UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-18672
ZOOM TELEPHONICS, INC.
(Exact Name of Registrant as Specified in its Charter)
Canada 04-2621506
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
207 South Street, Boston, Massachusetts 02111
--------------------------------------- -----
(Address of Principal Executive Offices in the U.S.) (Zip Code)
1200 Royal Center
1055 West Georgia Street, Vancouver, B.C. V6E 3P3
(Address of Principal Executive Offices in Canada) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 423-1072
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
The number of shares outstanding of the registrant's Common Stock, No Par Value,
as of November 14, 1997 was 7,472,371 shares.
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the Three
Months Ending September 30, 1997 and 1996 4
Consolidated Statements of Operations for the Nine
Months Ending September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the Nine
Months Ending September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management Discussion and Analysis of
Financial Condition and Results of Operations 8-10
Part II. Other Information
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ZOOM TELEPHONICS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
9/30/97 12/31/96
ASSETS (Unaudited) (Audited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 12,397,004 $ 9,172,186
Accounts receivable, net of reserves
for doubtful accounts, returns and allowances of
$6,994,901 at 9/30/97 and $3,564,101 at 12/31/96 6,540,383 18,970,041
Inventories 13,027,212 19,057,575
Recoverable income taxes 4,709,653 1,219,000
Deferred income taxes 2,031,364 2,032,683
Prepaid expenses and other assets 757,653 532,808
-------------- --------------
Total current assets 39,463,269 50,984,293
Property and equipment, net 4,074,233 4,081,406
Goodwill, net of accumulated amortization 1,436,898 1,558,764
Other non-current assets 69,315 157,691
-------------- --------------
$ 45,043,715 $ 56,782,154
============== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable $ 3,516,117 $ 8,074,472
Accrued expenses 1,309,333 1,352,725
-------------- --------------
Total current liabilities 4,825,450 9,427,197
-------------- --------------
Stockholders' equity:
Common stock, no par value; 25,000,000 shares authorized;
7,472,371 shares issued and outstanding at September 30, 1997
and 7,446,842 at December 31, 1996 25,173,375 24,890,468
Retained earnings 15,044,890 22,464,489
-------------- --------------
Total stockholders' equity 40,218,265 47,354,957
-------------- --------------
$ 45,043,715 $ 56,782,154
============== ==============
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending September 30,
1997 1996
<S> <C> <C>
Net sales $ 13,010,940 $ 20,002,140
Costs of goods sold 11,574,428 16,124,408
-------------- -------------
Gross profit 1,436,512 3,877,732
Operating expenses:
Selling 2,891,884 2,198,975
General and administrative 1,256,689 924,131
Research and development 853,342 715,242
-------------- -------------
Total operating expenses 5,001,915 3,838,348
-------------- -------------
Income (loss) from operations (3,565,403) 39,384
Other income, net 147,804 144,013
-------------- -------------
Income (loss) before income tax (3,417,599) 183,397
Income tax expense (benefit) (1,266,386) (69,429)
-------------- -------------
Net income (loss) $ (2,151,213) $ 252,826
============== =============
Income (loss) per common and common
equivalent share:
Primary $ (.29) $ .03
============== =============
Fully diluted $ (.29) $ .03
============== =============
Average common and common equivalent
shares outstanding:
Primary 7,472,371 7,481,791
============== =============
Fully diluted 7,472,371 7,510,290
============== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Operations
(Unaudited)
Nine Months Ending September 30,
1997 1996
<S> <C> <C>
Net sales $ 42,998,784 $ 74,378,283
Costs of goods sold 40,752,747 58,975,745
-------------- ----------
Gross profit 2,246,037 15,402,538
Operating expenses:
Selling 7,870,249 6,856,203
General and administrative 3,686,944 2,621,048
Research and development 3,094,054 1,945,145
-------------- -------------
Total operating expenses 14,651,247 11,422,396
-------------- -------------
Income (loss) from operations (12,405,210) 3,980,142
Other income, net 626,753 128,070
-------------- -------------
Income (loss) before income tax (11,778,457) 4,108,212
Income tax expense (benefit) (4,358,858) 1,385,271
-------------- -------------
Net income (loss) $ (7,419,599) $ 2,722,941
============== =============
Income (loss) per common and common
equivalent share:
Primary $ (.99) $ .38
============== =============
Fully diluted $ (.99) $ .38
============== =============
Average common and common equivalent
shares outstanding:
Primary 7,467,540 7,095,663
============== =============
Fully diluted 7,467,540 7,095,663
============== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ending September 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,419,599) $ 2,722,941
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 732,968 429,649
Deferred income taxes 1,319 -
Changes in assets and liabilities:
Accounts receivable 12,429,658 7,582,351
Inventories 6,030,363 5,486,169
Refundable income taxes (3,490,653) (116,226)
Prepaid expenses and other assets (136,469) (462,375)
Accounts payable and accrued expenses (4,601,747) (13,873,008)
Tax benefit from exercise of non-qualified
stock options 78,675 -
-------------- --------------
Net cash provided by operating activities 3,624,515 1,769,501
-------------- --------------
Cash flows from investing activity:
Additions to property, plant and equipment (603,929) (1,198,175)
-------------- --------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving bank line of credit - (2,500,000)
Proceeds from the issuance of common stock - 1,573,218
Proceeds from exercise of stock options 204,232 2,804,439
-------------- --------------
Net cash provided by financing activities 204,232 11,877,657
-------------- --------------
Net increase in cash and cash equivalents 3,224,818 12,448,983
Cash and cash equivalents, beginning of period 9,172,186 150,671
-------------- --------------
Cash and cash equivalents, end of period $ 12,397,004 $ 12,599,654
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ 168,138
============== ==============
Income taxes - $ 1,873,000
============== ==============
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Zoom
Telephonics, Inc., (the "Company") presented herein have been prepared pursuant
to the rules of the Securities and Exchange Commission for quarterly reports on
Form 10-Q and Article 2 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. These statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ending December 31, 1996 included in the Company's 1996 Annual Report on
Form 10-K.
