in any event be deemed to include the Revolving Loans.
"ERISA" - The Employee Retirement Income Security Act of 1974, as
amended.
"Eurocurrency Liabilities" - Has the meaning assigned to that term in
Regulation D of the Board of Governors of the Federal Reserve System (or any
successor), as in effect from time to time, or in any successor regulation
relating to the liabilities described in said Regulation D.
<PAGE>
"Eurodollar Interest Rate" - For any Interest Period, an interest rate
per annum, expressed as a percentage, determined by the Bank pursuant to the
following formula:
*EIR = LIBOR + ERI
[1.00 - RR]
Where EIR = Eurodollar Interest Rate
LIBOR = See definition of LIBOR
RR = Reserve Rate
ERI = Eurodollar Rate Increment
*EIR and each component thereof to be rounded upwards to the next
higher 1/16th of 1%
"Eurodollar Rate Increment" - One and one-half percent (1.5%) per annum.
"Expiration Date" - August 31, 1997, unless extended by the Bank, which
extension may be given or withheld by the Bank in its sole discretion.
"Floating Rate" - As defined in ss.1.2.
"Floating Rate Loan" - Any Revolving Loan which bears interest at the
Floating Rate.
"FSC" - Zoom Telephonics Foreign Sales Corporation, a U.S. Virgin
Islands corporation which is a wholly-owned Subsidiary of the Borrower.
"Impositions" - All present and future taxes, levies, duties,
impositions, deductions, charges and withholdings applicable to the Bank with
respect to any LIBOR Loan, excluding, however, any taxes imposed directly on the
Bank's income and any franchise taxes imposed on it by the jurisdiction under
the laws of which the Bank is organized or any political subdivision thereof.
"Indebtedness" - All obligations of a Person, whether current or
long-term, senior or subordinated, which in accordance with generally accepted
accounting principles would be included as liabilities upon such Person's
balance sheet at the date as of which Indebtedness, is to be determined, and
shall also include guaranties, endorsements (other than for collection in the
ordinary course of business) or other arrangements whereby responsibility is
assumed for the obligations of others, whether by agreement to purchase or
otherwise acquire the obligations of others, including any agreement, contingent
or otherwise, to furnish funds through the purchase of goods, supplies or
services for the purpose of payment of the obligations of others.
"Interest Payment Date" - As to each LIBOR Loan, the last day of
Interest Period applicable to such LIBOR Loan; provided that if any Interest
Period is in excess of three months, there will be two Interest Payment Dates
applicable thereto - the first being three months from the commencement date of
such Interest Period and the second being the last day of such Interest Period.
<PAGE>
"Interest Period" - As to each LIBOR Loan, the period commencing with
the date of the making of such LIBOR Loan and ending one, two or three months
thereafter, as the Borrower may select; provided that (A) any such Interest
Period which would otherwise end on a day which is not a Business Day shall be
extended to the next succeeding Business Day unless such Business Day occurs in
a new calendar month, in which case such Interest Period shall end on the
immediately preceding Business Day, (B) any such Interest Period which begins on
a day for which there is no numerically corresponding day in the calendar month
during which such Interest Period is to end shall end on the last Business Day
of such calendar month, and (C) no Interest Period may be selected which would
end after the Expiration Date.
"LIBOR" - With respect to each Interest Period for a LIBOR Loan, that
rate per annum (rounded upward, if necessary, to the nearest 1/16 of 1%) at
which deposits in United States Dollars are offered to the Bank, for delivery on
the first day of the applicable Interest Period, in the London interbank market
at 10:00 a.m. London time two Business Days prior to the first day of the
applicable Interest Period for a term equal to the term of the LIBOR Loan
requested for such Interest Period and in an amount substantially equal to the
principal amount of the relevant LIBOR Loan. The Bank shall give prompt notice
to the Borrower of LIBOR as determined for each LIBOR Loan and such notice shall
be conclusive and binding, absent manifest error.
