UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 14, 1997 was 7,472,371 shares.
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the Three
Months Ending March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Three
Months Ending March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management Discussion and Analysis of
Financial Condition and Results of Operations 7 - 8
Part II. Other Information
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ZOOM TELEPHONICS, INC.
Consolidated Balance Sheets
<TABLE>
3/31/97 12/31/96
<CAPTION>
ASSETS (Unaudited) (Audited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 8,970,071 $ 9,172,186
Accounts receivable, net of reserves
for doubtful accounts, returns and allowances of
$3,917,580 at 3/31/97 and $3,564,101 at 12/31/96 16,205,942 18,970,041
Inventories 19,011,814 19,057,575
Recoverable income taxes 911,929 1,219,000
Deferred income taxes 2,032,683 2,032,683
Prepaid expenses and other assets 331,059 532,808
-------------- --------------
Total current assets 47,463,498 50,984,293
Property and equipment, net 4,188,762 4,081,406
Goodwill 1,518,622 1,558,764
Other non-current assets 138,804 157,691
-------------- --------------
$ 53,309,686 $ 56,782,154
============== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable 5,657,359 8,074,472
Accrued expenses 970,742 1,352,725
-------------- --------------
Total current liabilities 6,628,101 9,427,197
-------------- --------------
Stockholders' equity:
Common stock, no par value 25,000,000 shares authorized;
7,472,371 shares issued and outstanding at March 31, 1997
and 7,446,842 at December 31, 1996 25,173,375 24,890,468
Retained earnings 21,508,210 22,464,489
-------------- --------------
Total stockholders' equity 46,681,585 47,354,957
-------------- --------------
$ 53,309,686 $ 56,782,154
============== ==============
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending March 31,
1997 1996
<S> <C> <C>
Net sales $ 17,950,711 $ 33,245,098
Costs of goods sold 14,692,200 25,462,178
-------------- --------------
Gross profit 3,258,511 7,782,920
Operating expenses:
Selling 2,805,891 2,705,588
General and administrative 1,056,266 828,003
Research and development 1,043,344 611,084
-------------- --------------
Total operating expenses 4,905,501 4,144,675
-------------- --------------
Income (loss) from operations (1,646,990) 3,638,245
Other income (expense), net 129,087 (124,982)
-------------- ---------------
Income (loss) before income taxes (1,517,903) 3,513,263
Income tax expense (benefit) (561,624) 1,300,000
-------------- --------------
Net income (loss) $ (956,279) $ 2,213,263
============== ==============
Income (loss) per common and common
equivalent share:
Primary $ (.13) $ .35
============== ==============
Fully diluted $ (.13) $ .35
============== ==============
Average common and common equivalent
shares outstanding:
Primary 7,524,766 6,359,287
============== ==============
Fully diluted 7,524,766 6,359,287
============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ending March 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (956,279) $ 2,213,263
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 210,715 116,838
Changes in assets and liabilities:
Accounts receivable 2,764,099 (1,635,105)
Inventories 45,761 419,923
Refundable income taxes 307,071 -
Deferred registration fees - (350,000)
Prepaid expenses and other assets 220,636 7,481
Accounts payable and accrued expenses (2,799,096) (5,384,700)
Accrued income taxes - 652,308
Tax benefit from exercise of non-qualified
stock options 78,675 153,692
------------- -------------
Net cash used in operating activities (128,418) (3,806,300)
------------- --------------
Cash flows from investing activities:
Additions to property, plant and equipment (277,929) (213,161)
------------- -------------
Cash flows from financing activities:
Net borrowings under revolving bank line of credit - 4,100,000
Proceeds from exercise of stock options 204,232 367,200
------------- -------------
Net cash provided by financing activities 204,232 4,467,200
------------- -------------
Net increase (decrease) in cash and cash equivalents (202,115) 447,739
Cash and cash equivalents, beginning of period 9,172,186 150,671
------------- -------------
Cash and cash equivalents, end of period $ 8,970,071 $ 598,410
============= ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 0 $ 88,178
============= =============
Income taxes 0 494,000
============= =============
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The consolidated financial statements of Zoom Telephonics, Inc., (the
"Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ending
December 31, 1996 included in the Company's 1996 Annual Report on Form 10-K.