The consolidated balance sheet as of September 30, 1997, the
consolidated statements of operations for the three months and nine months
ending September 30, 1997 and 1996, and the consolidated statements of cash
flows for the nine months ending September 30, 1997 and 1996 are unaudited, but,
in the opinion of management, include all adjustments (consisting of normal,
recurring adjustments) necessary for a fair presentation of results for these
interim periods.
The results of operations for the nine months ending September 30,
1997 are not necessarily indicative of the results to be expected for the entire
fiscal year ending December 31, 1997.
(2) Inventories
<TABLE>
<CAPTION>
Inventories consist of the following: 9/30/97 12/31/96
<S> <C> <C>
Raw materials $7,154,681 $11,778,311
Work in process 3,467,044 2,968,064
Finished goods 2,405,487 4,311,200
---------- ----------
$13,027,212 $19,057,575
=========== ===========
</TABLE>
(3) Bank Credit Line
The company's $10 million line of credit discussed in the 1996 10-K
expired on August 31, 1997. This line of credit was not used in 1997. It has
been replaced by a secured $5 million line of credit effective September 30,
1997 and expiring September 30, 1998.
(4) Stock Options
Proceeds from the exercise of stock options under the Company's stock
option plans and income tax benefits attributable to stock options exercised are
credited to common stock. During the nine months ending September 30, 1997,
options with respect to 25,529 shares were exercised and such exercises resulted
in a tax benefit to the Company of $78,675.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Zoom Telephonics, Inc. ("Zoom" or "the Company") recorded net sales of
$13,010,940 and a net loss of $2,151,213 for the Company's third quarter ending
September 30, 1997. Earnings per share declined from a profit of $0.03 for the
third quarter of 1996 to a loss of $0.29 for the third quarter of 1997. Zoom's
net sales for the nine months ending September 30, 1997 were $42,998,784, with a
net loss of $7,419,599 or $.99 per share, versus net sales of $74,378,283 and
profits of $2,722,941 or $.38 per share for the nine months ending September 30,
1996.
Net sales for the quarter ending September 30, 1997 decreased
$6,991,200 or 35% from the third quarter of 1996. Net sales for the nine months
ending September 30, 1997 decreased $31,379,499 or 42% from the first nine
months of 1996. The majority of sales for both periods came from V.34 faxmodems,
which suffered from severe price competition and reduced demand, partly due to
customer awareness of new 56K modem technology. The transition to 56K modems had
been slower than expected, negatively impacting sales, average selling prices
and gross margins. The Company began shipping 56K modem products in March 1997,
but demand has been low due to delays in deployment of K56flex(TM) central site
equipment by Internet Service Providers.
Gross margin declined to 11.0% in the third quarter of 1997 from 19.4%
in the third quarter of 1996, reflecting increased price competition which
caused decreases in selling prices and continued high credits for channel price
protection. For the nine months of 1997, gross margin declined to 5.2% from
20.7% in the first nine months of 1996. The major contribution to this decline
occurred in the second quarter, which was impacted by significant credits for
price protection, writedowns of inventory for modem chipset price reductions and
increased reserves for obsolescence.
Selling expenses during the third quarter of 1997 increased 31.5% to
$2,891,884 or 22.2% of net sales from $2,198,975 or 11.0% of net sales in the
third quarter of 1996. Selling expenses during the first nine months of 1997
increased 14.8% to $7,870,249 or 18.3% of net sales from $6,856,203 or 9.2% of
net sales in the first nine months of 1996. The increase in selling expenses was
primarily due to an expansion of cooperative advertising allowances in the third
quarter and first nine months of 1997 compared to the third quarter and first
nine months of 1996, partially offset by a decrease in commissions paid as a
result of lower sales. The advertising expense increase was aimed at the retail
promotion of K56flex(TM) Zoom modems.
