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, 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
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 30, 1998 (computed by
reference to the closing price of such stock on The Nasdaq National Market) was
$53,195,003.
The number of shares outstanding of the registrant's Common Stock, No Par Value,
as of March 30, 1998 was 7,472,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Proxy Statement for the registrant's 1998 annual meeting
of stockholders to be filed with the SEC in April 1998 are incorporated by
reference into Part III, Items 10-12 of this Form 10-K.
<PAGE>
PART I
This Report contains statements that are "forward-looking statements" as that
term is defined under the Private Securities Litigation Reform Act of 1995 (the
"Act") and releases issued by the Securities and Exchange Commission. The words
"believe," "expect," "anticipate," "estimate," "may," "will," "plan," "intend,"
"could," "estimate," "is being," "goal" and other expressions which are
predictions of or indicate future events and trends and which do not relate to
historical matters identify forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of the Company
to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements.
Examples of these risks, uncertainties, and other factors include, without
limitation, 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. In addition to the foregoing, the Company's actual future
results could differ materially from those projected in the forward-looking
statements as a result of the risk factors set forth in the Company's various
filings with the Securities and Exchange Commission and of changes in general
economic conditions, changes in interest rates and changes in the assumptions
used in making such forward-looking statements. The Company undertakes no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
ITEM 1 - BUSINESS
Overview
Zoom Telephonics, Inc. ("Zoom" or the "Company") is a Canadian holding
corporation whose operations are solely carried out by its wholly owned United
States 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 other 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 speeds of
56,000 bps, available in internal, external and PCMCIA models. Most of these
faxmodems connect to a single telephone line, but Zoom also makes the
Zoom/MultiLine for up to eight telephone lines. In addition, Zoom has a number
of products sold as Zoom Business Products, which typically provide the link
between users of a corporate LAN (local area network) and remote users or the
Internet.
The Company also has a line of ISDN (Integrated Services Digital Network)
products, which can transmit and receive simultaneously up to 128,000 bps. To
date all of these products have been internal cards for Windows PCs, but in 1998
Zoom expects to ship external units, both for single users and for multiple
users on a LAN.
Late in 1997 the Company began shipments of a live-motion full-color video
camera that plugs into either a specialized video capture card included with the
camera, or into faxmodems either bundled with the camera or sold separately. The
Company is in the process of expanding its line of video-related products to
include other cameras and related devices, including video capture cards that
work with composite video sources including VCRs and Camcorders.
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, 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, the Microsoft Network, and Prodigy, (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 of modem unit sales, both for new PCs as bundled peripherals and for the
installed base of PCs, as upgrades and first-time purchases. 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 7%
of the worldwide installed base of PCs have a modem capable of data speeds
higher than 33,600 bps; and that 56K modems are in about 20% of the
approximately 34 million consumer PCs with modems in North America. As a result,
the Company believes that a substantial market exists for PC users to upgrade
their existing modems to 56K and higher speeds, and that modems will continue to
achieve increasing penetration of the PC installed base as applications
requiring data connectivity proliferate. The recently set V.90 56K standard
should accelerate adoption of 56K faxmodems.
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 speed of 2400 bps in 1987, to 33,600 bps
in 1996 and 1997, to 56,000 bps today. Modems with high data 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
and remote access to corporate networks. Other technological advances that are
increasing the use of modems in personal computing include new voice-related
capabilities, video telephony, and electronic mail. 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. As another example, video telephony enables the transmission of still
or moving color images, either exclusively through the dial-up telephone network
or through the Internet. 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 speeds
and increased modem functionality is expected to drive sales of new generations
of modems in the future, including DSL (Digital Subscriber Line) 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, 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 1998 Zoom brand modems had the second 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. In
1997 Zoom expanded its sales through Internet Service Providers, and Zoom
intends to continue partnering with these providers.
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, voice faxmodems, and video-capture-enabled
faxmodems. The Company also produces ISDN products, multi-line business
communications products, and video products, and expects to broaden its product
offerings in these areas.
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 believed to be the
highest-volume modem chipset manufacturer; and has significant resources for
semiconductor design and fabrication, analog and digital signal processing, and
communications firmware development. In addition, Rockwell has integrated
circuits and development efforts for faxmodems, fax machines, DSL, cable modems,
multimedia, and video. Rockwell has significant competitors, including Lucent,
and Zoom intends to continue to evaluate and consider using competitors'
offerings.
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 1997. 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, and 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
explorations 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 56,000 bps. The V.90 standard for
56K was recently adopted, and in late February 1998 Zoom began shipping
Dualmodetm 56K modems able to automatically connect to either a V.90 or K56flex
central site. The Company also ships ISDN products, and soon will begin shipping
its first external ISDN products. Starting with its acquisition of Tribe in
1996, the Company began shipping business products that provide remote users
access to the resources of a LAN, and connect users of the LAN to the Internet
and to remote LANs and computers. The Company also makes other related business
products, including a series of multi-line modems and a hub for AppleTalk
networks. In addition, since late 1997 the Company has introduced a full-color
live-motion video camera and related products.
Zoom has a broad line of faxmodems with top data speeds of 56,000 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. Pre-standard K56flextm and x2tm 56K modems have been shipping since
the second quarter of 1997. Zoom's first 56K modems incorporated K56flex, which
was backed by semiconductor manufacturers Rockwell and Lucent, central site
equipment manufacturers Ascend, Cisco, Microcom, Shiva, and others; and modem
companies Boca, Diamond, Motorola, and others; Compaq and many other computer
manufacturers, and hundreds of Internet Service Providers and online services.
x2 was backed by client modems and central site equipment by U.S. Robotics (now
merged with 3Com); semiconductor manufacturers Texas Instruments and Cirrus
Logic, as well as Newcom and other modem manufacturers. x2 benefited from
earlier introduction and faster initial rollout; but K56flex is now installed on
more central site ports and supported by more Internet Service Providers.
Central site deployment is critical, because this helps create customer utility
and demand.
In February 1998 a committee of the International Telecommunications Union
("ITU") agreed upon the V.90 standard for 56K. This standard is neither K56flex
nor x2, but instead incorporates technical features of each. Like preceding data
communications standards, V.90 is expected to accelerate the adoption of 56K. In
addition, V.90 will enable Zoom's V.90 modems to connect to interoperable V.90
central sites, even ones using 3Com central site equipment. Similarly, V.90 will
enable 3Com's V.90 modems to connect to interoperable V.90 central sites using
equipment made by Ascend, Cisco, Microcom, Shiva, and other central site
manufacturers who initially backed K56flex. It will take a number of months for
V.90 to be widely deployed. In the meantime Zoom has begun shipping Dualmode
modems designed to connect to either K56flex or V.90 central sites. Zoom has a
broad line of K56flex modems for North America and for many other countries, and
Zoom plans to transition these products to V.90/K56flex Dualmode products during
the first half of 1998.
Faxmodem Product Features. The following sets forth some of the key features
incorporated in one or more of the Company's faxmodems:
ZoomGuardtm. ZoomGuard is a trademark of Zoom, and represents the
protective circuitry added to Zoom's modems to improve their ability to
withstand the effects of lightning striking a phoneline to which the modem
is connected.
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.
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.
Cellular-ready PCMCIA Faxmodems. Some of the Company's faxmodems include a
cellular-ready feature that allows the faxmodem to be plugged into a
cellular phone for wireless communication of fax and data.
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 has received
regulatory approvals for, and is currently selling faxmodems in, a number of
countries, including Australia, Austria, Belgium, Denmark, Finland, France,
Germany, Hungary, India, Ireland, Italy, Japan, the Netherlands, Norway, Poland,
Portugal, Russia, 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.
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, 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 is completing the development of
external ISDN products for the North American and international markets, and
Zoom continues to integrate ISDN capability into some of its new LAN-oriented
business 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 bulletin boards, multi-line voice mail, and other applications. The
Zoom/MultiLine products hold up to eight voice faxmodems in one small external
case that includes status indicators for each faxmodem.
Remote Access, SOHO Router, and Internet Gateway Products. Zoom has a
significant R&D effort aimed at development of business products that provide
remote users access to the resources of a LAN, and connect the users of the LAN
to the Internet and to remote LANs and computers. Some of these products
incorporate technology acquired from Tribe Computer Works in 1996. In 1997 Zoom
extended the product line to include support for Windows, to incorporate analog
modem and leased line options, and to add new features. Zoom plans to continue
to expand this product line.
Full-color Live-motion Cameras and Other Video Products. In late 1997 Zoom
shipped the Zoom/Video Cam, a full-color live-motion camera. This camera can
plug into an included ISA capture card or into the video jack built into a
number of ISA-bus internal modems approved for sale in North America and in a
large number of other countries. The Zoom/Video Cam can be used for video phone
calls, video conferences, video mail, and still image capture. In 1998 Zoom has
continued to introduce video products, including a bundle that includes a 56K
video-ready faxmodem and the Zoom/Video Cam. Zoom plans to offer new cameras,
including a parallel port connected camera, and to introduce other video
products. Video products fit Zoom's marketing channel. Zoom expects the demand
for video products will grow due to a number of factors including improved video
technology, higher data communications bandwidth, faster PCs, and improved
video-related software.
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.
During 1997, Best Buy Co., Inc. and CompUSA, Inc. accounted for 17.2% and 10.9%
respectively, of Zoom's net sales. A significant reduction in sales to these
customers could have a material adverse effect on the Company's business.
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 AAFES, Best Buy, CompUSA, Computer City,
Fry's, Future Shop, J&R, MEI Micro Center, Office Depot, OfficeMax, and Staples.
Personal Technology Research reported that in January 1998 the Company had the
second 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 high-volume retailers. The
Company's North American distributors include Ingram Micro, MicroAge, and Tech
Data.
OEMs. 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, typically a PC. 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
distributors include Actebis, California Computer, Criterium, Ingram Micro,
Northamber, TURCom, UMD, Veracomp, and Yutron Tech. The Company's major European
high-volume retailers include Argos, Byte, Exell, PC World, Tandy, and Vobis.
The Company's international net sales (including sales to OEMs located outside
the United States) have grown from 8% in 1994 to 19% in 1997. 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.
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
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 then established a Munich office to
provide sales administration and public relations services for Western Europe as
well as sales outreach for Italy, Spain, Greece, and Scandinavia. The Company
has also established sales offices in Belgium to service Holland and Belgium, in
Germany, and in the United Kingdom to service the UK and Irish markets.
Warehousing, customs clearance, shipping, and invoicing for Europe are now
primarily done under contract with Road Air, an unaffiliated specialist in these
services located in Holland. Technical support for Europe is handled by Zoom's
distributors and an independent company which specializes in technical support
in the UK. 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. (See
note 15 to Consolidated Financial Statements.)
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 25, 1998 the Company had 37
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 1997, 1996 and 1995 the Company expended $4.2 million, $2.9
million and $1.8 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 or China 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 or China. 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 one primary contract assembler for a given design, with
back-up production tooling at a second assembler for Zoom's highest-volume
products. The Company's 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
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, Newcom and 3Com.
Motorola has announced plans to sell its retail modem division, but the
purchaser may continue to be a competitor, albeit without the Motorola name.
Many of the Company's competitors and potential competitors have more extensive
financial, engineering, product development, manufacturing and marketing
resources than the Company. In addition, the difficult modem environment during
the past 18 months may bring on a period of consolidation that has possible
benefits, but also has risks.
