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, 1998
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, 1998 was 7,474,871 shares.
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the Three
Months Ending March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Three
Months Ending March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management Discussion and Analysis of
Financial Condition and Results of Operations 7 - 10
Part II. Other Information
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ZOOM TELEPHONICS, INC.
Consolidated Balance Sheets
3/31/98 12/31/97
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 9,023,581 $ 11,281,337
Accounts receivable, net of reserves for
doubtfulaccounts, returns and allowances of
$6,145,878 at3/31/98 and $4,518,206 at 12/31/97 12,581,123 13,365,413
Inventories 12,235,200 12,034,349
Recoverable income taxes 3,793,963 3,793,963
Deferred income taxes 2,265,103 2,388,189
Prepaid expenses and other assets 252,509 212,989
------------ ----------
Total current assets 40,151,479 43,076,240
Property and equipment, net 3,844,483 3,967,767
Goodwill, net of accumulated amortization 1,356,482 1,393,874
Other non-current assets 31,619 77,392
------------ -----------
$45,384,063 $ 48,515,273
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 2,358,794 6,204,370
Accrued expenses 2,302,783 1,808,308
------------- ------------
Total current liabilities 4,661,577 8,012,678
------------- ------------
Stockholders' equity:
Common stock, no par value. 25,000,000
shares authorized;7,474,871 shares issued
and outstanding at March 31, 1998
and 7,472,371 at December 31, 1997 25,190,579 25,170,267
Retained earnings 15,531,907 15,332,328
------------- ------------
Total stockholders' equity 40,722,486 40,502,595
------------- ------------
$ 45,384,063 $ 48,515,273
============= ============
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ending March 31,
1998 1997
---- ----
Net sales $ 18,758,702 $ 17,950,711
Costs of goods sold 13,557,817 14,692,200
------------- ------------
Gross profit 5,200,885 3,258,511
Operating expenses:
Selling 2,844,025 2,805,891
General and administrative 1,266,057 1,056,266
Research and development 967,496 1,043,344
------------- -----------
Total operating expenses 5,077,578 4,905,501
------------- -----------
Income (loss) from operations 123,307 (1,646,990)
Other income, net 199,358 129,087
------------- -----------
Income (loss) before income taxes 322,665 (1,517,903)
Income tax expense (benefit) 123,086 (561,624)
------------- -----------
Net income (loss) $ 199,579 $ (956,279)
============ ============
Income (loss) per common share:
Basic $ .03 $ (.13)
============ ============
Diluted $ .03 $ (.13)
============ ============
Weighted average number of common
shares outstanding:
Basic 7,472,873 7,457,717
============ ============
Diluted 7,483,799 7,457,717
============ ============
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending March 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 199,579 $ (956,279)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 254,611 210,715
Deferred income taxes 123,086 -
Changes in assets and liabilities:
Accounts receivable 784,290 2,764,099
Inventories (200,851) 45,761
Recoverable income taxes
- 307,071
Prepaid expenses and other assets 6,253 220,636
Accounts payable and accrued expenses (3,351,101) (2,799,096)
Tax benefit from exercise of non-qualified
stock options - 78,675
------------- -------------
Net cash used in operating activities (2,184,133) (128,418)
------------- -------------
Cash flows from investing activity:
Additions to property, plant and equipment (93,935) (277,929)
------------- -------------
Net cash used in investing activity (93,935) (277,929)
------------- -------------
Cash flows from financing activity:
Proceeds from exercise of stock options 20,312 204,232
------------- -------------
Net cash provided by financing activity 20,312 204,232
------------- -------------
Net decrease in cash and cash equivalents (2,257,756) (202,115)
Cash and cash equivalents, beginning of period 11,281,337 9,172,186
------------- -------------
Cash and cash equivalents, end of period $ 9,023,581 $ 8,970,071
============= ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ -
============= =============
Income taxes - -
============= =============
</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, 1997 included in the Company's 1997 Annual Report on Form 10-K.
The consolidated balance sheet as of March 31, 1998, the consolidated
statements of income for the three months ending March 31, 1998 and 1997, and
the consolidated statements of cash flows for the three months ending March 31,
1998 and 1997 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, 1998
are not necessarily indicative of the results to be expected for the entire
fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>
(2) Inventories
Inventories consist of the following: 3/31/98 12/31/97
<S> <C> <C>
Raw materials $ 6,363,489 $ 7,261,914
Work in process 2,917,791 2,542,260
Finished goods 2,953,920 2,230,175
-------------- -------------
$ 12,235,200 $ 12,034,349
============== ============
</TABLE>
<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 $18,758,702 and net income of $199,579 for the Company's first quarter ending
March 31, 1998 compared to sales of $17,950,711 and a net loss of $956,279 for
the first quarter ending March 31, 1997. Earnings per share improved to $0.03
for the first quarter of 1998 from a loss of $0.13 for the first quarter of
1997.
