UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to________________
Commission File Number 0-18672
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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) (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 29, 1999 (computed by
reference to the closing price of such stock on The Nasdaq National Market) was
$23,116,668.
The number of shares outstanding of the registrant's Common Stock, No Par Value,
as of March 29, 1999 was 7,474,871 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Proxy Statement for the registrant's 1999 annual meeting
of shareholders to be filed with the SEC in April 1999 are incorporated by
reference into Part III, Items 10-12 of this Form 10-K.
<PAGE>
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HABOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains forward-looking statements. 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.
PART I
ITEM 1 - BUSINESS
Overview
Zoom Telephonics, Inc. ("Zoom" or the "Company") is a Canadian holding
corporation whose operations are 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 modems and other
personal computer communications products for the home and office. Modem0s link
personal computers ("PCs") to the local telephone line for transmission of data,
fax, voice, and video through the worldwide telephone network, and enable PC's
to connect to other computers and networks, including the Internet and local
area networks ("LANs").
The Company offers a broad line of modems with top data speeds of 56,000 bits
per second ("bps"), available in internal, external and PCMCIA models (PCMCIA
models plug into a PCMCIA- standard slot typically found in a notebook or laptop
computer). Most of these modems connect to a single telephone line, but Zoom
also makes the Zoom/MultiLine modem to connect 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 and remote users or
the Internet.
The Company also has a line of Integrated Services Digital Network ("ISDN")
products, which can transmit and receive simultaneously up to 128,000 bps. Zoom
has a broad line of internal and external modems and ISDN products with
interfaces appropriate to North America, Europe, and many other countries
throughout the rest of the world.
In December 1998 Zoom began shipping the first models in its ZoomAir tm line of
wireless products. These products connect a notebook or desktop computer to
another computer or an existing LAN without wires, currently providing a 2
megabits per second ("mbps") data rate using the 802.11 DSSS, a wireless data
communications standard running at 2.4 gigahertz. Zoom currently ships network
interface cards that plug into either a PCMCIA or LAN ISA (standard desktop
computer) slot. Another product, ZoomAir Access Point Software, connects
wireless and wired networks together, provides network ID security, and allows
wired and wireless network users to concurrently share a single Internet
connection.
Zoom also ships a line of live-motion full-color video cameras. One model
interfaces to the PC through a Universal Serial Bus ("USB") port, and a second
model interfaces the PC through a parallel port. A third model plugs into either
a specialized video capture card included with the camera, or into modems either
bundled with the camera or sold separately.
Zoom's objective is to build upon its position as a leading supplier of modems
and to capitalize on a number of current and emerging trends in computer
connectivity, including Internet access, higher data rates, video telephony, and
alternatives to traditional wired local area networks. 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, (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 modems 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 PCs 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 also become increasingly important to PC users.
Worldwide PC shipments continue to grow, and industry sources estimate that over
200 million PCs are installed worldwide. Currently 56K modems are often bundled
with a new PC, particularly in North America. However, some of the installed PCs
either have no modem or have a modem with a speed below 56K. Thus there should
continue to be substantial demand for modems either for bundling into a new PC
or for after-market sales. This is particularly true since the V.90 56K standard
was set recently, in 1998. The Company believes that modems will continue to
achieve increasing penetration of the PC installed base as applications
requiring data connectivity proliferate.
The growing use of PCs outside the traditional office setting has also increased
the demand for modems that 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 in 1998. 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 and Windows 98 include remote access, faxing
and internet access capabilities that can only be used with a modem or other
wide area networking devices.
The demand for faster speeds and increased modem functionality is expected to
drive sales of new generations of modems in the future, including Digital
Subscriber Line ("DSL") and cable modems, both as upgrades and as peripherals
bundled with new PCs.
Zoom Strategy
Zoom focuses on the sale and development of PC communications products tailored
to its channels of distribution, including high-volume retailers, distributors,
personal computer manufacturers, and other OEMs. 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 modems and to capitalize on a
number of current and emerging trends in computer connectivity, including
Internet access, higher data rates, video telephony, and alternatives to
traditional wired local area networks.