"LIBOR Loan" - Any Revolving Loan which bears interest at a Eurodollar
Interest Rate.
"Loan Documents" - Each of this letter agreement, the Revolving Note
and each other instrument, document or agreement evidencing, securing,
guaranteeing or relating in any way to any of the Revolving Loans or any of the
letters of credit issued hereunder, all whether now existing or hereafter
arising or entered into.
"London" - The City of London in England.
"Maximum Revolving Amount" - At any date as of which same is to be
determined, the amount by which (x) $10,000,000 exceeds (y) the sum of (i) all
then undrawn amounts of letters of credit issued by the Bank for the account of
the Borrower plus (ii) all amounts then drawn on any such letter of credit which
at said date shall not have been reimbursed to the Bank by the Borrower (by
virtue of the making of a Revolving Loan or otherwise).
"Net Income" (or "Net Loss") - The book net income (or book net loss,
as the case may be) of a Person for any period, after all taxes actually paid or
accrued and all expenses and other charges determined in accordance with
generally accepted accounting principles consistently applied.
"Net Quick Assets" - Such current assets of the Borrower as consist of
cash, cash-equivalents, readily-marketable securities and Receivables (less an
allowance for bad debt consistent with the Borrower's prior experience).
<PAGE>
"Obligations" - All Indebtedness, covenants, agreements, liabilities
and obligations, now existing or hereafter arising, made by the Borrower with or
for the benefit of the Bank or owed by the Borrower to the Bank in any capacity.
"Other Acceptable Foreign Receivables" - Those Receivables of the
Borrower which are not Qualified Foreign Receivables (because they are not
supported by acceptable credit enhancement) but which satisfy all of the
criteria set forth below to be Qualified Domestic Receivables other than the
requirement that the relevant customer be located in the United States; provided
that in each case the Bank has approved the relevant customer as being
satisfactory for this purpose. The approval of the Bank of any customer for this
purpose may be given or withheld by the Bank, and any approval previously given
may at any time be withdrawn by the Bank, all at the Bank's sole discretion. In
addition, if FSC and/or Zoom UK executes and delivers to the Bank (together with
such corporate documentation as the Bank may reasonably require) and thereafter
maintains in effect a guaranty of the Borrower's Obligations (such guaranty to
be satisfactory in form and substance to the Bank), then "Other Acceptable
Foreign Receivables" will be deemed to include such amounts as are now or
hereafter owed to the Borrower by FSC and/or Zoom UK, as applicable (exclusive
of any such amounts includable in the definition of "Qualified Domestic
Receivables" or "Qualified Foreign Receivables"), even though such amounts are
owed to the Borrower by an entity related to the Borrower, to the extent, but
only to the extent, that such amounts arise out of sales of the Borrower's
products made by FSC and/or Zoom UK, as the case may be, to unrelated customers
and that the Receivables of FSC and/or Zoom UK, as the case may be, generated by
such sales satisfy all of the requirements set forth in the immediately
preceding two sentences to be "Other Acceptable Foreign Receivables", other than
the requirement that such Receivables be owned by the Borrower.
"Parent" - Zoom Telephonics, Inc., a Canadian corporation which owns
100% of the outstanding capital stock of the Borrower.
"Parent's Subsidiaries" - Any corporation or other entity of which the
Parent and/or any of the other Parent's Subsidiaries, directly or indirectly,
owns, or has the right to control or direct the voting of, fifty (50%) percent
or more of the outstanding capital stock or other ownership interest having
general voting power (under ordinary circumstances).
"PBGC" - The Pension Benefit Guaranty Corporation or any successor
thereto.
"Person" - An individual, corporation, partnership, limited liability
company, joint venture, trust or unincorporated organization, or a government or
any agency or political subdivision thereof.