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 DSL 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 DSL 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 non-exclusive 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 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, France, Germany, Hungary, India, Ireland, Italy, Japan, the
Netherlands, Norway, Poland, Portugal, Russia, 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, 1998 and January 31, 1997 was $6.5 million
and $5.1 million, respectively, most of which was for delivery of products
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 25, 1998 Zoom had 342 full-time employees (including employees
hired on a temporary basis). Of this total, 37 were engaged in research and
development, 195 were involved in purchasing, assembly, packaging, shipping and
quality control, 73 were engaged in sales, marketing and technical support, and
the remaining 37 performed accounting, administrative and executive functions.
The Company's temporary employees were comprised of 34 individuals at February
25, 1998. 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 are represented by a labor union.
Executive Officers Of The Registrant
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 49 Chief Executive Officer, President and
Chairman of the Board
Peter R. Kramer 46 Executive Vice President and Director
Robert A. Crist 54 Vice President of Finance and
Chief Financial Officer
Terry J. Manning 46 Vice President of Sales and Marketing
Dean N. Panagopoulos 40 Vice President of Information Systems
Deena Randall 44 Vice President of Operations
Dana Whitney 35 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.
Robert A. Crist joined Zoom in July 1997 as Vice President of Finance and Chief
Financial Officer. From April 1992 until joining the company, Mr. Crist served
in various capacities at Wang Laboratories, Inc., a computer software and
services company, including Chief Financial Officer for the Software Business.
Prior to 1992 Mr. Crist served in various capacities at Unisys Corporation and
its predecessor Burroughs Corporation, both computer hardware and services
companies, including Assistant Corporate Controller, Corporate Manufacturing &
Engineering Controller, Computer Systems and Networking Controller,
Semiconductor Business Controller and Corporate Director of Business Planning
and Analysis. Mr. Crist earned his BA degree from Pennsylvania State University
and his MBA from the University of Rochester in 1971.
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 department. 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.
Dana Whitney joined Zoom in 1994 as director of engineering. From 1990 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.
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.
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, 1996
High Low
First $ 20.875 $ 13.750
Quarter............................................................
Second 27.000 13.375
Quarter............................................................
Third 16.125 7.500
Quarter............................................................
Fourth 13.125 8.250
Quarter............................................................
Fiscal Year Ending December 31, 1997
First $ 10.625 $ 8.375
Quarter............................................................
Second 8.750 6.500
Quarter............................................................
Third 8.250 7.000
Quarter............................................................
Fourth 7.625 5.125
Quarter............................................................
As of March 25, 1998, there were approximately 369 holders of record of the
Company's Common Stock.
Recent Sales of Unregistered Securities
N/A
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
gross revenues in Canada exceeds 5%).
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
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.
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, 1995, 1996 and
1997 and the balance sheet data as of December 31, 1996 and 1997 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, 1993 and 1994 and the balance
sheet data as of December 31, 1993, 1994 and 1995 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,
----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.......................... $ 55,230 $ 68,180 $ 96,997 $ 100,195 $ 64,478
Cost of goods sold................. 42,324 53,875 73,402 79,803 56,298
------ ------ ------- ------ ------
Gross profit................... 2,906 14,305 23,595 20,392 8,180
Operating expenses:
Selling..................... 4,562 6,573 9,023 10,216 11,103
General and administrative.. 1,204 1,776 2,840 3,674 4,957
Research and development.... 1,101 1,250 1,835 2,940 4,182
----- ----- ------ ----- -----
Total operating expenses.... 6,867 9,599 13,698 16,830 20,242
----- ----- ------ ------ ------
Income (loss) from operations.. 6,039 4,706 9,897 3,562 (12,062)
Interest income (expense) net ..... 90 (75) (33) 293 741
---- ----- ------ ----- ------
Income (loss) before income taxes 6,129 4,631 9,864 3,855 (11,321)
Income tax expense (benefit)....... 2,342 1,817 3,800 1,375 (4,189)
----- ----- ----- ----- -------
Net income (loss).............. 3,787 2,814 6,064 2,480 (7,132)
===== ===== ====== ===== =======
Income (loss) per common and common equivalent share:
Basic.......................... $ 0.63 $ 0.47 $ 1.00 $ 0.35 $ (0.95)
==== ==== ==== ==== ======
Diluted........................ $ 0.63 $ 0.47 $ 0.98 $ 0.35 $ (0.95)
==== ==== ==== ==== ======
Weighted average common and common equivalent shares:
Basic.......................... 6,010 6,010 6,075 7,068 7,469
Diluted........................ 6,010 6,014 6,173 7,162 7,469
At December 31,
----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital $14,618 $17,146 $24,135 $ 41,557 $ 35,064
Total assets 23,993 26,816 49,595 56,782 48,515
Long-term debt - - - - -
Total stockholders' equity 16,199 19,303 27,274 47,355 40,503
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report contains statements that are "forward-looking statements" as that
term is defined under the Private Securities Litigation Reform Act of 1995 (the
"Act") and releases issued by the Securities and Exchange Commission. The words
"believe" "expect," "anticipate," "estimate," "may," "will," "plan," "intend,"
"could," "estimate," "is being," "goal" and other expressions which are
predictions of or indicate future events and trends and which do not relate to
historical matters identify forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of the Company
to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements.
Examples of these risks, uncertainties, and other factors include, without
limitation, 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. In addition to the foregoing, the Company's actual future
results could differ materially from those projected in the forward-looking
statements as a result of the risk factors set forth in the Company's various
filings with the Securities and Exchange Commission and of changes in general
economic conditions, changes in interest rates and changes in the assumptions
used in making such forward-looking statements. The Company undertakes no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
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 1997 the Company's net sales decreased by 35.6% to $64.5 million. In 1997 as
compared to 1996, the Company's sales to retailers and distributors in the
United States decreased by 19% to $45.4 million, the Company's worldwide sales
to OEM customers decreased by 70% to $5.7 million, and the Company's
international sales (excluding sales to OEMs) decreased by 28% to $13.4 million.
The Company's results of operations have been and may continue to be subject to
significant fluctuations. The results for a particular period 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 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 on-hand 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 1995, 1996 and 1997 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>
Years Ending December 31,
----------------------------------
<S> <C> <C> <C>
1995 1996 1997
---- ---- ----
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of goods sold................................. 75.7 79.7 87.3
---- ---- ----
Gross profit................................... 24.3 20.3 12.7
Operating expenses:
Selling........................................ 9.3 10.2 17.2
General and administration..................... 2.9 3.7 7.7
Research and development....................... 1.9 2.9 6.5
--- --- ---
Total operating expenses....................... 14.1 16.8 31.4
---- ---- ----
Operating income (loss)............................ 10.2 3.5 (18.7)
Interest income (expense), net................ (0.0) 0.3 1.1
----- --- ---
Income before income taxes......................... 10.2 3.8 (17.6)
Income tax expense 3.9 1.3 (6.5)
--- --- -----
(benefit)................................................
Net income (loss).................................. 6.3% 2.5% (11.1)%
=== === ======
</TABLE>
Year Ending December 31, 1997 Compared to Year Ending December 31, 1996
Net Sales. Net sales decreased 35.6% to $64.5 million in 1997 from $100.2
million in 1996. The availability of pre-standard 56K modems reduced 33.6K unit
volumes and average selling prices. The lack of a standard for 56K and the slow
deployment of central sites compatible with the Company's K56flex 56K modems
caused low sales of 56K modems until late in 1997. The result was an overall
reduction in unit volumes and average selling prices. The decline in average
selling prices was further exacerbated by severe price competition and a decline
in modem chipset prices. The Company experienced decreases in net sales in all
of its sales channels. North American non-OEM sales decreased 26% to $45.4
million in 1997, non-OEM sales outside North America decreased 28% to $13.4
million, and worldwide OEM sales decreased 70% to $5.7 million.
Gross Profit. Gross profit as a percentage of net sales declined to 12.7% in
1997 from 20.3% in 1996. This decline in gross margin was caused by a number of
factors, including increased channel price protection due to the rapid decline
in prices, increased inventory reserves against slower speed modems, write-downs
of the Company's inventory of modem chipsets including lower speed modems due to
declining chipset costs, and the impact of lower volumes on certain fixed
manufacturing costs. For most faxmodems models, the decline in selling price was
partially offset by declining part costs.
Selling Expenses. Selling expenses increased 8.7% to $11.1 million or 17.2% of
net sales in 1997 from $10.2 million or 10.2% of net sales in 1996. The increase
was primarily due to increased cooperative advertising expenses in the
high-volume retailer and Internet Service Provider channels.
General and Administrative Expenses. General and administrative expenses
increased 35% to $4.9 million or 7.7% of net sales in 1997 from $3.7 million or
3.7% of net sales in 1996. This increase was primarily due to increased
personnel expenses, bad debt expenses and foreign exchange losses.
Research and Development Expenses. Research and development expenses increased
42% to $4.2 million or 6.5% of net sales in 1997 from $2.9 million or 2.9% of
net sales in 1996. 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 video and ISDN areas, and to costs associated with broadening
the product line and international regulatory approvals.
Interest Income. Net interest income increased to $503,680 in 1997 from a net
interest income of $233,963 in 1996. The increase was the result of the
Company's higher average cash balances during the last year compared to 1996.
Other Income (Expense), Net. Other non-interest income increased to $237,273 in
1997 from $58,551 in 1996. The increase was primarily the result of higher
sublease income compared to 1996.
Provision for Income Taxes. The Company's effective tax rate increased to 37% in
1997 from 35.7% in 1996 due primarily to the inapplicability of the foreign
sales corporation provisions to the Company's 1997 loss before income taxes.
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 bps and
33,600 bps shipments did not fully offset dramatic declines in shipments of
14,400 bps faxmodems. Overall, the 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.
Interest Income, Net. Net interest income increased to $233,963 in 1996 from an
expense of $81,893 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.
Liquidity and Capital Resources
On December 31, 1997, the Company had working capital of $35.1 million,
including $11.3 in cash and cash equivalents. The Company also has a secured $5
million line of credit expiring September 30, 1998. No amounts were outstanding
under this line of credit as of December 31, 1997. This line of credit bears
interest at the bank's prime rate (8.50% on December 31, 1997). The line of
credit is secured and contains certain financial and other covenants.
In 1997 the Company's net cash provided by operating activities was
approximately $2.7 million. During that period inventory and accounts receivable
decreased by $7.0 million and $5.6 million, respectively. The decrease in
inventory was primarily due to lower sales in 1997 as compared to sales in 1996
and 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 sales in 1997 as compared to
sales in 1996. These sources of cash were offset by the reduction of accounts
payable and accrued expenses of $1.4 million, and the Company's $7.1 million net
loss.
The Company's capital expenditures in 1997 of approximately $0.8 million
consisted primarily of the Company's computer hardware and software, continued
renovations to its headquarters, and purchases of other equipment and tooling.
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.
Year 2000 Date Conversion
The Company has implemented a comprehensive Enterprise Resource Planning System
which is fully prepared for the year 2000. The Company is in the process of
implementing new systems for all remaining non mission critical, computer
systems. 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.
New Accounting Pronouncements
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." SFAS 128 establishes a different method
of computing net income (loss) per share than was required under the provisions
of Accounting Principles Board Opinion No. 15. Under SFAS 128, the Company
presents both basic net income (loss) per share and diluted net income (loss)
per share. The impact on diluted net income (loss) per share was not material.