General and administrative expenses were $1,256,689 or 9.7% of net
sales during the third quarter of 1997 compared to $924,131 or 4.6% of net sales
in the third quarter of 1996. General and administrative expenses were
$3,686,944 or 8.6% of net sales during the first nine months of 1997 compared to
$2,621,048 or 3.5% of net sales in the first nine months of 1996. The increase
was primarily due to increased bad debt expenses, legal and audit fees, and
foreign exchange losses.
Research and development expenses increased 19.3% to $853,342 or 6.6%
of net sales during the third quarter of 1997 from $715,242 or 3.6% of net sales
in the third quarter of 1996. Research and development expenses increased 59.1%
to $3,094,055 or 7.2% of net sales during the first nine months of 1997 from
$1,945,145 or 2.6% of net sales in the first nine months of 1996. The increase
in expenses was primarily due to the addition of personnel to accelerate the
Company's new product development efforts, particularly for 56K, ISDN and remote
access products; and due to increased expenses relating to homologation of
products outside of North America.
<PAGE>
The Company experienced a net loss of $2,151,213 or 16.5% of net sales
during the third quarter of 1997 compared to net income of $252,826 or 1.3% of
net sales in the third quarter of 1996. For the nine month period of 1997, the
Company lost $7,419,599 or 17.3% of net sales compared to income of $2,722,941
or 3.7% of net sales in the first nine months of 1996. The decline was primarily
due to lower sales, the reduction in gross margin and higher operating expenses.
Liquidity and Capital Resources
Zoom ended the third quarter of 1997 with a strong balance sheet,
with stockholders's equity of $40,218,265 or $5.38 per share, cash and cash
equivalents of $12,397,004 and a current ratio of 8.2. Working capital declined
during the first nine months to $34,637,819 from $41,557,096 at December 31,
1996 while the current ratio improved to 8.2 from 5.4. Cash and cash equivalents
increased to $12,397,004 from $9,172,186, particularly due to a reduction in
inventories and accounts receivable. In addition, the Company has a $5 million
secured line of credit.
Operating activities provided $3,624,515 in cash during the first nine
months of 1997. During this period, accounts receivable and inventories
decreased $18,460,850. The $12,429,658 decline in accounts receivable was due
primarily to the lower sales volume. The $6,030,363 reduction in inventory
resulted from modem chipset writedowns, increased obsolescence reserves, and the
Company's actions to reduce the level of inventories, . This source of cash was
offset by the net loss of $7,419,599, a reduction of accounts payable and other
accrued expenses of $4,601,747, and an increase in refundable income taxes of
$3,490,653.
Zoom's capital expenditures of $603,929 during the first nine months
of 1997 included purchases of computer equipment and continuing renovation of
its headquarters. Although the Company does not have any significant capital
commitments, it anticipates that it will continue with modest investments in
equipment and in improvements to its facilities during the year.
During the first nine months of 1997, financing activities provided
the Company with $204,232 from the exercise of employee and director stock
options.
The Company believes that its existing cash, together with funds
generated from operations and available sources of financing, will be sufficient
to meet normal working capital requirements. Additional financing may be needed
in the event sales increase significantly or if losses continue to be incurred.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." SFAS 128 establishes a different method of computing net income per
share that is currently required under the provisions of Accounting Principles
Board Opinion No. 15. Under SFAS 128, the Company will be required to present
both basic net income per share and diluted net income per share. Basic net
income per share is expected to be higher than the currently presented net
income per share as the effect of dilutive stock options will not be considered
in computing basic net income per share. The impact on diluted net income per
share is not expected to be material.
The Company plans to adopt SFAS No. 128 in its fiscal quarter ending
December 31, 1997 and at that time all historical net income per share data
presented will be restated to conform to the provisions of SFAS No. 128.