"Qualified Domestic Receivables" - Only those Receivables of the
Borrower which arise out of bona fide sales made to customers of the Borrower
(which customers are located in the United States and are unrelated to the
Borrower) in the ordinary course of the Borrower's business and which remain
unpaid no more than 90 days past the respective invoice dates of such
<PAGE>
Receivables, the payment of which is not in dispute. Unless the Bank in its sole
discretion otherwise determines with respect to any Receivable, a Receivable
which would otherwise be a Qualified Domestic Receivable shall be deemed not to
be a Qualified Domestic Receivable (i) if such Receivable is not free and clear
of all adverse interests in favor of any Person other than the Borrower; (ii) if
such Receivable is subject to any deduction, off-set, contra account,
counterclaim or condition; (iii) if a field examination made by the Bank fails
to confirm that such Receivable exists and satisfies all of the criteria set
forth herein to be a Qualified Domestic Receivable; (iv) if such Receivable is
not properly invoiced at the date of sale; (v) if the customer or account debtor
has disputed liability or made any claim with respect to the Receivable or the
merchandise covered thereby (provided, however, that if such dispute or claim
relates to less than 15% of the principal amount of the relevant Receivable,
then only the disputed amount and not the entire amount of such Receivable will
be deemed excluded pursuant to this clause (v)); (vi) if the customer or account
debtor is subject to a petition for bankruptcy or any other application for
relief under the Bankruptcy Code (whether or not such petition was filed by said
customer or account debtor) or is subject to an assignment for the benefit of
creditors, or if said customer's or account debtor's business is suspended, or
if the customer or account debtor is insolvent or is not paying its debts as
they become due, or if a receiver or trustee is appointed for any of its assets
or affairs; (vii) if the customer or account debtor has failed to pay other
Receivables so that an aggregate of 25% of the total Receivables owing to the
Borrower by such customer or account debtor has been outstanding for more than
90 days past their respective due dates; or (viii) if the Bank reasonably
believes that collection of such Receivable is insecure or that it may not be
paid by reason of financial inability to pay or otherwise or that such
Receivable is not for any reason suitable for use as a basis for borrowing
hereunder. In addition, if Tribe executes and delivers to the Bank (together
with such corporate documentation as the Bank may reasonably require) and
thereafter maintains in effect a guaranty of the Borrower's Obligations (such
guaranty to be satisfactory in form and substance to the Bank), then "Qualified
Domestic Receivables" will be deemed to include such amounts as are now or
hereafter owed by Tribe to the Borrower (even though such amounts are owed to
the Borrower by an entity related to the Borrower) to the extent, but only to
the extent, that such amounts arise out of sales of the Borrower's products made
by Tribe to unrelated customers and that the Receivables of Tribe generated by
such sales satisfy all of the requirements set forth in the immediately
preceding two sentences to be Qualified Domestic Receivables, other than the
requirement that such Receivables be owned by the Borrower.
"Qualified Foreign Receivables" - Those Receivables of the Borrower
which satisfy all of the criteria set forth above to be Qualified Domestic
Receivables other than the requirement that the relevant customer be located in
the United States; provided that each such Qualified Foreign Receivable is
supported by credit insurance or a letter of credit, in each case issued by a
credit enhancer satisfactory to the Bank and in each case containing terms and
conditions satisfactory to the Bank. In addition, if FSC and/or Zoom UK executes
and delivers to the Bank (together with such corporate documentation as the Bank
may reasonably require) and thereafter maintains in effect a guaranty of the
Borrower's Obligations (such guaranty to be satisfactory in form and substance
to the Bank), then "Qualified Foreign Receivables" will be deemed to include
such amounts as are now or hereafter owed to the Borrower by FSC and/or Zoom UK,
as applicable (even though such amounts are owed to the Borrower by an entity
<PAGE>
related to the Borrower) to the extent, but only to the extent, that such
amounts arise out of sales of the Borrower's products made by FSC and/or Zoom
UK, as the case may be, to unrelated customers and that the Receivables of FSC
and/or Zoom UK, as the case may be, generated by such sales satisfy all of the
requirements set forth in the immediately preceding sentence to be Qualified
Foreign Receivables, other than the requirement that such Receivables be owned
by the Borrower. Amounts included in "Qualified Foreign Receivables" pursuant to
the immediately preceding sentence are not to be "double counted" with any
amounts includable in "Qualified Domestic Receivables" or "Other Acceptable
Foreign Receivables".