Prior periods presented have been restated to comply with the provisions of SFAS
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
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.
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 27
Independent Auditors' Report 28
Consolidated Balance Sheets as of December 31, 1996 and 1997 29
Consolidated Statements of Operations for the years ending December 31, 1995, 1996 and 30
1997
Consolidated Statements of Stockholders' Equity for the years ending December 31, 31
1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ending December 31, 1995, 1996 and 32
1997
Notes to Consolidated Financial Statements 33
Schedule II: Valuation and Qualifying Accounts for Fiscal Years Ending December 31,
1995, 1996 and 1997 85
</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
of the Registrant" 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 1998 annual
meeting which will be filed with the SEC in April 1998 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 1998 annual meeting which will be filed with
the SEC in April 1998, 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 1998 annual meeting which
will be filed with the SEC in April 1998, 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, as amended, of Zoom Telephonics, Inc., filed as
Exhibit 10.2 to the June 1996 Form 10-Q. *
10.3 Letter Agreement Regarding Revolving Line of Credit by and between Zoom Telephonics,
Inc. and Fleet National Bank.
10.4 Loan Modification Agreement by and between Zoom Telephonics, Inc. and Fleet National Bank.
10.5 Lease between Zoom Telephonics, Inc. 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 Amended and Restated Promissory Note issued by the Company in favor
of Fleet National Bank.
10.8 Security Agreement between the Company and Fleet National Bank.
**10.9 Employment Agreement.
11. Statement re: computation of per share income (loss).
21. Subsidiaries, filed as Exhibit 21 to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. *
23. Consent of KPMG Peat Marwick LLP.
27. Financial Data Schedule.
27.1 Financial Data Schedule. 1996
27.2 Financial Data Schedule. 1995
(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 or filed 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 31, 1998
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.
<TABLE>
<S> <C> <C>
Signature Title(s) Date
/s/ Frank B. Manning Principal Executive Officer and March 31, 1998
- --------------------------
Frank B. Manning Chairman of the Board
/s/ Robert A. Crist Principal Financial and Accounting Officer March 31, 1998
- -----------------------------
Robert A. Crist
/s/ Peter R. Kramer Director March 31, 1998
- --------------------------
Peter R. Kramer
/s/ Bernard Furman Director March 31, 1998
Bernard Furman
/s/ L. Lamont Gordon Director March 31, 1998
- --------------------------
L. Lamont Gordon
/s/ J. Ronald Woods Director March 31, 1998
- --------------------------
J. Ronald Woods
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
<TABLE>
<S> <C>
Page
Independent Auditors' Report 28
Consolidated Balance Sheets as of December 31, 1996 and 1997 29
Consolidated Statements of Operations for the years ending December 31, 1995, 1996 and 30
1997
Consolidated Statements of Stockholders' Equity for the years ending December 31, 1995, 31
1996 and 1997
Consolidated Statements of Cash Flows for the years ending December 31, 1995, 1996 and 32
1997
Notes to Consolidated Financial Statements 33
Schedule II: Valuation and Qualifying Accounts for Fiscal Years Ending December 31,
1995, 1996 and 1997 85
</TABLE>
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Zoom Telephonics, Inc.:
We have audited the accompanying consolidated balance sheets of Zoom
Telephonics, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements 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, 1997 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, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 13, 1998
<PAGE>
ZOOM TELEPHONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
Assets 1996 1997
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,172,186 $ 11,281,337
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of $3,564,101
in 1996 and $4,518,206 in 1997 (note 10) 18,970,041 13,365,413
Inventories (note 3) 19,057,575 12,034,349
Refundable income taxes 1,219,000 3,793,963
Net deferred tax assets (note 9) 2,032,683 2,388,189
Prepaid expenses and other current assets 532,808 212,989
------- -------
Total current assets 50,984,293 43,076,240
---------- ----------
Property, plant and equipment, net (note 4) 4,081,406 3,967,767
Goodwill, net of accumulated amortization of 1,558,764 1,393,874
$76,149 in 1996 and $241,039 in 1997 (note 12)
Other assets 157,691 77,392
------- ------
Total assets $ 56,782,154 $ 48,515,273
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,074,472 $ 6,204,370
Accrued expenses 1,352,725 1,808,308
--------- ---------
Total current liabilities 9,427,197 8,012,678
--------- ---------
Commitments and contingencies (note 5)
Stockholders' equity (notes 7 and 8):
Common stock, no par value. Authorized
25,000,000 shares; issued and outstanding
7,446,842 shares at December 31, 1996 and
7,472,371 shares at December 31, 1997 24,890,468 25,170,267
Retained earnings 22,464,489 15,332,328
---------- ----------
Total stockholders' equity $ 47,354,957 $ 40,502,595
=========== ==========
Total liabilities and stockholders'equity $ 56,782,154 $ 48,515,273
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ending December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net sales (notes 10 and 15) $ 96,997,313 $ 100,195,021 $ 64,478,457
Cost of goods sold 73,401,620 79,803,297 56,298,264
---------- ---------- ----------
Gross profit 23,595,693 20,391,724 8,180,193
---------- ---------- ---------
Operating expenses:
Selling 9,023,443 10,215,528 11,103,437
General and administrative 2,839,775 3,674,134 4,956,916
Research and development 1,835,482 2,940,153 4,182,220
--------- --------- ---------
13,698,700 16,829,815 20,242,573
---------- ---------- ----------
Operating income (loss) 9,896,993 3,561,909 (12,062,380)
Interest income 81,893 233,963 503,680
Other, net (115,206) 58,551 237,273
--------- ------ -------
Total other income(expense), net (33,313) 292,514 740,953
------- ------- -------
Income (loss) before income taxes 9,863,680 3,854,423 (11,321,427)
Income tax expense (benefit) (note 9) 3,800,000 1,374,501 (4,189,266)
--------- --------- -----------
Net income (loss) $ 6,063,680 $ 2,479,922 $ (7,132,161)
========= ========= ===========
Net income (loss) per share (note 2):
Basic $ 1.00 $ .35 $ (.95)
==== === =====
Diluted $ .98 $ .35 $ (.95)
=== === =====
Weighted average common and common equivalent shares (note 8):
Basic 6,074,788 7,068,314 7,468,758
========= ========= =========
Diluted 6,173,265 7,162,391 7,468,758
========= ========= =========
</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, 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 (note 8) 186,450 1,570,350 - 1,570,350
Tax benefit from exercise of nonqualified
stock options (notes 8 and 9) - 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
Net proceeds from stock offering (note 7) 800,000 11,573,218 - 11,573,218
Stock issuance for product line acquisition
(note 12) 102,641 1,590,929 - 1,590,929
Exercise of stock options (note 8) 343,271 2,825,543 - 2,825,543
Tax benefit from exercise of nonqualified
stock options (notes 8 and 9) - 1,611,201 - 1,611,201
------- --------- ------- ---------
Balance at December 31, 1996 7,446,842 24,890,468 22,464,489 47,354,957
Net income (loss) - - (7,132,161) (7,132,161)
Exercise of stock options (note 8) 25,529 204,232 - 204,232
Tax benefit from exercise of nonqualified
stock options (notes 8 and 9) - 75,567 - 75,567
-------- -------- ---------- ---------
Balance at December 31, 1997 7,472,371 $ 25,170,267 $ 15,332,328 $ 40,502,595
========= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ending December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,063,680 $ 2,479,922 $ (7,132,161)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 252,400 674,162 1,116,443
Net deferred income taxes (416,789) (519,222) (355,506)
Changes in assets and liabilities:
Accounts receivable (7,609,226) 1,426,273 5,604,628
Inventories (14,624,140) 5,211,667 7,023,226
Prepaid expenses and other current assets 28,553 (715,728) 400,118
Refundable income taxes - (1,219,000) (2,574,963)
Accounts payable and accrued expenses 12,280,557 (10,156,983) (1,414,519)
Income taxes payable 27,252 (236,493) -
Tax benefit from exercise of nonqualified
stock options 337,093 1,611,201 75,567
------- --------- ------
Net cash provided by (used in)
operating activities (3,660,620) (1,444,201) 2,742,833
----------- ----------- -----------
Cash flows from investing activities:
Purchase of certain assets of a business product line - (81,375) -
Additions to property, plant and equipment (1,234,459) (1,351,670) (837,914)
---------- ---------- ---------
Net cash used in investing activities (1,234,459) (1,433,045) (837,914)
----------- ----------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under revolving
bank line of credit (note 6) 2,500,000 (2,500,000) -
Net proceeds from issuance of common stock - 11,573,218 -
Exercise of nonqualified stock options 1,570,350 2,825,543 204,232
--------- --------- -------
Net cash provided by financing
activities 4,070,350 11,898,761 204,232
--------- ---------- -------
Net increase (decrease) in cash and cash equivalents (824,729) 9,021,515 2,109,151
Cash and cash equivalents at beginning of year 975,400 150,671 9,172,186
------- ------- ---------
Cash and cash equivalents at end of year $ 150,671 $ 9,172,186 $ 11,281,337
======= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
(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) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated 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.
Thepreparation 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 those 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
significant intercompany balances and transactions have been eliminated
in consolidation.
(c) Cash and Cash Equivalents
The Company considers all investments with 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 and recorded 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.
(f)Goodwill
Goodwill resulted from the excess of cost over fair value of net assets
acquired for the purchase of a product line in June 1996 and is being
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 discounted estimated future 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. The assessment
of recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved.
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(g)Income Taxes
The Company 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 basis and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences 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 (Loss) Per Common Share
The Company has adopted SFAS No. 128, "Earnings per Share," which
establishes standards for computing and presenting earnings per share,
simplifying previous standards and making them comparable to
international earnings per share standards.
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares and dilutive potential common
shares outstanding during the period. Under the treasury stock method,
the unexercised options are assumed to be exercised at the begining of
the period or at issuance, if later. The assumed proceeds are then used
to purchase common shares at the average market price during the
period.
Potential common shares for which inclusion would have the effect of
increasing diluted earnings per share (i.e., antidilutive) are excluded
from the computation.
(i)Revenue Recognition
Sales are recognized upon shipment of products to customers, at which
time the Company records provisions for returns, warranty and price
protection.
(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 continues to measure 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 pro forma impact on
earnings (loss) and earnings (loss) per share have been disclosed in
the Notes to Consolidated Financial Statements as required by SFAS 123
for companies that continue to account for stock-based compensation
under APB 25.
(l)Advertising Costs
Advertising costs are reported in selling, general, and administrative
expenses in the accompanying consolidated statements of operations and
include costs of advertising, production, trade shows, and other
activities designed to enhance demand for the Company's products. There
are no capitalized advertising costs in the accompanying consolidated
balance sheets.
(m)Reclassifications
Certain reclassifications to the 1995 and 1996 consolidated financial
statements have been made to conform to the 1997 presentation. These
reclassifications were not material.