The consolidated balance sheet as of March 31, 1997, the consolidated
statements of income for the three months ending March 31, 1997 and 1996, and
the consolidated statements of cash flows for the three months ending March 31,
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 three months ending March 31, 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: 3/31/97 12/31/96
<S> <C> <C>
Raw materials $ 11,853,325 $ 11,778,311
Work in process 3,434,211 2,968,064
Finished goods 3,724,278 4,311,200
------------ ------------
$ 19,011,814 $ 19,057,575
============ ============
</TABLE>
(3) Stock Options
Proceeds from the exercise of stock under the Company's stock option plans and
income tax benefits attributable to stock options exercised are credited to
common stock. During the three months ending March 31, 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 $17,950,711 and a net loss of $956,279 for the Company's first quarter ending
March 31, 1997. Earnings per share declined from a profit of $0.35 for the first
quarter of 1996 to a loss of $0.13 for the first quarter of 1997.
Net sales for the quarter ending March 31, 1997 decreased $15,294,387
or 46% from the first quarter of 1996. This decrease was primarily due to a
decrease in average selling price of faxmodems and a decrease in units shipped.
During the first quarter of 1997 the vast majority of sales came from V.34
faxmodems, which suffered from severe price competition and reduced demand,
partly due to customer demand for faxmodems incorporating 56K technology. Zoom
is now shipping 56K faxmodems.
Gross margin declined to 18.2% in the first quarter of 1997 from
23.4% in the first quarter of 1996, reflecting increased price competition which
caused decrease in selling prices and continued high charges for price
protection. Writedowns for modem chipset price drops and increased reserves for
scrap and obsolescence also contributed to the reduced gross margin percentage.
Selling expenses during the first quarter of 1997 increased
3.7% to $2,805,891 or 15.6% of net sales from $2,705,588 or 8.1% of net sales in
the first quarter of 1996. Cooperative advertising allowances, personnel and
occupancy costs increased in the first quarter of 1997 compared to the first
quarter of 1996. These increases were offset by a significant decrease in
commissions paid as a result of lower sales.
General and administrative expenses increased 27.7% to
$1,056,266 or 5.9% of net sales during the first quarter of 1997 from $828,003
or 2.5% of net sales in the first quarter of 1996. The increase was primarily
due to increased personnel expenses, particularly in the information systems
department.
Research and development expenses increased 70.7% to
$1,043,344 or 5.8% of net sales during the first quarter of 1997 from $611,084
or 1.8% of net sales in the first quarter of 1996. The increase in expenses was
primarily due to the addition of personnel to accelerate the Company's new
product development efforts.
The Company experienced a loss of $956,279 or 5.3% of net sales during
the first quarter of 1997 compared to income of $2,213,263 or 6.7% of net sales
in the first quarter of 1996. The decline was primarily due to lower sales,
lower gross profit, and higher operating expenses, particularly for research and
development.
<PAGE>
Liquidity and Capital Resources
Zoom ended the first quarter of 1997 with a strong balance sheet.
Working capital declined slightly during the quarter to $40,835,397 from
$41,557,096 at December 31, 1996 while the current ratio improved to 7.2 from
5.4. Cash and cash equivalents decreased slightly to $8,970,071 from $9,172,186.
In addition, the Company has an unused $10 million line of credit.
Operating activities used $128,418 in cash during the first quarter
of 1997. During this period, accounts receivable decreased $2,764,099 due to
lower sales in the first quarter. This source of cash was offset by the net loss
of $956,279 and a reduction of accounts payable and other accrued expenses by
$2,799,096. Other sources of cash were decreases in refundable income taxes of
$307,071 and other prepaid expenses of $220,636.
Zoom's capital expenditures of $277,929 during the first quarter of
1997 reflected 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 to invest in equipment and in
improvements to its facilities during the year.
During the first quarter of 1997, financing activities provided the
Company with $204,232 of cash proceeds from the exercise of employee and
director stock options.