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 modems
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 1999 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 and by
broadening its product offerings through its established sales channels.
Introduce Innovative PC Communications Products. Zoom seeks to identify new
high-volume opportunities for PC communications, to develop competitively priced
leading-edge products to address these opportunities, and to build upon and
exploit its brand equity by delivering these products quickly and effectively
through its established sales channels. The Company was one of the first
high-volume producers of faxmodems, voice faxmodems, and video-capture-enabled
faxmodems. The Company also produces innovative ISDN products, multi-line
business communications products, wireless LAN products, and video products, and
expects to continue to broaden its product offerings.
Outsource Chipset Technology. Zoom pursues a strategy of outsourcing rather than
internally developing its chipsets, which are application-specific integrated
circuits that form the technology base for its modems and certain other
products. By outsourcing the chipset technology, the Company is able to
concentrate its research and development resources on 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 buys
modem chipsets exclusively from the two highest-volume modem chipset
manufacturers, Lucent Technologies and Conexant Systems, Inc. (formerly
Rockwell). These companies have significant resources for semiconductor design
and fabrication, analog and digital signal processing, and communications
firmware development. Integrated circuit product areas covered by one or both
companies include modems, DSL, cable modems, home phoneline networking, and
video. Similarly, Zoom buys chipsets from Harris Semi-Conductor for its ZoomAir
wireless network interface cards.
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 in Mexico and mainland China
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 modems in selected Western
European countries in 1993. During 1995 the Company also received approvals and
began shipping its first modems for the Japanese market. The Company now sells
its products in 52 countries. The Company's international sales (excluding sales
to OEMs) have increased from 8% of net sales in 1994 to 22% of net sales in
1998. 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 continues to target the OEM market as a significant
opportunity for growth and diversification, particularly for PC-bus and embedded
modems and for wireless LAN products. In addition, Zoom sometimes sells packaged
modems private-labeled for its customers and channels.
Explore Acquisitions. Zoom acquired the products and certain other assets of
Tribe Computer Works ("Tribe") in mid-1996, and in March 1999 has recently
acquired certain product lines and assets from Hayes Microcomputers Products,
Inc. 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 telephone network and
connected networks, enabling remote access to on-line services, the Internet,
corporate computer networks, and other computers. The Company offers a broad
line of modems with top data transmission speeds of 56,000 bps. Soon after the
V.90 standard for 56K was set in early 1998, Zoom began shipping Dualmodetm 56K
modems able to automatically connect to either a V.90 or K56flex central site.
The Company also ships internal and 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 line of full-color live-motion video camera and related products.
In December 1998 Zoom began shipping the ZoomAir line of wireless local area
network products.
Zoom has a broad line of modems with top data speeds of 56,000 bps, available in
internal, external and PCMCIA models. The internal modems are designed primarily
for installation in IBM PC-compatibles. The external modems 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 multi-line
modems that have up to eight modems in a compact enclosure. The PCMCIA modems
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 modems are shipped complete with
third-party software that supports the hardware capabilities of the modem.
56K modems 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 began shipping in the
second quarter of 1997, and Zoom's first 56K modems supported K56flex. 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. V.90 enables Zoom's V.90
modems to connect to interoperable V.90 central sites, including sites using
central site equipment made by 3Com, an x2 supporter. Similarly, V.90 enables
3Com's V.90 modems to connect to inter-operable V.90 central sites using
equipment made by Ascend, Cisco, Microcom, Shiva, and other central site
manufacturers who initially backed K56flex. V.90 is now widely deployed, though
there is still some equipment that incorporates only K56flex or x2. Zoom has
successfully transitioned its 56K product line to Dualmode modems designed to
connect to either K56flex or V.90 central sites, to provide flexibility to
Zoom's customers.