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(3) Inventories
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Raw materials $ 11,778,311 $ 7,261,914
Work in process 2,968,064 2,542,260
Finished goods 4,311,200 2,230,175
--------- ---------
$ 19,057,575 $ 12,034,349
========== ==========
</TABLE>
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
Estimated
1996 1997 useful lives
---- ---- ------
<S> <C> <C> <C>
Land $ 309,637 $ 309,637 -
Buildings and improvements 1,939,071 2,097,044 31.5
years
Leasehold improvements 469,583 470,777 5 years
Computer hardware and software 1,666,175 1,919,412 3 years
Machinery and equipment 427,186 444,126 5 years
Molds, tools and dies 807,573 961,968 5 years
Office furniture and fixtures 433,968 523,936 5 years
------- -------
6,053,193 6,726,899
Less accumulated depreciation 1,971,787 2,759,132
--------- ---------
$ 4,081,406 $ 3,967,767
========= =========
</TABLE>
(5) Lease Commitments
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. Under non-cancelable
operating leases, rent expense was $46,897, $275,673 and $392,010 for
the years ending December 31, 1995, 1996 and 1997, respectively. Future
minimum rental payments, excluding executory costs, required under
these operating leases for the next four years are as follows:
Year Total
1998 $ 351,492
1999 309,708
2000 309,708
2001 309,708
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(6) Credit Lines
The Company's $10 million line of credit expired on August 31, 1997. It
was replaced by a secured $5 million line of credit effective November
13, 1997 and expiring September 30, 1998. No amounts were outstanding
under this line of credit as of December 31, 1997.
(7) 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
for general business purposes.
(8) Stock Option Plans
Employee Stock Option Plan
The Employee Stock Option Plan (the "Employee 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 Employee Stock Option Plan provides for the availability of 1,500,000
shares of common stock for the granting of employee stock options. Shares of
common stock were registered for issuance under the Employee Stock Option Plan
in accordance with the Securities Act of 1933. 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>
Weighted average
Number of shares exercise price
<S> <C> <C>
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
Granted 196,650 7.96
Exercised (19,529) 8.00
Expired (144,038) 8.81
-------- ----
Balance at December 31, 1997 602,300 $ 8.07
======= ====
</TABLE>
The following table summarizes information about fixed stock options under the
Employee Stock Option Plan outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ 6.50 to $8.63 602,300 2.66 years $ 8.07 141,327 $8.13
============= ======= ========= ======= ======= ====
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
The Company recognized a tax benefit of $337,093, $1,611,201 and $75,567 in
1995, 1996 and 1997, respectively, upon the exercise of nonqualified stock
options under the Employee Stock Option Plan. These benefits have been
recorded as an increase to the value of common stock.
1991 Director Stock Option Plan
In 1991, the Company established the Director Stock Option Plan (the "Directors'
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 Directors Plan, each
eligible director shall automatically be granted an option to purchase 6,000
shares of common stock on July 10 and January 10 of each year, beginning July
10, 1991. The option price shall be the fair market value of the common stock
on the date the option is granted. Each option shall expire two years from
the grant date. Options outstanding under this plan are as follows:
<TABLE>
<CAPTION>
Weighted average
Number of shares exercise price
<S> <C> <C>
Balance at December 31, 1994 72,000 $ 13.22
Granted 36,000 7.50
Exercised (36,000) 10.19
Expired (36,000) 16.31
-------- -----
Balance at December 31, 1995 36,000 7.44
Granted 36,000 13.97
Exercised (18,000) 7.54
Expired - -
------ ----
Balance at December 31, 1996 54,000 11.76
Granted 36,000 8.69
Exercised (6,000) 8.00
Expired (12,000) 7.00
-------- ----
Balance at December 31, 1997 72,000 $ 11.33
====== =====
</TABLE>
The following table summarizes information about fixed stock options under the
Directors' Stock Option Plan at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ 7.25 to 10.13 36,000 1.25 years $ 8.69 18,000 $ 10.13
$ 10.14 to 17.19 36,000 .25 years $ 13.97 36,000 $ 13.97
------ ------
72,000 .75 years $ 11.33 54,000 $ 12.69
====== ======
</TABLE>
At December 31, 1997, there were 129,613 additional shares available for grant
under both Plans. The per share weighted-average fair value of stock options
granted during 1997, 1996 and 1995 was $4.43, $4.03 and $3.58, respectively,
on the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1997 - expected dividend yield 0.00%,
risk-free interest rate of 5.69%, volatility 70% and an expected life of 3.5
years; 1996 - expected dividend yield 0.0%, risk-free interest rate of 5.05%,
volatility 70% and an expected life of 2.9 years; 1995 - expected dividend
yield 0.0%, risk-free interest rate of 5.07, volatility 70% and an expected
life of 2.0 years.
The Company applies APB Opinion No. 25 in accounting for its stock options and,
accordingly, no compensation cost has been recognized in the accompanying
consolidated 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 (loss) and basic and diluted net income (loss)
per share would have been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) As reported $ 6,063,680 $ 2,479,922 $ (7,132,161)
Pro forma 5,929,829 2,100,665 (7,718,857)
Net income (loss) per share As reported-basic $ 1.00 $ 0.35 $ (0.95)
Pro forma-basic 0.97 0.29 (1.03)
As reported-diluted $ 0.98 $ 0.35 $ (0.95)
Pro forma-diluted 0.96 0.29 (1.03)
</TABLE>
Proforma net income (loss) reflects only options granted in 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma amounts presented
above because compensation cost for options granted prior to January 1, 1995
is not considered.
The following reconciles the denominators of the diluted net income (loss)
computations:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average
number of shares
outstanding 6,074,788 7,068,314 7,468,758
Incremental shares
from the assumed
exercise of dilutive
stock options 383,291 121,027 -
Common shares
assumed to have
been repurchased,
treasury stock method (284,814) (26,950) -
--------- -------- --------
Weighted average
common and common
equivalent shares
outstanding 6,173,265 7,162,391 7,468,758
========= ========= =========
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(9) Income Taxes
Income tax expense (benefit) attributable to income from operations
consists of:
<TABLE>
<CAPTION>
Current Deferred Total
<S> <C> <C> <C>
Year ending December 31, 1995:
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
========= ======== =========
Year ending December 31, 1996:
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
========= ======== =========
Year ending December 31, 1997:
US federal $(3,842,852) $ 483,213 $(3,359,639)
State and local 9,092 (838,719) (829,627)
----- -------- ---------
$ (3,833,760) $ (355,506) $(4,189,266)
=========== ======== ===========
</TABLE>
Income tax expense (benefit) was $3,800,000, $1,374,501 and
($4,189,266) for the years ending December 31, 1995, 1996 and 1997,
respectively, and differed from the amounts as computed by applying the
US federal income tax rate of 34% to pretax income (loss) as a result
of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Computed "expected" US tax expense (benefit) $ 3,353,651 $ 1,310,504 $ (3,849,285)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit 556,829 112,604 (547,555)
Tax benefit from foreign sales corp. (116,382) (66,271) -
Other, net 5,902 17,664 207,574
-------- --------- ----------
$ 3,800,000 $ 1,374,501 $ (4,189,266)
========= ========= ===========
</TABLE>
(Continued)
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Total income tax expense (benefit) was allocated as follows: 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Income (loss) from operations $ 3,800,000 $ 1,374,501 $ (4,189,266)
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial statement purposes (337,093) (1,611,201) (75,567)
--------- ----------- ----------
$ 3,462,907 $ (236,700) $ (4,264,833)
========= ========= ===========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1997 are presented below:
<TABLE>
<CAPTION>
1996 1997
---- ----
Deferred tax assets:
<S> <C> <C>
Allowance for bad debt $ 421,298 $ 181,394
Sales returns reserve 280,029 400,688
Price protection reserve 160,281 -
Other accounts receivable reserves 43,896 122,964
Uniform capitalization 236,007 135,414
Inventory reserve 816,690 405,852
Vacation accrual 81,073 102,940
Warranty reserve 6,035 50,343
Amortization of goodwill - 82,935
Legal accrual - 94,816
Accrued royalties - 87,390
State net operating loss carry forward - 596,520
Federal tax credits - 117,515
Other 40,597 35,797
------ ------
Total current gross deferred tax assets 2,085,906 2,414,568
--------- ---------
Total gross deferred tax assets $ 2,085,906 $ 2,414,568
========= =========
Deferred tax liability:
Property, plant and equipment, principally due
to differences indepreciation (53,223) (26,379)
Net deferred tax assets $ 2,032,683 $ 2,388,189
========= =========
</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
assets 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 available, the
ultimate realizability of deferred tax assets for federal and state tax purposes
appears more likely than not.
(Continued)
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(10) Significant Customers
One customer accounted for approximately 19% of net sales for the year
ending December 31, 1995 and 15% of net sales for the year ending
December 31, 1996. One customer accounted for 17% of net sales for the
year ending December 31, 1997. At December 31, 1997, two customers
comprised approximately 42% of net accounts receivable. At December 31,
1996, two customers comprised approximately 40% of net accounts
receivable.
(11) Financial Instruments
The Company generates a portion of its revenues in international markets
and denominated in foreign currencies, which subjects its operations to
exposure to foreign currency fluctuations. The impact of currency
fluctuations can be positive or negative in any given period.
Tominimize the adverse impact of foreign currency fluctuations, 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, 1996 and
1997, 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, 1997, the Company's foreign
currency-denominated net assets were not material. Other than the
forward exchange contracts described above, the Company has no other
involvement with derivative financial instruments.
(12) Product Line Acquisition
OnJune 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
(13) Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash paid during year for interest $ 115,206 $ 169,248 $ -
======= ======= =======
Cash paid during year for income taxes $ 3,516,000 $ 1,873,000 $ 3,650
========= ========= =====
</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
statement of cash flows.
(14) 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 1996 and 1997, the
Company purchased substantially all of its modem chipsets 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.
(15) Geographic Information
The Company's domestic net sales and export sales to Europe and other
locations for 1995, 1996, and 1997 were comprised as follows:
<TABLE>
<CAPTION>
1995 % of Total 1996 % of Total 1997 % of Total
---- ---------- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
North America $ 69,452,313 72% $ 73,085,465 73% $ 52,227,550 81%
Europe 14,605,000 15% 18,227,729 18% 6,447,846 10%
Other 12,940,000 13% 8,881,827 9% 5,803,061 9%
---------- --- --------- -- --------- --
Total $ 96,997,313 100% $100,195,021 100% $ 64,478,457 100%
========== ==== =========== ==== ========== ====
</TABLE>
<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, as amended, of Zoom Telephonics, Inc.,
filed as Exhibit 10.2 to the June 1996 Form 10-Q. *
10.3 Letter Agreement Regarding Revolving Line of Credit by and between Zoom
Telephonics, Inc. and Fleet National Bank.
10.4 Loan Modification Agreement by and between Zoom Telephonics, Inc. and Fleet
National Bank.
10.5 Lease between Zoom Telephonics, Inc. 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 Amended and Restated Promissory Note issued by the Company in
favor of Fleet National Bank.
10.8 Security Agreement between the Company and Fleet National Bank.
**10.9 Employment Agreement.
11. Statement re: computation of per share income (loss).
21. Subsidiaries, filed as Exhibit 21 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996. *
23. Consent of KPMG Peat Marwick LLP.
27. Financial Data Schedule.
27.1 Financial Data Schedule. 1996
27.2 Financial Data Schedule. 1995
</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.
Exhibit 10.3. Letter Agreement Regarding Revolving Line of Credit by and between
Zoom Telephonics, Inc. and Fleet National Bank
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.
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
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
(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
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.
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.
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
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
(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.
(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:
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.
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 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
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 each fiscal
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.
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;
(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;
(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 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
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:
(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
(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.
(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
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:
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.
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
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.
"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.
"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).
"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
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
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.
"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.