The Company believes that its existing cash, together with funds
generated from operations and available sources of financing, will be sufficient
to meet its normal working capital requirements in 1997.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
Forward-looking statements in this report, including without limitation
statements relating to the adequacy of the Company's resources, are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such forward-looking statements
involve risks and uncertainties, including without limitation: potential
quarterly fluctuations in the Company's operating results, seasonality of sales,
rapid technological change, competition, the concentration of the Company's
customers, the Company's dependence upon a principal supplier for its modem
chipsets and on third-party assemblers, risks associated with inventory
management, risk of product returns and price-protection, sales channel risks,
risks associated with international sales, the ability of the Company to manage
its growth, the Company's reliance on key employees, risks associated with
proprietary technology, and other risks and uncertainties indicated from time to
time in the Company's filings with the Securities and Exchange Commission.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. - Legal Proceedings
On March 21, 1996, James A. Storer and REFAC International, Ltd., a
company engaged in the business of acquiring and licensing patents, filed a
complaint in the United States District Court, District of Massachusetts, naming
Hayes Microcomputer Products, Inc. and the Company as defendants in a patent
lawsuit. The complaint alleges that the V.42 bis international
telecommunications standard for data compression in computer modems is covered
by a patent owned by the plaintiffs, and the defendants' modems that incorporate
this standard infringe the patent. While the complaint seeks to permanently
enjoin the defendants from infringing the patent and monetary damages for past
infringement, REFAC has offered to negotiate a royalty for licensing the patent.
The Company believes that the alleged infringement involves technology
incorporated in chipsets provided to it from Rockwell International and that, if
so, the Company will be indemnified by Rockwell. By an agreement dated July 12,
1996 Rockwell has agreed, subject to certain conditions, to assume defense of
Zoom against the action.
On April 10, 1997, Carol Levy, on behalf of the interests of the general
public, filed a claim in the Marin County Superior Court (California) against
Zoom together with numerous other corporation defendants including Boca
Research, Inc., Cisco Systems, Inc., Compaq Computer Corporation, Lucent
Technologies, Inc., Motorola, Inc. and Rockwell Semiconductor Systems, Inc.,
alleging that the defendants have engaged in unfair competition due to alleged
false advertising relating to the "K56" modems. The Plaintiff is seeking
monetary damages, injunctive relief, and attorneys fees. Zoom, together with the
other defendants, deny the allegations and plan to vigorously defend against
this claim.
ITEM 6 - Exhibits and reports on Form 8-K
(a) Exhibit Description Page
------- -------------------------- ----
11 Statement Re: Computation of 11
Per Share Earnings
(b) No reports on Form 8-K were filed by the Company during the
quarter ending March 31, 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: May 14, 1997 By: /s/ Frank Manning
--------------------------
Frank B. Manning, President
Date: May 14, 1997 By: /s/ Steven T. Shedd
-------------------------
Steven T. Shedd, 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 March 31,
1997 1996
---------------------------- ---------------------------
Fully Fully
Primary diluted Primary diluted
<S> <C> <C> <C> <C>
Net income (loss) $ (956,279) $ (956,279) $ 2,213,263 $ 2,213,263
============ ============ =========== ===========
Weighted average of shares
outstanding 7,457,717 7,457,717 6,221,444 6,221,444
Incremental shares from the assumed
exercise of dilutive stock options 541,884 541,884 426,277 426,277
Common shares assumed to have been
repurchased, treasury stock method (474,835) (474,835) (288,434) (288,434)
------------- -------------- ------------- --------------
Weighted average common and
common equivalent shares
outstanding 7,524,766 7,524,766 6,359,287 6,359,287
============= ============== ============= ==============
Net income (loss) per share $ (.13) $ (.13) $ .35 .35
===============================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<MULTIPLIER> 1
<CURRENCY> USD
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<EXCHANGE-RATE> 1
<CASH> 8,970,071
<SECURITIES> 0
<RECEIVABLES> 16,205,942
<ALLOWANCES> 3,917,580
<INVENTORY> 19,011,814
<CURRENT-ASSETS> 47,463,498
<PP&E> 4,188,762
<DEPRECIATION> 210,715
<TOTAL-ASSETS> 53,309,686
<CURRENT-LIABILITIES> 6,628,101
<BONDS> 0
0
0
<COMMON> 25,173,375
<OTHER-SE> 21,508,210
<TOTAL-LIABILITY-AND-EQUITY> 53,309,686
<SALES> 21,440,851
<TOTAL-REVENUES> 17,950,711
<CGS> 14,692,200
<TOTAL-COSTS> 4,905,501
<OTHER-EXPENSES> 129,087
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,517,903)
<INCOME-TAX> (561,624)
<INCOME-CONTINUING> (956,279)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (956,279)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