Modem Product Features. The following sets forth some of the key features
incorporated in one or more of the Company's modems:
ZoomGuardtm. ZoomGuard 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.
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 modem'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 and Windows 98 support Plug & Play, a
standard that is intended to allow the installation of Plug & Play-compatible
peripherals like modems with limited hardware configuration by the end-user.
Cellular-ready PCMCIA Modems. Some of the
Company's modems include a cellular-ready feature that allows the modem to be
plugged into a cellular phone for wireless communication of fax and data.
International Modems. 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 modem 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 modems 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, Spain, 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. In 1998 the European community adopted the CTR 21 standard for
interconnection of products to the telephone network, and this has significantly
simplified the approval process for the 15 European Union countries plus
Bulgaria, Iceland, Israel, Norway, Switzerland, and Turkey currently accepting
the CTR 21 standard.
ISDN Products. Zoom has 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. In 1998 Zoom began shipping external
ISDN products for the North American and international markets. In addition,
Zoom continues to integrate ISDN capability into some of its new LAN-oriented
business products.
<PAGE>
Multi-line Modems. In 1996 Zoom began shipping a family of multi-line modems
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 modem.
Wireless LAN Products. In December 1998 Zoom began shipping the first models in
its ZoomAirtm line of wireless local area network products. These products
connect a notebook or desktop computer to another computer or an existing local
area network without wires, currently providing a 2 megabits per second ("mbps")
data rate using the 802.11 DSSS standard running at 2.4 gigahertz. Zoom
currently ships network interface cards that plug into either a PCMCIA or ISA
slot. Another product, ZoomAir Access Point Software, connects wireless and
wired networks together, provides network ID security, and allows wired and
wireless network users to concurrently share a single Internet connection.
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, with some models that include DSL, cable modem, and
wireless LAN capabilities.
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
continued to introduce video products, including a bundle that includes a 56K
video-ready modem and the Zoom/Video Cam, a parallel-port camera, and a USB
camera. 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.
Dialers. The Company shipped its first telephone dialer, the Demon Dialer(R), in
1981; and in 1983 began shipping the Hotshot(TM) dialer. As the dialer market
shrank, due to equal access, the Company focused on modems and other peripherals
for the personal computer market. The Company has begun shipping a new
generation of dialers incorporating proprietary technology. Dailer products
currently represent under 1% of Zoom's sales, but may become more important in
the future.
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 1998 Best Buy Co., Inc. and Ingram Micro, Inc. accounted for 19.7% and
and 13.6% 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 Best Buy, CDW, Fry's, Future Shop, J&R, MEI
Micro Center, Micro Warehouse, Office Depot, PC Connection, and Staples.
Personal Technology Research reported that in January 1999 the Zoom 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, 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. In addition, 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
international distributors include Actebis, California Computer, Criterium,
Ingram Micro, Northamber, Pouliadis Associates Corp., TrCom, UMD, Veracomp, and
Yutron Tech. The Company's major European high-volume retailers include
Compustore, Dixons/PC World, Fnac, Multirama, Oneway, Simply Computers, Staples
UK, Tandy, Tempo Stores, and Vobis. The Company's international net sales
(including sales to OEMs located outside the United States) have grown from 8%
in 1994 to 22% in 1998. 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, the Company's Munich office provides
sales administration and public relations services for Western Europe as well as
sales outreach for 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. The Company works
with an independent representative for sales and support in France and Italy.