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: /s/ Frank Manning
Name: Frank Manning
Title: President & CEO
By: /s/ Steven Shedd
Name: Steven Shedd
Title: V.P. Finance & CFO
Accepted and agreed:
FLEET NATIONAL BANK
By: /s/ Kimberly Martone
Its Vice President, High Technology Division
By: /s/ Thomas Davies
Its Senior Vice President, High Technology Division
Exhibit 10.4. Loan Modification Agreement by and between Zoom Telephonics, Inc.
and Fleet National Bank
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement ("this Agreement") is made as of November 13,
1997 between Zoom Telephonics, Inc., a Delaware corporation (the "Borrower") and
Fleet National Bank (the "Bank"). For good and valuable consideration, receipt
and sufficiency of which are hereby acknowledged, the Borrower and the Bank act
and agree as follows:
1. Reference is made to: (i) that certain letter agreement dated January 17,
1997 (the "Letter Agreement") between the Borrower and the Bank; (ii) that
certain $10,000,000 face principal amount promissory note dated January 17, 1997
(the "January Revolving Note") made by the Borrower and payable to the order of
the Bank; (iii) that certain Guaranty Agreement dated as of January 17, 1997
(the "FSC Guaranty") from Zoom Telephonics Foreign Sales Corporation ("FSC") to
the Bank; (iv) that certain Guaranty Agreement dated as of January 17, 1997 (the
"Tribe Guaranty") from Tribe Computer Works, Incorporated ("Tribe") to the Bank;
(v) that certain Inventory and Accounts Receivable Security Agreement of even
date herewith (the "Zoom Security Agreement") given by the Borrower to the Bank;
(vi) that certain Inventory and Accounts Receivable Security Agreement of even
date herewith (the "Tribe Security Agreement") given by Tribe to the Bank; (vii)
that certain Inventory and Accounts Receivable Security Agreement of even date
herewith (the "FSC Security Agreement") given by FSC to the Bank; and (viii)
that certain $5,000,000 face principal amount promissory note of even date
herewith (the "November Revolving Note") made by the Borrower and payable to the
order of the Bank. The Letter Agreement, The FSC Guaranty, the Tribe Guaranty,
the Zoom Security Agreement, the Tribe Security Agreement, the FSC Security
Agreement and the November Revolving Note hereinafter collectively referred to
as the "Financing Documents".
2. The Letter Agreement is hereby amended, effective as of the date hereof:
a. By deleting from the second sentence of Section 1.1 of the Letter
Agreement the amount "$10,000,000" and by substituting in its stead the
following:
"$5,000,000"
b. By deleting in its entirety the fourth sentence of Section 1.1 of the
Letter Agreement and by substituting in its stead the following:
"The Revolving Loans shall be evidenced by that certain
$5,000,000 face principal amount promissory note (the `Revolving
Note') dated November 13, 1997 made by the Borrower and payable
to the order of the Bank."
As a result, all references in the Letter Agreement to a "Revolving Note" will
be deemed to refer to the November Revolving Note.
c. By inserting into Section 1.1 of the Letter Agreement, immediately
following the fourth sentence of such Section, the following:
"The Revolving Loans are secured by that certain Inventory and
Accounts Receivable Security Agreement dated November 13, 1997
(the `Security Agreement') given by the Borrower to the Bank and
are guaranteed by Tribe pursuant to that certain Guaranty dated
as of January 17, 1997 (the `Tribe Guaranty') from Tribe to the
Bank and by FSC pursuant to that certain Guaranty dated as of
January 17, 1997 (the `FSC Guaranty') from FSC to the Bank. The
Tribe Guaranty is secured by that certain Inventory and Accounts
Receivable Security Agreement dated November 13, 1997 (the `Tribe
Security Agreement') given by Tribe to the Bank and the FSC
Guaranty is secured by that certain Inventory and Accounts
Receivable Security Agreement dated November 13, 1997 (the `FSC
Security Agreement') given by FSC to the Bank."
d. By deleting in their entireties Sections 1.2 and 1.3 of the
Letter Agreement and by substituting in their stead the following:
"1.2. Interest Rate. The Revolving Loans shall be evidenced by
the Revolving Note and interest thereon shall be payable at the
times and at the rate provided for in the Revolving Note. Overdue
principal of the Revolving Loans 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)
four (4%) percent per annum plus (ii) the per annum rate
otherwise payable under the Revolving Note (but in no event in
excess of the maximum rate from time to time permitted by then
applicable law), compounded monthly and payable on demand.
1.3. Repayment; Renewal of Revolving Loan Facility. 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. The
Borrower may prepay at any time, without penalty or premium, the
whole or any portion of any Revolving Loan. 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 Bank may, at its sole discretion,
renew the revolving 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."
e. By deleting in their entireties Sections 1.4, 1.5 and 1.6
of the Letter Agreement and by substituting in their stead the following:
"1.4. Reserved.
1.5. Reserved.
1.6. Reserved."
f. By deleting in its entirety paragraph (i) of Section 1.7
of the Letter Agreement.
g. By deleting from paragraph (ii) of Section 1.7 of the Letter
Agreement the words "(whether or not then subject to any Eurodollar Interest
Rate)".
h. By deleting in its entirety Section 1.8 of the Letter Agreement.
i. By deleting from the second sentence of the third paragraph of
Section 1.9 of the Letter Agreement the word "Impositions" and by substituting
in its stead the following:
"impositions"
j. By inserting into the third sentence of the third paragraph of
Section 1.9 of the Letter Agreement, immediately after the words "immediately
available funds", the following:
"in lawful currency of the United States"
k. By deleting from the first sentence of Section 1.10 of the Letter
Agreement the amount "$10,000,000" (in each place where it appears) and by
substituting in its stead the following:
"$5,000,000"
l. By inserting into Article I of the Letter Agreement, at the end
thereof, the following:
"1.12. Foreign Exchange. The Bank is also providing to the
Borrower (on terms agreed to or to be agreed to outside of this
letter agreement) a facility (the `F/X Facility') for forward
foreign exchange contracts (`Foreign Exchange Contracts') between
the Bank and the Borrower. The F/X Facility will have an expiry
date of September 30, 1998 and will permit Foreign Exchange
Contracts in a maximum aggregate notional amount of $1,000,000
outstanding at any one time and a $500,000 daily settlement
limit."
m. By deleting the period at the end of the second sentence of
Subsection 2.1(a) of the Letter Agreement and by substituting in its stead the
following:
"and to grant the security interests contemplated by the Security
Agreement."
n. By inserting into clause (i) of Subsection 2.1(c) of the Letter
Agreement, immediately after the words "any filing", the following:
"(other than filings under the Uniform Commercial Code or
other relevant record indexing laws)"
o. By adding to Subsection 2.1(j) of the Letter Agreement, at the
end thereof, the following:
"All of the books and records of the Borrower relating to
Receivables and/or inventory are located at said address. The
principal place of business and chief executive offices of each
of FSC and Tribe are as follows: FSC - 207 South Street, Boston,
MA; and Tribe - 207 South Street, Boston, MA. All of the books
and records of FSC and Tribe relating to Receivables and/or
inventory are located at the respective addresses described
above. Except as described on item 2.1(j) of the attached
Disclosure Schedule, none of the inventory of the Borrower, FSC
or Tribe is located at any location other than at the respective
chief executive offices of the Borrower, FSC and Tribe described
above."
p. By inserting into the introductory clause to Article III of the
Letter Agreement, immediately after the words "letter of credit issued hereunder
shall be outstanding", the following:
"or the F/X Facility shall be in effect or any Foreign
Exchange Contract shall be outstanding"
q. By adding to each of clause (i) and clause (ii) of Section 3.6 of the
Letter Agreement, at the end of each such clause, the following:
"Financial statements delivered under this clause shall include a
certification by the chief financial officer of the Borrower to
the effect that as at the date of such financial statements 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."
r. By deleting from the last sentence of clause (iii) of Section 3.6 of
the Letter Agreement the words "compliance with ss.ss.3.7-3.10" and by
substituting in their stead the following:
"compliance with each of ss.ss.3.7, 3.8 and 3.10"
s. By deleting from clause (vi) of Section 3.6 of the Letter Agreement
the words "Sections 3.7, 3.8, 3.9 and/or 3.10" and by substituting in their
stead the following:
"Sections 3.7, 3.8 and/or 3.10"
t. By deleting in its entirety Section 3.8 of the Letter Agreement and
by substituting in its stead the following:
"3.8. Capital Base. The Borrower will maintain as at the end of
each fiscal quarter (commencing with its results as at December
31, 1997) 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
$35,000,000 for September 30, 1997; and as at the last day of
each fiscal quarter thereafter (commencing with December 31,
1997) (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)."
u. By deleting in its entirety Section 3.9 of the Letter Agreement.
v. By inserting into the introductory clause to Article IV of the Letter
Agreement, immediately after the words "letter of credit issued hereunder shall
be outstanding", the following:
"or the F/X Facility shall be in effect or any Foreign
Exchange Contract shall be outstanding"
w. By inserting into clause (i) of Section 4.1 of the Letter Agreement,
immediately after the words "issued by the Bank", the following:
"and any Indebtedness in respect of Foreign Exchange Contracts
issued by the Bank"
x. By renumbering clauses (ix) and (x) of Section 4.1 of the Letter
Agreement so that same will be known as clauses "(x)" and "(xi)", respectively.
y. By inserting into Section 4.1 of the Letter Agreement, immediately
after clause (viii) thereof, the following:
"(ix) any Indebtedness which represents mortgage debt secured by
the Borrower's premises at 201 and 207 South Street, Boston, MA;"
z. By renumbering clause (vi) of Section 4.2 of the Letter Agreement so
that same will be known as clause "(vii)".
aa By inserting into Section 4.2 of the Letter Agreement,
immediately after clause (v) thereof, the following:
"(vi) any mortgage which may hereafter be granted by the Borrower
encumbering its premises at 201 and 207 South Street, Boston, MA;
or"
bb. By inserting into the final unnumbered paragraph of Section 4.2 of
the Letter Agreement, immediately after the words "on its assets", the
following:
"(other than its real property at 201 South Street and 207
South Street, Boston, MA)"
cc. By deleting the period at the end of Section 4.3 of the Letter
Agreement and by substituting in its stead the following:
", and (iv) any guaranties in favor of the Bank."
dd. By deleting in its entirety the first sentence of Section 4.10
of the Letter Agreement and by substituting in its stead the following:
"The Borrower will not change its name or legal structure (nor
permit Tribe and/or FSC to do so), nor will the Borrower move its
chief executive offices or principal place of business from the
premises described in Subsection 2.1(j) above (nor permit Tribe
and/or FSC to do so), nor will the Borrower remove any books or
records relating to Collateral from such premises (nor permit
Tribe and/or FSC to do so), nor will the Borrower keep any
Collateral at any location other than at such premises or other
premises shown on item 2.1(j) of the attached Disclosure Schedule
(nor permit Tribe and/or FSC to do so) without, in each instance,
giving the Bank at least 30 days' prior written notice and
providing all such financing statements, certificates and other
documentation as the Bank may request in order to maintain the
perfection and priority of the security interests granted or
intended to be granted pursuant to the Security Agreement."
ee. By deleting from clause (c) of Section 5.1 of the Letter
Agreement the reference to Section 3.9.
ff. By renumbering clause (n) of Section 5.1 of the Letter Agreement
so that same will be known as clause "(p)".