"Receivables" - As to any Person, all of such Person's present and
future accounts receivable for goods sold or for services rendered.
"Reserve Rate" - The aggregate rate, expressed as a decimal, at which
the Bank would be required to maintain reserves under Regulation D of the Board
of Governors of the Federal Reserve System (or any successor or similar
regulation relating to such reserve requirements) against Eurocurrency
Liabilities, as well as any other reserve required of the Bank with respect to
the LIBOR Loans. The Eurodollar Interest Rate shall be adjusted automatically on
and as of the effective date of any change in the Reserve Rate.
"Senior Debt" - All Indebtedness of the Borrower and/or its
Subsidiaries which does not constitute Subordinated Debt.
"Subordinated Debt" - Any Indebtedness of the Borrower which is
expressly subordinated, pursuant to a subordination agreement in form and
substance satisfactory to the Bank, to all Indebtedness now or hereafter owed by
the Borrower to the Bank.
"Subsidiary" - Any corporation or other entity of which the Borrower
and/or any of its Subsidiaries, directly or indirectly, owns, or has the right
to control or direct the voting of, fifty (50%) percent or more of the
outstanding capital stock or other ownership interest having general voting
power (under ordinary circumstances).
"Tangible Net Worth" - An amount equal to the total assets of any
Person (excluding (i) the total intangible assets of such Person, (ii) any
minority interests in Subsidiaries and (iii) any assets representing amounts due
from any officer or employee of such Person or from any Subsidiary of such
Person) minus the total liabilities of such Person. Total intangible assets
shall be deemed to include, but shall not be limited to, the excess of cost over
book value of acquired businesses accounted for by the purchase method,
formulae, trademarks, trade names, patents, patent rights and deferred expenses
(including, but not limited to, unamortized debt discount and expense,
organizational expense, capitalized software costs and experimental and
development expenses).
"Tribe" - Tribe Computer Works Incorporated, a Delaware corporation
which is a wholly-owned Subsidiary of the Borrower.
<PAGE>
"Zoom UK" - Zoom Telephonics, Ltd., a United Kingdom corporation which
is a wholly-owned Subsidiary of the Borrower.
Any defined term used in the plural preceded by the definite article
shall be taken to encompass all members of the relevant class. Any defined term
used in the singular preceded by "any" shall be taken to indicate any number of
the members of the relevant class.
<PAGE>
This letter agreement is executed, as an instrument under seal, as of
the day and year first above written.
Very truly yours,
ZOOM TELEPHONICS, INC.
By___________________
Name:
Title:
By____________________
Name:
Title:
Accepted and agreed:
FLEET NATIONAL BANK
By__________________
Its
By__________________
Its
<PAGE>
DISCLOSURE SCHEDULE
Item 2.1(a) Jurisdictions in which Borrower is qualified; Subsidiaries
Item 2.1(e) Litigation
Item 4.1 Existing Indebtedness
Item 4.2 Existing Liens
Item 4.3 Existing Guaranties
Exhibit 11. Statement re computation of per share earnings
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
<S> <C> <C> <C> <C> <C> <C>
Net income $ 2,813,578 $ 2,813,578 $ 6,063,080 $ 6,063,080 $ 2,479,922 $ 2,479,922
=========== =========== =========== =========== =========== ===========
Weighted average of shares 6,010,282 6,010,282 6,074,788 6,074,788 7,068,314 7,068,314
outstanding
Incremental shares from the assumed -- 18,000 370,527 383,291 121,027 121,027
exercise of dilutive stock options
Common shares assumed to have been -- (14,614) (319,212) (284,814) (26,950) (26,950)
repurchased, treasury stock method ------- -------- -------- ------- -------
Weighted average common and common 6,010,282 6,013,668 6,126,203 6,173,265 7,162,391 7,162,391
equivalent shares outstanding ========= ========= ========= ========= ========= =========
Net income per share $ .47 $ .47 $ .99 $ .98 $ .35 $ .35
============= ============= ============= ============= ============= ===========
</TABLE>
Exhibit 21. Subsidiaries of Zoom
LIST OF SUBSIDIARIES
Zoom Telephonics, Inc., a Delaware corporation
Zoom Telephonics Foreign Sales Corporation, a U.S. Virgin Islands corporation
Zoom Telephonics, Ltd., a United Kingdom corporation
Tribe Acquisition Corporation, a Delaware corporation
Exhibit 23. Consent of KPMG Peat Marwick LLP
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Zoom Telephonics, Inc.