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 under contract with an independent company that 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 Zoom's sales staff or
commissioned sales representatives. (See note 14 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
per week and also employs an independent technical support team in the United
Kingdom that supports the Company's European products five day per week. Zoom's
technical support 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 and other chipsets that
incorporate sophisticated technology, thereby eliminating the need for the
Company to develop this technology in-house. As of March 25, 1999 the Company
had 52 employees engaged primarily in research and development. This research
and development team performs electronics hardware design and layout, mechanical
design, prototype construction and testing, component specification, firmware
development, product testing, foreign and domestic regulatory approval efforts,
end-user and internal documentation, and third-party software selection and
testing. During 1996, 1997, and 1998 the Company expended $2.9 million, $4.2
million and $4.4 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 modems. Currently Lucent and Conexant are the Company's only modem
chipset suppliers. Due to capacity constraints, the Company has experienced
delays in receiving shipments of modem chipsets in the past, and the Company may
experience such delays in the future. Moreover, there can be no assurance that
either supplier will, in the future, sell chipsets to the Company in quantities
sufficient to meet the Company's needs. An interruption in a modem chipset
supplier's ability to deliver chipsets, a failure of the Company's suppliers to
produce chipset enhancements or new chipsets on a timely basis and at
competitive prices, a material increase in the price of the chipsets, or any
other adverse change in the Company's relationship with modem chipset suppliers
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 modems 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 3Com, Action Tec, Best Data, Boca
Research, Creative Labs Diamond Multimedia, GVC, NewCom, and Viking. Some 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 30
months has caused 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 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.
<PAGE>
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 issued patents, which
expire in 2011, 2013 and 2013, respectively, generally relate to modem
distinctive ring, use of a modem 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 Lucent and
Conexant. 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 past claims have related to technology included in modem chipsets and the
Company forwarded 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 modems in Australia, Austria, Belgium, Bulgaria, China,
Cypress, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, India,
Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, Norway, Poland,
Portugal, Russia, Slovenia, South Africa, South Korea, Spain, Srilanka, Sweden,
Switzerland, Turkey, 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 March 25, 1999 and March 25, 1998 was $1.6 million and
$2.7 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.
<PAGE>
Employees
As of December 31, 1998 Zoom had 323 full-time employees (including employees
hired on a temporary basis). Of this total, 44 were engaged in research and
development, 164 were involved in purchasing, assembly, packaging, shipping and
quality control, 62 were engaged in sales, marketing and technical support, and
the remaining 32 performed accounting, administrative, management information
systems, and executive functions. The Company's temporary employees were
comprised of 21 individuals at December 31, 1998. Most of these temporary
employees were employed in manufacturing. None of the Company's employees are
represented by a labor union.
Subsequent Event
In March 1999, the Company entered into a series of separate agreements to
purchase various assets, licenses, and inventory from Hayes Microcomputer
Products, Inc. Hayes engaged in the business of design, manufacture, and support
of computer communications products for business, government, and consumers
worldwide. On October 9, 1998 Hayes filed for reorganization under Chapter 11 of
the United States Bankruptcy Code, Case No. 98-2276 through 98-2281, in the
United States Bankruptcy Court ("the Court"). The Company has paid approximately
$5.0 million in aggregate for all of the assets of Hayes Microcomputer Products
Inc. Europe Region, product and rights for the American modem business, ADSL and
cable modem equipment, and some inventory.
On March 19, 1999 the Court filed the Company's acceptance for the American
modem business, completing the majority of the purchases. At this time the
proceedings are ongoing and the Company is involved in the bidding for some
remaining assets. The purchases are not subject to any financing and are being
paid for through the Company's cash balances. The Company intends to continue
production, sales, and support of most of the more popular Hayes modems under
the Hayes name. The acquisition will be accounted for as a purchase.
<PAGE>
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 50 Chief Executive Officer, President and
Chairman of the Board
Peter R. Kramer 47 Executive Vice President and Director
Robert A. Crist 55 Vice President of Finance and Chief Financial Officer
Terry J. Manning 47 Vice President of Sales and Marketing
Dean N. Panagopoulos 41 Vice President of Information Systems
Deena Randall 45 Vice President of Operations
Dana Whitney 36 Vice President of Engineering and Network Products
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. Since
1998 Mr. Manning has also been a director of the Massachusetts Technology
Development Corporation, which invests in seed and early-stage technology
companies in Massachusetts.
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 Director of
Business Planning and Analysis, Corporate Manufacturing & Engineering
Controller, Computer Systems and Networking Controller, and Semiconductor
Business Controller. Mr. Crist earned his BA degree from Pennsylvania State
University and he earned 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 48,000 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.