gg. By inserting into Section 5.1 of the Letter Agreement,
immediately following clause (m) thereof, the following:
"(n) the Security Agreement, the Tribe Security Agreement, the
FSC Security Agreement or any other Loan Document shall for any
reason (other than due to payment in full of all amounts secured
or evidenced thereby or due to discharge in writing by the Bank)
not remain in full force and effect; or (o) the security
interests and liens of the Bank in and on any of the Collateral
covered or intended to be covered by the Security Agreement, the
FSC security Agreement and/or the Tribe Security Agreement and as
to which perfection may be had under Article 9 of the Uniform
Commercial Code shall for any reason (other than due to written
release by the Bank or due to failure by the Bank to file or take
other appropriate steps to perfect a security interest in
Collateral the location of which has been disclosed to the Bank)
not be fully perfected liens and security interests; or"
hh. By deleting the period at the end of clause (b) of Section 5.2
of the Letter Agreement and by substituting in its stead the following:
"and terminate the F/X Facility."
ii. By inserting into clause (c) of Section 5.2 of the Letter Agreement,
immediately after the words "the Revolving Note", the following:
", under the Security Agreement, under the FSC Guaranty, under
the FSC Security Agreement, under the Tribe Guaranty, under the
Tribe Security Agreement,"
jj. By adding to Section 5.3 of the Letter Agreement, at the end
thereof, the following:
"ANY AND ALL RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS RIGHTS OR
REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES ANY
OF THE OBLIGATIONS PRIOR TO THE EXERCISE BY THE BANK OF ITS RIGHT
OF SET-OFF UNDER THIS SECTION ARE HEREBY KNOWINGLY, VOLUNTARILY
AND IRREVOCABLY WAIVED."
kk. By inserting into Section 6.1 of the Letter Agreement, immediately
after the words "the Revolving Note", in each place where same appear, the
following:
", the Security Agreement, the FSC Security Agreement, the
Tribe Security Agreement"
ll. By inserting into Section 6.2 of the Letter Agreement,
immediately after the words "0.20% per annum", the following:
"(0.5% per annum for all periods on or after November 13, 1997)"
mm. By inserting into Section 6.2 of the Letter Agreement, immediately
after the amount "$10,000,000", in both places where same appears, the
following:
"($5,000,000 for all periods on or after November 13, 1997)"
nn. By deleting from Section 6.5 of the Loan Agreement the words "Steven
T. Shedd, Chief Financial Officer" and by substituting in their stead the
following:
"Robert Crist, Chief Financial Officer"
oo. By inserting into Article VI of the Letter Agreement, at the end
thereof, the following:
"6.9. Replacement Note. Upon receipt of an affidavit of an
officer of the Bank as to the loss, theft, destruction or
mutilation of the Revolving Note or of any other Loan Document
which is not of public record and, in the case of any such
mutilation, upon surrender and cancellation of the Revolving Note
or other Loan Document, the Borrower will issue, in lieu thereof,
a replacement Revolving Note or other Loan Document in the same
principal amount (as to the Revolving Note) and in any event of
like tenor.
6.10. Usury. All agreements between the Borrower and the Bank are
hereby expressly limited so that in no contingency or event
whatsoever, whether by reason of acceleration of maturity of the
Revolving Note or otherwise, shall the amount paid or agreed to
be paid to the Bank for the use or the forbearance of the
Indebtedness represented by the Revolving Note exceed the maximum
permissible under applicable law. In this regard, it is expressly
agreed that it is the intent of the Borrower and the Bank, in the
execution, delivery and acceptance of the Revolving Note, to
contract in strict compliance with the laws of The Commonwealth
of Massachusetts. If, under any circumstances whatsoever,
performance or fulfillment of any provision of the Revolving Note
or any of the other Loan Documents at the time such provision is
to be performed or fulfilled shall involve exceeding the limit of
validity prescribed by applicable law, then the obligation so to
be performed or fulfilled shall be reduced automatically to the
limits of such validity, and if under any circumstances
whatsoever the Bank should ever receive as interest an amount
which would exceed the highest lawful rate, such amount which
would be excessive interest shall be applied to the reduction of
the principal balance evidenced by the Revolving Note and not to
the payment of interest. The provisions of this Section 6.10
shall control every other provision of this letter agreement and
of the Revolving Note.
6.11. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT
TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING
OUT OF, UNDER OR IN CONNECTION WITH THIS LETTER AGREEMENT, THE
REVOLVING NOTE OR ANY OTHER LOAN DOCUMENTS OR OUT OF ANY COURSE
OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A
MATERIAL INDUCEMENT FOR THE BANK TO ENTER INTO THIS LETTER
AGREEMENT AND TO MAKE REVOLVING LOANS AS CONTEMPLATED HEREIN."
pp. By deleting in their entireties the following definitions appearing
in Section 7.1 of the Letter Agreement: "Eurocurrency Liabilities", "Eurodollar
Interest Rate", "Eurodollar Rate Increment", "Floating Rate", "Floating Rate
Loan", "Impositions", "Interest Payment Date", "Interest Period", "LIBOR",
"LIBOR Loan", "London", "Other Acceptable Foreign Receivables" and "Reserve
Rate".
qq. By deleting from the definition of "Bank Certificate" appearing in
Section 7.1 of the Letter Agreement the references to Sections 1.2 and 1.6.
rr. By deleting in its entirety the definition of "Borrowing Base"
appearing in Section 7.1 of the Letter Agreement and by substituting in its
stead the following:
"`Borrowing Base' - As determined at any date, the sum of (i) 70%
of the aggregate principal amount of the Qualified Domestic
Receivables of the Borrower then outstanding plus (ii) 70% of the
aggregate principal amount of the Qualified Insured Foreign
Receivables of the Borrower then outstanding."
ss. By deleting in its entirety the proviso clause in the definition
of "Business Day" appearing in Section 7.1 of the Letter Agreement.
tt. By inserting into Section 7.1 of the Letter Agreement,
immediately after the definition of "Capital Base", the following:
"`Collateral' - All property now or hereafter owned by the
Borrower, FSC and/or Tribe or in which the Borrower, FSC and/or
Tribe has any interest, but only to the extent that same is
described as `Collateral' in the Security Agreement, the FSC
Security Agreement and/or the Tribe Security Agreement or in
Subsection 7.2(b) below."
uu. By deleting from the definition of "Expiration Date" appearing in
Section 7.1 of the Letter Agreement the date "August 31, 1997" and by
substituting in its stead the following:
"September 30, 1998"
As a result, from and after the date hereof, for the purposes of the Letter
Agreement and the other Financing Documents, the "Expiration Date" will be
deemed to be September 30, 1998.
vv. By inserting into Section 7.1 of the Letter Agreement,
immediately after the definition of "Expiration Date", the following:
"`Foreign Exchange Contracts' - As defined in ss.1.12 above.
`FSC Guaranty' - As defined in ss.1.1 above.
`FSC Security Agreement' - As defined in ss.1.1 above.
`F/X Facility' - As defined in ss.1.12 above."
ww. By inserting into the definition of "Loan Documents" appearing in
Section 7.1 of the Letter Agreement, immediately after the words "Revolving
Note", the following:
", the Security Agreement, the Tribe Guaranty, the Tribe
Security Agreement, the FSC Guaranty, the FSC Security Agreement"
xx. By deleting from the definition of "Maximum Revolving Amount"
appearing in Section 7.1 of the Letter Agreement the amount "$10,000,000" and by
inserting in its stead the following:
"$5,000,000"
yy. By deleting the period at the end of the definition of
"Obligations" appearing in Section 7.1 of the Letter Agreement and by
substituting in its stead the following:
", including, without limitation, the Revolving Loans and any
obligations now or hereafter arising with respect to Foreign
Exchange Contracts."
zz. By deleting in its entirety clause (i) of the second sentence of the
definition of "Qualified Domestic Receivables" appearing in Section 7.1 of the
Letter Agreement and by substituting in its stead the following:
"(i) (A) if the Bank does not have a fully perfected first
priority security interest in such Receivable or (B) if such
Receivable is not free and clear of all adverse interests in
favor of any Person other than the Borrower and the Bank;"
aaa. By renumbering clause (viii) of the second sentence of the
definition of "Qualified Domestic Receivables" appearing in Section 7.1 of the
Letter Agreement so that it will be known as clause (ix) thereof.
bbb. By inserting into the second sentence of the definition of
"Qualified Domestic Receivables" appearing in Section 7.1 of the Letter
Agreement, immediately following clause (vii) thereof, the following:
"(viii) if such Receivable is owed by the United States
government or any agency or department thereof (unless assigned
to the Bank under the Federal Assignment of Claims Act);"
ccc. By deleting in its entirety the last sentence of the definition of
"Qualified Domestic Receivables" appearing in Section 7.1 of the Letter
Agreement and by substituting in its stead the following:
"In addition, so long as the Tribe Guaranty and the Tribe
Security Agreement are in full force and effect and the Bank has
a fully perfected first priority security interest in all of
Tribe's Receivables, term `Qualified Domestic Receivables' will
be deemed to include such Receivables (the `Tribe Intercompany
Receivables') as are now or hereafter owed by Tribe to the
Borrower (even though such Tribe Intercompany Receivables would
otherwise be excluded as being amounts owed to the Borrower by a
related entity) to the extent, but only to the extent, that such
Tribe Intercompany Receivables arise out of sales of the
Borrower's products made by Tribe to unrelated customers and that
the Receivables of Tribe (the `Matching Tribe Receivables')
generated by such sales satisfy all of the requirements set forth
in the immediately preceding two sentences to be Qualified
Domestic Receivables, except that such Matching Tribe Receivable
will not be owned by the Borrower."
ddd. By deleting in its entirety the definition of "Qualified Foreign
Receivables" appearing in Section 7.1 of the Letter Agreement and by
substituting in its stead the following:
"`Qualified Insured 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 Insured Foreign Receivable is supported
by credit insurance issued by an insurer satisfactory to the Bank
and containing terms and conditions satisfactory to the Bank. In
addition, so long as the FSC Guaranty and the FSC Security
Agreement are in full force and effect and the Bank has a fully
perfected first priority security interest in all of FSC's
Receivables, the term `Qualified Insured Foreign Receivables'
will be deemed to include such Receivables (the `FSC Intercompany
Receivables') as are now or hereafter owed by FSC to the Borrower
(even though such FSC Intercompany Receivables are not themselves
insured and would otherwise be excluded as being amounts owed to
the Borrower by a related entity) to the extent, but only to the
extent, that the FSC Intercompany Receivables arise out of sales
of the Borrower's products made by FSC to unrelated customers and
that the Receivables of FSC (the `Matching FSC Receivables')
generated by such sales are insured with credit insurance
satisfactory to the Bank and satisfy all of the other
requirements set forth above to be Qualified Insured Foreign
Receivables, except that such Matching FSC Receivables will not
be owned by the Borrower. Amounts included in Qualified Insured
Foreign Receivables will in no event be `double counted' with any
amounts includable in Qualified Domestic Receivables."
eee. By inserting into Section 7.1 of the Letter Agreement
immediately after the definition of "Tribe", the following:
"`Tribe Guaranty' - As defined in ss.1.1 above.
`Tribe Security Agreement' - As defined in ss.1.1 above."
fff. By adding to Article VII of the Letter Agreement, at the end
thereof, the following:
"7.2. Security Agreement. (a) Each of the Borrower, FSC and Tribe
acknowledges and agrees that the `Obligations' described in and
secured by the Security Agreement, the FSC Security Agreement and
the Tribe Security Agreement include, without limitation, all of
the obligations of the Borrower under the Revolving Note and/or
this letter agreement and/or with respect to any Foreign Exchange
Contracts.