Net sales for the quarter ending March 31, 1998 were 4.5% higher
than the prior year, reflecting an increase in the average selling price of
faxmodems which offset a decline in total units sold. The increase in average
selling price compared to the quarter ending March 31, 1997 was the result of
the marked shift of sales to 56 kbps modems and away from 33.6 kbps modems and
other slower speed modems. The increase in 56K modem sales was triggered by wide
deployment of K56flex(TM) by Internet Service Providers in late 1997. The
definition of the V.90 56K modem standard in February 1998 also contributed to
increased 56K sales, but was also responsible for lower prices, price
protection, and stock rotation for 33.6K and pre-standard 56K modems. These
issues are expected to continue in the second quarter of 1998. Zoom's decreased
unit volume during the quarter compared to the same period in 1997 was primarily
due to reduced sales of 33.6K modems worldwide.
The overall increase of net sales of 4.5% compared to the quarter ending
March 31, 1997 was comprised of a sales increase of 13.7% in North America and a
decline of 26.8% in international markets outside North America. The 56K modem
products have been slower to gain acceptance in due to slower 56K central
site deployment.
Gross margin increased to 27.7% in the quarter ending March 31, 1998
from 18.2% in the quarter ending March 31, 1997. The primary reason for this
increase in gross margin was the sales mix shift to 56K modem speeds. as well as
cost reductions on key components. The Company cannot make assurances that the
gross margin is sustainable because of the potential product returns, price
declines and related price protection credits mentioned above. In addition, unit
costs could be negatively impacted if volumes decline.
Selling expenses during the first quarter of 1998 increased slightly to
$2,844,025 or 15.2% of net sales from $2,805,891 or 15.6% of net sales in the
first quarter of 1997, reflecting an increase in international sales personnel.
General and administrative expenses were $1,266,057 or 6.7% of net
sales during the first quarter of 1998 compared to $1,056,266 or 5.9% of net
sales in the first quarter of 1997. The increase was primarily due to increased
provisions for bad debt expense.
Research and development expenses decreased slightly to $967,496 or
5.2% of net sales during the first quarter of 1998 from $1,043,344 or 5.8% of
net sales in the first quarter of 1997. The decrease in expenses was primarily
due to the reduction in expenses for government approvals.
The Company realized a net profit of $199,579 or 1.1% of net sales
during the first quarter of 1998 compared to a net loss of $956,279 or 5.3% of
net sales in the first quarter of 1997. The improvement was primarily due to a
more favorable sales mix of more current technology products and the cost
reduction of key components.
<PAGE>
Liquidity and Capital Resources
Zoom ended the first quarter of 1998 with a strong balance sheet,
with stockholders' equity of $40,722,486 or $5.45 book value per share, cash and
cash equivalents of $9,023,581, and working capital of $35,489,902. In addition,
the Company has a $5 million secured line of credit. As of March 31, 1998,
$300,000 was outstanding under this line to cover a letter of credit.
Operating activities used $2,184,133 in cash during the first
three months of 1998, comprised mainly of a decline in accounts payable and
accrued expenses of $3,351,101, offset by a decrease in receivables of $784,290.
Zoom's capital expenditures of $93,935 during the first three
months of 1998 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 three months of 1998, financing activities provided
the Company with $20,312 from the exercise of employee 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 for the rest of 1998. Additional
financing may be needed in the event sales increase substantially or if
significant losses are incurred.
Year 2000 Date Conversion
The Company has implemented a comprehensive Enterprise Resource
Planning System which is fully year 2000 date compliant. The Company is in the
process of making sure that all other systems are year 2,000 ready. All major
conversions are complete and the implementation schedule for minor systems
anticipates a complete conversion prior to January 1, 2000. The Company
presently believes that, with the completed conversions and anticipated
conversions to new software, the year 2000 problem will not pose a significant
operational problem to the Company. However, there can be no assurance that the
systems of other parties upon which the Company's businesses also rely,
including but not limited to the Company's customers and suppliers will be
converted on a timely basis. The Company's business, financial condition, or
results of operations could be materially adversely affected by the failure of
its systems or those of other parties to operate or properly manage dates beyond
1999.
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.