We consent to incorporation by reference in the registration statement (No.
33-42834) on Form S-8 of Zoom Telephonics, Inc. of our report dated February
18, 1997, relating to the consolidated balance sheets of Zoom Telephonics,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows and
related schedule for each of the years in the three-year period ended
December 31, 1996, which report appears in the December 31, 1996 annual
report on Form 10-K of Zoom Telephonics, Inc.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<MULTIPLIER> 1
<CURRENCY> USD
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<EXCHANGE-RATE> 1
<CASH> 9,172,186
<SECURITIES> 0
<RECEIVABLES> 18,970,041
<ALLOWANCES> 3,564,101
<INVENTORY> 19,057,575
<CURRENT-ASSETS> 50,984,293
<PP&E> 4,081,406
<DEPRECIATION> 1,971,787
<TOTAL-ASSETS> 56,782,154
<CURRENT-LIABILITIES> 9,427,197
<BONDS> 0
0
0
<COMMON> 24,890,468
<OTHER-SE> 22,464,489
<TOTAL-LIABILITY-AND-EQUITY> 56,782,154
<SALES> 116,569,378
<TOTAL-REVENUES> 100,195,021
<CGS> 79,803,297
<TOTAL-COSTS> 16,829,814
<OTHER-EXPENSES> 292,514
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169,248
<INCOME-PRETAX> 3,854,423
<INCOME-TAX> 1,374,501
<INCOME-CONTINUING> 2,479,922
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,479,922
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
<TABLE>
<CAPTION>
Schedule II
ZOOM TELEPHONICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ending December 31, 1994, 1995, 1996
Balance at Balance at
beginning of Charged to Amounts end of
Description year expense written off year
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reserve for doubtful accounts $ 191,921 $ 62,079 $ - $ 254,000
Reserve for price protection 126,754 2,610,591 1,978,557 758,788
Reserve for sales returns 250,747 366,902 87,000 530,649
Other allowances 257,473 1,548,537 1,161,983 644,027
------------------ -------------- ------------- -----------
Year ending December 31, 1994 $ 826,895 $4,588,109 $3,227,540 $2,187,464
================== ============== ============= ===========
Reserve for doubtful accounts $ 254,000 $ 770,000 $ 175,124 $ 848,876
Reserve for price protection 758,788 2,228,039 2,486,110 500,717
Reserve for sales returns 530,649 400,000 210,153 720,496
Other allowances 644,027 1,463,933 1,460,586 647,374
------------------ -------------- ------------- -----------
Year ending December 31, 1995 $ 2,187,464 $4,861,972 $4,331,973 $2,717,463
================== ============== ============= ===========
Reserve for doubtful accounts $ 848,876 $ 400,000 $ 165,568 $1,083,308
Reserve for price protection 500,717 3,536,410 3,328,531 708,596
Reserve for sales returns 720,496 - 442 720,054
Other allowances 647,374 1,855,183 1,450,414 1,052,143
------------------ -------------- ------------- -----------
Year ending December 31, 1996 $ 2,717,463 $5,791,593 $4,944,955 $3,564,101
================== ============== ============= ===========
</TABLE>