(b) Each of the Security Agreement, the FSC Security
Agreement and the Tribe Security Agreement is hereby modified to
provide as follows:
(i) That the `Collateral' subject thereto includes,
without limitation and in addition to the Collateral described
therein, all of the Borrower's, FSC's and Tribe's (as the case
may be) files, books and records (including, without limitation,
all electronically recorded data) all whether now owned or
existing or hereafter acquired, created or arising. Each of the
Borrower, FSC and Tribe hereby grants to the Bank a security
interest in all such Collateral in order to secure the full and
prompt payment and performance of all of the Obligations.
(ii) That, upon the occurrence of any Event of Default (as
defined in ss.5.1 of this letter agreement), the Bank may, at any
time, without further notice to the Borrower, FSC or Tribe,
notify account debtors that the Collateral has been assigned to
the Bank and that payments by such account debtors shall be made
directly to the Bank. At any time after the occurrence of an
Event of Default, the Bank may collect the Borrowers', FSC's and
Tribe's Receivables, or any of same, directly from account
debtors and may charge the collection costs and expenses to the
Borrower."
ggg. By adding to the Letter Agreement, as an exhibit thereto, Item
2.1(j) in the form attached to this Agreement.
3. Each of Tribe and FSC hereby joins in the Letter Agreement for the
purposes described in Paragraph 2fff above and each of Tribe and FSC hereby
grants to the Bank, in order to secure the Obligations (as described in said
Paragraph 2fff above), a security interest in and to all of the Collateral (as
described in said Paragraph 2fff above).
4. Wherever in any Financing Document, or in any certificate or opinion
to be delivered in connection therewith, reference is made to a "letter
agreement" or to the "Letter Agreement", from and after the date hereof same
will be deemed to refer to the Letter Agreement, as hereby amended.
5. Simultaneously with the execution and delivery of this Agreement, the
Borrower is executing and delivering to the Bank the November Revolving Note, in
substitution for the January Revolving Note. The November Revolving Note is a
$5,000,000 promissory note of the Borrower, substantially in the form attached
hereto as Exhibit 1. Wherever in any of the Financing Documents or in any
certificate or opinion to be delivered in connection therewith, reference is
made to a "Revolving Note", from and after the date hereof same will be deemed
to refer to the November Revolving Note.
6. Each of Tribe and FSC confirms that each of the Tribe Guaranty and
the FSC Guaranty, respectively, remains in full force and effect and guarantees,
inter alia, payment and performance of the Letter Agreement (as hereby amended)
and the November Revolving Note.
7. In order to induce the Bank to enter into this Agreement, the
Borrower further represents and warrants as follows:
a. The execution, delivery and performance of this Agreement, the
November Revolving Note and the Zoom Security Agreement have been duly
authorized by the Borrower by all necessary corporate and other action, will not
require the consent of any third party and will not conflict with, violate the
provisions of, or cause a default or constitute an event which, with the passage
of time or the giving of notice or both, could cause a default on the part of
the Borrower under its charter documents or by-laws or under any contract,
agreement, law, rule, order, ordinance, franchise, instrument or other document,
or result in the imposition of any lien or encumbrance (except in favor of the
Bank) on any property or assets of the Borrower. The execution, delivery and
performance of this Agreement and the FSC Security Agreement have been duly
authorized by FSC by all necessary corporate and other action, will not require
the consent of any third party and will not conflict with, violate the
provisions of, or cause a default or constitute an event which, with the passage
of time or the giving of notice or both, could cause a default on the part of
FSC under its charter documents or by-laws or under any contract, agreement,
law, rule, order, ordinance, franchise, instrument or other document, or result
in the imposition of any lien or encumbrance (except in favor of the Bank) on
any property or assets of FSC. The execution, delivery and performance of this
Agreement and the Tribe Security Agreement have been duly authorized by Tribe by
all necessary corporate and other action, will not require the consent of any
third party and will not conflict with, violate the provisions of, or cause a
default or constitute an event which, with the passage of time or the giving of
notice or both, could cause a default on the part of Tribe under its charter
documents or by-laws or under any contract, agreement, law, rule, order,
ordinance, franchise, instrument or other document, or result in the imposition
of any lien or encumbrance (except in favor of the Bank) on any property or
assets of Tribe.
b. The Borrower has duly executed and delivered each of this Agreement,
the November Revolving Note and the Zoom Security Agreement. FSC has duly
executed and delivered each of this Agreement and the FSC Security Agreement.
Tribe has duly executed and delivered each of this Agreement and the Tribe
Security Agreement.
c. Each of this Agreement, the November Revolving Note and the Zoom
Security Agreement is the legal, valid and binding obligation of the Borrower,
enforceable against the Borrower in accordance with its respective terms. Each
of this Agreement and the FSC Security Agreement is the legal, valid and binding
obligation of FSC, enforceable against FSC in accordance with its respective
terms. Each of this Agreement and the Tribe Security Agreement is the legal,
valid and binding obligation of Tribe, enforceable against Tribe in accordance
with its respective terms.
d. The statements, representations and warranties made in the Letter
Agreement, in the Tribe Guaranty and/or in the FSC Guaranty continue to be
correct as of the date hereof; except as amended, updated and/or supplemented by
the attached Supplemental Disclosure Schedule.
e. Giving effect to the foregoing amendments, the covenants and
agreements of the Borrower, FSC and/or Tribe contained in the Letter Agreement,
in the Zoom Security Agreement, in the FSC Security Agreement, in the Tribe
Security Agreement, in the FSC Guaranty and/or in the Tribe Guaranty have been
complied with on and as of the date hereof.
f. Giving effect to the foregoing amendments, no event which constitutes
or which, with notice or lapse of time, or both, could constitute, an Event of
Default (as defined in the Letter Agreement) has occurred and is continuing.
g. Except for certain losses heretofore disclosed in writing to the
Bank, no material adverse change has occurred in the financial condition of the
Borrower from that disclosed in the quarterly financial statements of the
Borrower dated June 30, 1997, heretofore furnished to the Bank.
8. As a further inducement to the Bank to enter into this Agreement, on
or about the date hereof the Borrower is paying to the Bank a non-refundable
amendment fee of $5,000. This fee is in addition to, and is not to be reduced by
nor applied against, any other fees, interest or other payments now, heretofore
or hereafter paid or payable by the Borrower to the Bank under the January
Revolving Note, the November Revolving Note, the Letter Agreement or any other
Financing Documents.
9. Except as expressly affected hereby, the Letter Agreement and each of
the other Financing Documents remains in full force and effect as heretofore.
10. Nothing contained herein will be deemed to constitute a waiver or a
release of any provision of any of the Financing Documents. Nothing contained
herein will in any event be deemed to constitute an agreement to give a waiver
or release or to agree to any amendment or modification of any provision of any
of the Financing Documents on any other or future occasion.
Executed, as an instrument under seal, as of the day and year first
above written.
ZOOM TELEPHONICS, INC.
By: /s/ Robert A. Crist
Name: Robert A. Crist
Title: V.P. Finance & CFO
By: /s/ Frank Manning
Name: Frank Manning
Title: President & CEO
Accepted and agreed:
FLEET NATIONAL BANK
By: /s/ Kimberly Martone
Name: Kimberly Martone
Title: Vice President
Agreed (as to Sections 3 and 6 above):
ZOOM TELEPHONICS FOREIGN
SALES CORPORATION
By: /s/ Frank Manning
Name: Frank Manning
Title: President & CEO
TRIBE COMPUTER WORKS, INCORPORATED
By: /s/ Frank Manning
Name: Frank Manning
Title: President & CEO
Exhibit 10.7. Amended and Restated Promissory Note issued by the Company in
favor of Fleet National Bank
AMENDED AND RESTATED PROMISSORY NOTE
$5,000,000.00 Boston, Massachusetts
November 13, 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 Five Million and 00/100
($5,000,000.00) Dollars or such portion thereof as may have been advanced by the
Bank or may hereafter be advanced by the Bank pursuant to ss.1.1 of that certain
letter agreement dated January 17, 1997 between the Borrower and the Bank, as
amended (as so amended, 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 or in the Rate Increment is effective. 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) four (4%)
percent per annum plus (ii) the per annum rate otherwise payable under this note
(but in no event in excess of the maximum rate permitted by then applicable
law), compounded monthly and payable on demand. As used herein, "Prime Rate"
means the variable rate of interest per annum designated by the Bank from time
to time as its prime rate, it being understood that such rate is merely a
reference rate and does not necessarily represent the lowest or best rate being
charged to any customer. 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) September 30, 1998. The Borrower may at any time
and from time to time prepay all or any portion of said Principal, without
premium or penalty. 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 lawful money
of the United States 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 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
all reasonable 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 amends and restates in its entirety that certain promissory note dated
January 17, 1997 in the face principal amount of $10,000,00 made by the Borrower
and payable to the order of the Bank. This note is secured by, and is entitled
to the benefits of, the Security Agreement (as defined 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.
THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE
RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED ON THIS NOTE OR ARISING
OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY RELATED DOCUMENTS OR OUT OF
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN)
OR ACTIONS OF ANY PERSON. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE
BANK TO ACCEPT THIS NOTE AND TO MAKE THE REVOLVING LOANS AS CONTEMPLATED 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: /s/ Peter Kramer
Title: Secretary
By: /s/ Robert A. Crist
Name: Robert A. Crist
Title: V.P. Finance & CFO
By: /s/ Frank Manning
Name: Frank Manning
Title: President & CEO
Exhibit 10.8. Security Agreement between the Company and Fleet National Bank
Inventory and Accounts Receivable Security Agreement
(Short Form)
November 13, 1997
Date
To secure the due payment and performance of all of the liabilities and
obligations hereunder of the undersigned, herein called "Borrower", to Fleet
National Bank , hereinafter called "Bank", and all other liabilities and
obligations of Borrower to Bank of every name and nature whatsoever, direct or
indirect, absolute or contingent, now existing or hereafter arising or acquired,
including, without limitation, the due payment and performance of all
liabilities and obligations under any and all notes, all hereinafter called
"Obligations", the Borrower hereby grants to Bank a continuing security interest
in:
(a) All accounts, contracts, contract rights, notes, bills, drafts,
acceptances, general intangibles, (other than general intangibles which consist
of patents, trademarks, copyrights and other similar intellectual property)
choses in action, and all other debts, obligations and liabilities, in whatever
form, owing to Borrower from any person, firm or corporation, or any other legal
entity, whether now existing or hereafter arising, now or hereafter received by
or belonging or owing to Borrower, for goods sold by it or for services rendered
by it or however otherwise same may have been established or created, all
guarantees and securities therefor, all right, title and interest of Borrower in
the merchandise or services which gave rise thereto, including the rights of
reclamation and stoppage in transit, all rights of an unpaid seller of
merchandise or services, and in the proceeds thereof, including, without
limitation, all proceeds of credit, fire or other insurance, and any tax
refunds.
(b) All goods, merchandise, raw materials, goods and work in process,
finished goods and other tangible personal property, now owned or hereafter
acquired and held for sale or lease, or furnished or to be furnished under
contract of service, or used or consumed in Borrower's business and in the
products and proceeds thereof, including, without limitation, all proceeds of
fire or other insurance. This portion of the collateral being sometimes referred
to as "Inventory".