<PAGE>
New Accounting Pronouncements
In December 1997, the Company adopted the Financial Accounting
Standards Board Statement No. 128, "Earnings per Share." (SFAS 128). All
previously reported net income (loss) per share data have been restated to
conform to the provisions of SFAS 128. Under SFAS 128, basic net income (loss)
per share is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares for the period.
Diluted net income (loss) per share reflect the maximum dilution that would have
resulted from the assumed exercise and share repurchase related to dilutive
stock options and are computed by dividing net income (loss) by the weighted
average number of common shares and all dilutive securities outstanding.
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. The Company adopted SFAS 130 in March 1998 and it did not 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
shareholders. 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.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), which establishes
guidelines for the costs of all computer software developed or obtained for
internal use. SOP 98-1 is effective for the Company in 1999, and is not expected
to have a material impact on the Company's financial statements.
"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, the rate of increase of deployment of K56flex or V.90 compatible central
site equipment by 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 first-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.
PART II - OTHER INFORMATION
ITEM 1. - Legal Proceedings
No material developments in the quarter ended March 31, 1998.
ITEM 6 - Exhibits and reports on Form 8-K
(a) Exhibit Description Page
------- -------------------------- ----
11 Statement Re: Computation of 11
Per Share Income (Loss)
(b) 27. Financial Data Schedule 12
27.1 Financial Data Schedule 1997 13
27.2 Financial Data Schedule 1996 14
(c) No reports on Form 8-K were filed by the Company during the
quarter ending March 31, 1998
<PAGE>
ZOOM TELEPHONICS, INC.
FINANCIAL INFORMATION NOT AUDITED
The preceding financial information, with the exception of the consolidated
balance sheet at December 31, 1997, 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, 1998 By: /s/ Frank Manning
--------------------------
Frank B. Manning, President
Date: May 14, 1998 By: /s/ Robert Crist
-------------------------
Robert Crist, Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 11. Statement re: computation of per share income (loss)
<TABLE>
<CAPTION>
Three Months Ending March 31,
1998 1997
----------------------------- ----------------
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Net income (loss) $ 199,579 $ 199,579 $ (956,279) $ (956,279)
========== ========== ============ ============
Weighted average number of shares
outstanding 7,472,873 7,472,873 7,457,717 7,457,717
Incremental shares from the assumed
exercise of dilutive stock options - 10,956 - -
Weighted average number of common and
common equivalent shares outstanding 7,472,873 7,483,799 7,457,717 7 ,457,717
=========== =========== ============== ==============
Net income (loss) per share $ .03 $ .03 $ (.13) $ (.13)
============ =========== =============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 9,023,581
<SECURITIES> 0
<RECEIVABLES> 12,581,123
<ALLOWANCES> 6,145,878
<INVENTORY> 12,235,200
<CURRENT-ASSETS> 40,151,479
<PP&E> 3,844,483
<DEPRECIATION> 2,977,347
<TOTAL-ASSETS> 45,384,063
<CURRENT-LIABILITIES> 4,661,577
<BONDS> 0
0
0
<COMMON> 25,190,579
<OTHER-SE> 15,531,907
<TOTAL-LIABILITY-AND-EQUITY> 45,384,063
<SALES> 23,394,139
<TOTAL-REVENUES> 18,758,702
<CGS> 13,557,817
<TOTAL-COSTS> 5,077,578
<OTHER-EXPENSES> 123,307
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 322,665
<INCOME-TAX> 123,086
<INCOME-CONTINUING> 199,579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 199,579
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<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> 53,309,686
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 598,410
<SECURITIES> 0
<RECEIVABLES> 22,031,419
<ALLOWANCES> 3,378,658
<INVENTORY> 23,753,634
<CURRENT-ASSETS> 48,461,350
<PP&E> 3,235,230
<DEPRECIATION> 1,490,612
<TOTAL-ASSETS> 51,696,580
<CURRENT-LIABILITIES> 21,688,281
<BONDS> 0
0
0
<COMMON> 7,810,469
<OTHER-SE> 22,197,830
<TOTAL-LIABILITY-AND-EQUITY> 51,696,580
<SALES> 36,955,796
<TOTAL-REVENUES> 33,245,098
<CGS> 25,462,178
<TOTAL-COSTS> 4,144,675
<OTHER-EXPENSES> 21,643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146,625
<INCOME-PRETAX> 3,513,263
<INCOME-TAX> 1,300,000
<INCOME-CONTINUING> 2,213,263
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,213,263
<EPS-PRIMARY> .36
<EPS-DILUTED> .35
</TABLE>