In June 1997, the Financial Accounting Standards Board issued
Statement 130 (SFAS 130), "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Under this concept, all
revenues, expenses, gains and losses recognized during the period are included
in income, regardless of whether they are considered to be the results of
operations of the period. SFAS 130, which becomes effective for the Company in
its year ending December 31, 1998, is not expected to have a material impact on
the consolidated financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued
Statement 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information," which establishes standards for the way that public
business enterprises report selected information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to share-
holders. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS 131, which becomes
effective for the Company in its year ending December 31, 1998, is currently not
expected to have a material impact on the Company's consolidated financial
statements and disclosures as the Company does not have multiple reportable
operating segments.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
Forward-looking statements in this report, including without
limitation statements relating to the adequacy of the Company's resources are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such forward-looking statements
involve risks and uncertainties, including without limitation: overall product
demand for 56K modems or the Company's K56flex(TM) modems, the rate of increase
of deployment of K56flex compatible Internet Service Providers, the ability of
the company to meet the financial covenants in it's $5M credit line, the ability
to obtain additional financing, if required, at favorable terms, if at all,
potential quarterly fluctuations in the Company's operating results, seasonality
of sales, rapid technological change, competition, the concentration of the
Company's customers, the Company's dependence upon a principal supplier for its
modem chipsets and on third-party assemblers, risks associated with inventory
management, risk of product returns and price-protection, sales channel risks,
risks associated with international sales, the ability of the Company to manage
its growth, the Company's reliance on key employees, risks associated with
proprietary technology, and other risks and uncertainties indicated from time to
time in the Company's filings with the Securities and Exchange Commission.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. - Legal Proceedings
No material developments
ITEM 6 - Exhibits and reports on Form 8-K
(a) Exhibit Description Page
------- ----------------------------- ----
11 Statement Re: Computation of 13
Per Share Earnings
(b) No reports on Form 8-K were filed by the Company during the
quarter ending September 30, 1997
<PAGE>
ZOOM TELEPHONICS, INC.
FINANCIAL INFORMATION NOT AUDITED
The preceding financial information, with the exception of the
consolidated balance sheet at December 31, 1996, has not been audited. However,
in the opinion of management, all material adjustments, consisting only of
normal recurring accruals necessary to present a fair statement of the results
for these periods, have been reflected. The results for these periods are not
necessarily indicative of the results for the full fiscal year.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZOOM TELEPHONICS, INC.
Date: November 14, 1997 By: /s/ Frank Manning
--------------------------
Frank B. Manning, President
Date: November 14, 1997 By: /s/ Robert A. Crist
---------------------------
Robert A. Crist Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 11. Statement re: computation of per share earnings
<TABLE>
<CAPTION>
Three Months Ending September 30,
1997 1996
----------------------------- ----------------------------
Fully Fully
Primary diluted Primary diluted
<S> <C> <C> <C> <C>
Net income (loss) $ (2,151,213) $ (2,151,213) $ 252,826 $ 252,826
============== ============== ========= =========
Weighted average of shares
outstanding 7,472,371 7,472,371 7,442,264 7,442,264
Incremental shares from the assumed
exercise of dilutive stock options - - 404,157 389,759
Common shares assumed to have been
repurchased, treasury stock method - - (364,630) (321,733)
-------------- --------------- ------------- --------------
Weighted average common and
common equivalent shares
outstanding 7,472,371 7,472,371 7,481,791 7,510,290
============= ============== ============= ==============
Net income (loss) per share $ (.29) $ (.29) $ .03 $ .03
===================================================================
<CAPTION>
Nine Months Ending September 30,
1997 1996
----------------------------- ----------------
Fully Fully
Primary diluted Primary diluted
<S> <C> <C> <C> <C>
Net income (loss) $ (7,419,599) $ (7,419,599) $ 2,722,941 $ 2,722,941
============== ============== =========== ===========
Weighted average of shares
outstanding 7,467,540 7,467,540 6,941,510 6,941,510
Incremental shares from the assumed
exercise of dilutive stock options - - 398,091 398,091
Common shares assumed to have been
repurchased, treasury stock method - - (243,938) (243,938)
-------------- --------------- ------------- --------------
Weighted average common and
common equivalent shares
outstanding 7,467,540 7,467,540 7,095,663 7,095,663
============= ============== ============= ==============
Net income (loss) per share $ (.99) $ (.99) $ .38 $ .38
================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<MULTIPLIER> 1
<CURRENCY> USD
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<CASH> 12,397,004
<SECURITIES> 0
<RECEIVABLES> 6,540,383
<ALLOWANCES> 6,994,901
<INVENTORY> 13,027,212
<CURRENT-ASSETS> 39,463,269
<PP&E> 4,074,233
<DEPRECIATION> 611,102
<TOTAL-ASSETS> 45,043,715
<CURRENT-LIABILITIES> 4,825,450
<BONDS> 0
0
0
<COMMON> 25,173,375
<OTHER-SE> 15,044,890
<TOTAL-LIABILITY-AND-EQUITY> 45,043,715
<SALES> 54,814,792
<TOTAL-REVENUES> 42,998,784
<CGS> 40,752,747
<TOTAL-COSTS> 14,651,247
<OTHER-EXPENSES> 626,753
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,778,457)
<INCOME-TAX> (4,358,858)
<INCOME-CONTINUING> (7,419,599)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,419,599)
<EPS-PRIMARY> (0.99)
<EPS-DILUTED> (0.99)
</TABLE>