All of the accounts and other property as set forth in (a) above and inventory
as set forth in (b) above are hereinafter referred to collectively as
"Collateral".
The Collateral and all proceeds and products thereof shall be security for all
Obligations. Until all Obligations have been fully satisfied, Bank's security
interest in the Collateral and all proceeds and products thereof, shall continue
in full force and effect and Bank will at all times after the occurrence and
during the continuance of an Event of Default (as defined in the Letter
Agreement between Bank and Borrower) have the right to take physical possession
of the Inventory and to maintain such possession on Borrower's premises or to
remove the Inventory or any part thereof to such other places as Bank may
desire. If Bank exercises Bank's right to take possession of the Inventory,
Borrower shall, upon Bank's demand, assemble the Inventory and make it available
to Bank at a place reasonably convenient to Bank.
If Borrower shall fail to pay, when due, any of the Obligations or shall fail to
observe or perform any of the provisions of this Agreement or any other
agreement now or hereafter entered into between Bank and Borrower, Borrower
shall be in default hereunder. In the event of such default all Obligations of
Borrower to Bank shall, at the option of Bank, and without notice to or demand
upon Borrower become and be immediately due and payable and thereupon Bank may
exercise any and all rights and remedies of a secured party available under the
Uniform Commercial Code and all other applicable law.
Borrower represents, warrants and covenants that all inventory is and will be
owned by Borrower, free of all other liens and encumbrances, and shall be kept
by Borrower at 207 South Street, Boston, MA 02111 or at one of the other
locations shown on the Disclosure Schedules attached to the aforesaid Letter
Agreement and that Borrower shall not (without Bank's prior written approval)
remove the Inventory therefrom except for the purposes of sale in the ordinary
course of business.
Except for sales made in the ordinary course of business, Borrower shall not
sell, encumber, grant a security interest in or dispose of or permit the sale,
encumbrance or disposal of any Collateral without Bank's prior written consent.
A sale in the ordinary course of business shall not include a transfer in total
or partial satisfaction of a debt.
Borrower shall perform any and all steps requested by Bank to perfect Bank's
security interest in the Collateral, such as leasing warehouses to Bank or its
designee, placing and maintaining signs, appointing custodians, executing and
filing financing or continuation statements in form and substance satisfactory
to Bank. If any Inventory is in the possession or control of any of Borrower's
agents or processors, Borrower shall notify such agents or processors of Bank's
interest therein, and upon request instruct them to hold all such Inventory for
Bank's account and subject to Bank's instructions. A physical listing of all
Inventory, where located, shall be taken by Borrower whenever requested by Bank,
and a copy of each such physical listing shall be supplied to Bank. Bank may
examine and inspect the Inventory at any time.
Borrower agrees to keep all the Inventory insured with coverage and amounts not
less than that usually carried by one engaged in a like business and in any
event not less than that required by Bank with loss payable to the Bank and
Borrower, as their interests may appear, hereby appointing Bank as attorney for
Borrower in obtaining, adjusting, settling and cancelling such insurance and
endorsing any drafts. All premiums on such insurance shall be paid by Borrower
and the policies delivered to Bank. If Borrower fails to do so, Bank may procure
such insurance and charge the cost to Borrower's loan account. As further
assurance for the payment and performance of the Obligations, Borrower hereby
assigns to Bank all sums including returned or unearned premiums, which may
become payable under any policy of insurance on the Collateral and Borrower
hereby directs each insurance company issuing any such policy to make payment of
such sums directly to Bank.
If in the event of the sale of the Collateral the proceeds thereof are
insufficient to pay all amounts to which Bank is legally entitled, Borrower will
be liable for the deficiency, together with interest thereon and the reasonable
fees of any attorney employed by Bank to collect such deficiency.
Bank shall have the right to enforce any remedies hereunder alternatively,
successively or concurrently. A waiver of any default of Borrower shall not be a
waiver of any subsequent, similar or other default. No delay in the exercise of
any of Bank's rights or remedies hereunder shall constitute a waiver of such
right or remedy or of any other right or remedy.
This Agreement shall not be construed to be in limitation of or in substitution
for any other grant of security interest from Borrower to Bank made prior to or
contemporaneously herewith, and no other such grant of a security interest made
subsequent to or contemporaneously herewith shall be construed to be in
limitation of or in substitution for this Agreement unless expressly and
specifically provided therein.
This Agreement shall take effect as a sealed instrument, shall be governed by
and construed according to the laws of the Commonwealth of Massachusetts, shall
be binding upon the heirs, executors, administrators, successors and assigns of
Borrower and shall inure to the benefit of the successors and assigns of Bank.
Witnessed by: ZOOM TELEPHONICS, INC.
/s/ Robert A. Crist
V.P. Finance & CFO, Borrower
By: /s/ Frank Manning
FLEET NATIONAL BANK Its President & CEO, Title
Address: 207 South Street
Number and Street
By: /s/ Kimberly Martone
Its Vice President, High Technology Boston, MA 02111
----------------------------------
Division City, County and State
**or at one of the other locations shown on the Disclosure Schedules attached to
the aforesaid Letter Agreement.
Exhibit 10.9. Employment Agreement
May 23, 1997
Employment Agreement Between Zoom Telephonics and Bob Crist
Zoom Telephonics will hire Bob Crist as VP-Chief Financial Officer effective
July 1, 1997. The salary is $130,000 per year. Zoom will provide a parking space
near Zoom. After Bob joins Zoom, he will get options for 30,000 shares at the
market price based on the closing price of the prior day, and he will determine
what day they are issued. Options will be normal Zoom options: 35% vest in 1
year, 35% vest more in 2 years, and 30% more in 3.5 years, with the expiration 4
years after the grant date. In addition, Bob will get 30,000 more shares in
September 1998, assuming he is still employed at Zoom.
In the event of a change of control, all issued and outstanding options will
automatically vest, to be exercised at the grant price within 30 days of the
change of control. In addition, if (i) Bob is terminated without cause within 6
months after change of control, or (ii) Bob leaves the company within 6 months
after change in control (ie: including but not limited to no longer reporting to
the CEO, COO, or President of the acquiring company; or no longer reported to by
the financial employees who had reported to Bob or their replacements), Bob will
receive 6 months salary as severance.
Zoom has the right to terminate Bob's employment at will. In the event of Zoom's
terminating Bob's employment for some other reason other than cause or a change
of control, the following will happen: 18 month's worth of issued and
outstanding options will vest, but the number of automatically vested options
shall not exceed 20,000. The options may be exercised up to 30 days after
employment ends. In addition, Zoom will pay to Bob 3 months severance.
Reasons for terminating for cause attached.
Bob will also receive Zoom's normal benefit package, and will receive 3 weeks
vacation per year during his first 9 months of employment, and 4 weeks for later
years.
The duties of the job have been discussed. Some important areas include public
and internal reporting, budgeting and control, asset management, financial
planning, taxes, corporate structure, and the protection of the Company's assets
and interests.
Agreed:
/s/ Frank Manning /s/ Robert A. Crist
President Bob Crist
Exhibit 11. Statement re: computation of per share income (loss)
<TABLE>
<CAPTION>
1995 1996 1997
--------------------- --------------------- ------------
Basic Diluted Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 6,063,080 $ 6,063,080 $2,479,922 $ 2,479,922 $(7,132,161) $(7,132,161)
========= ========= ========= ========= =========== ===========
Weighted average
number of shares
outstanding 6,074,788 6,074,788 7,068,314 7,068,314 7,468,758 7,468,758
Incremental shares
from the assumed
exercise of dilutive
stock options - 383,291 - 121,027 - -
Common shares
assumed to have
been repurchased,
treasury stock method - (284,814) - (26,950) - -
Weighted average
common and common
equivalent shares
outstanding 6,074,788 6,173,265 7,068,314 7,162,391 7,468,758 7,468,758
========= ========= ========= ========= ========= =========
Net income (loss)
per share $ 1.00 $ .98 $ .35 $ .35 $ (.95) $ (.95)
==== === === === ===== =====
</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.
The audits referred to in our report dated February 13, 1998, included the
related financial statement schedule for each of the years in the three-year
period ended December 31, 1997, included in the annual report on Form 10-K. The
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presently fairly in all material respects the information set forth therein.
We consent to incorporation by reference in the registration statements (No:
33-42834 and No. 33-90930) on Form S-8 of Zoom Telephonics, Inc. of our report
dated February 13, 1998, relating to the consolidated balance sheets of Zoom
Telephonics, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows and related schedule for each of the years in the three-year period ended
December 31, 1997, which report appears in the December 31, 1997 annual report
on Form 10-K of Zoom Telephonics, Inc.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<EXCHANGE-RATE> 1
<CASH> 11,281,337
<SECURITIES> 0
<RECEIVABLES> 13,365,413
<ALLOWANCES> 4,518,206
<INVENTORY> 12,034,349
<CURRENT-ASSETS> 43,076,240
<PP&E> 3,967,767
<DEPRECIATION> 951,553
<TOTAL-ASSETS> 48,515,273
<CURRENT-LIABILITIES> 8,012,678
<BONDS> 0
0
0
<COMMON> 25,170,267
<OTHER-SE> 15,332,328
<TOTAL-LIABILITY-AND-EQUITY> 48,515,273
<SALES> 80,035,116
<TOTAL-REVENUES> 64,478,457
<CGS> 56,298,264
<TOTAL-COSTS> 20,198,594
<OTHER-EXPENSES> 740,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (503,680)
<INCOME-PRETAX> (11,321,427)
<INCOME-TAX> (4,189,266)
<INCOME-CONTINUING> (7,132,161)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,132,161)
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> (0.95)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<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> 16,829,815
<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> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Jan-01-1995
<PERIOD-END> Dec-31-1995
<EXCHANGE-RATE> 1
<CASH> 150,671
<SECURITIES> 0
<RECEIVABLES> 20,396,314
<ALLOWANCES> 2,717,463
<INVENTORY> 24,173,557
<CURRENT-ASSETS> 46,455,910
<PP&E> 3,138,907
<DEPRECIATION> 598,013
<TOTAL-ASSETS> 49,594,817
<CURRENT-LIABILITIES> 22,320,673
<BONDS> 0
0
0
<COMMON> 7,289,577
<OTHER-SE> 19,984,567
<TOTAL-LIABILITY-AND-EQUITY> 49,594,817
<SALES> 107,409,953
<TOTAL-REVENUES> 96,997,313
<CGS> 73,401,620
<TOTAL-COSTS> 13,698,700
<OTHER-EXPENSES> (33,313)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (81,893)
<INCOME-PRETAX> 9,863,680
<INCOME-TAX> 3,800,000
<INCOME-CONTINUING> 6,063,680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,063,680
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .98
</TABLE>
Schedule II
ZOOM TELEPHONICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ending December 31, 1995, 1996, 1997
<TABLE>
<CAPTION>
Balance at Balance
beginning Charged to Amounts at end
Description of year expense written off of year
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
Reserve for doubtful accounts $ 1,083,308 $ 2,631,782 $ 3,248,060 $ 467,030
Reserve for price protection 708,596 5,965,245 5,367,363 1,306,478
Reserve for sales returns 720,054 626,426 314,841 1,031,639
Other allowances 1,052,143 3,531,766 2,870,850 1,713,059
--------- --------- --------- ---------
Year ending December 31, 1997 $ 3,564,101 $ 12,755,219 $ 11,801,114 $ 4,518,206
========== ========== ========== =========
</TABLE>