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 alleged 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. The complaint sought to permanently enjoin the defendants
from infringing the patent and monetary damages for past infringement, and REFAC
had offered to negotiate a royalty for licensing the patent. The Company
believed that the alleged infringement involved technology incorporated in
chipsets provided to it from Rockwell International. By an agreement dated July
12, 1996 Rockwell International agreed, subject to certain conditions, to assume
defense of and indemnify Zoom against the action.
On April 22, 1998 a stipulation of dismissal with prejudice was filed by the
Company in the United States District Court, District of Massachusetts; on April
23, 1998 the Court entered judgement pursuant to the stipulation and the case
was marked closed. No damages were aseesed against the company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered in this report.
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "ZOOM." The following table sets forth, for the periods indicated, the
high and low sale prices per share of Common Stock, as reported by the Nasdaq
National Market.
Fiscal Year Ending December 31, 1997
High Low
---- ---
First Quarter........................... $ 10.625 $ 8.375
Second Quarter.......................... 8.750 6.500
Third Quarter........................... 8.250 7.000
Fourth Quarter.......................... 7.625 5.125
Fiscal Year Ending December 31, 1998
First Quarter........................... $ 9.625 $ 6.563
Second Quarter.......................... 8.750 5.813
Third Quarter........................... 6.750 3.125
Fourth Quarter.......................... 8.625 2.250
As of March 29, 1999, there were approximately 336 holders of record of the
Company's Common Stock.
Recent Sales of Unregistered Securities
Not applicable.
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.
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
The following table contains certain selected consolidated financial data of the
Company and is qualified in its entirety by the more detailed Consolidated
Financial Statements and Notes thereto included elsewhere in this report. The
statement of operations data for the years ending December 31, 1996, 1997, and
1998 and the balance sheet data as of December 31, 1997 and 1998 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, 1994 and 1995 and the balance
sheet data as of December 31, 1994, 1995, and 1996 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,
----------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In thousands)
Statement of Operations Data:
Net sales................................. $ 68,180 $ 96,997 $ 100,195 $ 64,478 $ 61,364
Cost of goods sold........................ 53,875 73,402 79,803 56,298 44,651
------ ------- ------ ------ ------
Gross profit......................... 14,305 23,595 20,392 8,180 16,713
Operating expenses:
Selling............................ 6,573 9,023 10,216 11,103 11,801
General and administrative......... 1,776 2,840 3,674 4,957 4,976
Research and development........... 1,250 1,835 2,940 4,182 4,449
----- ------ ----- ----- -----
Total operating expenses........... 9,599 13,698 16,830 20,242 21,226
----- ------- ------ ------ ------
Operating income (loss) ............. 4,706 9,897 3,562 (12,062) (4,513)
Other income (expense) net ............... (75) (33) 293 741 1,074
--- ---- --- --- -----
Income (loss) before income taxes.... 4,631 9,864 3,855 (11,321) (3,439)
Income tax expense (benefit).............. 1,817 3,800 1,375 (4,189) (1,287)
----- ----- ----- ------- -------
Net income (loss).................... 2,814 6,064 2,480 (7,132) (2,152)
===== ====== ===== ======= =======
Income (loss) per common and common equivalent share:
Basic................................ $ 0.47 $ 1.00 $ $ (0.95) $ (0.29)
==== ==== ====== ========
0.35
Diluted.............................. $ 0.47 $ 0.98 $ $ (0.95) $ (0.29)
==== ==== ====== ========
0.35
Weighted average common and common equivalent shares:
Basic................................ 6,010 6,075 7,068 7,469 7,474
Diluted.............................. 6,014 6,173 7,162 7,469 7,474
At December 31,
----------------------------------------------------------------
1995 1997
---- ----
1994 1996 1998
------ ----- ----
(In thousands)
Balance Sheet Data:
Working capital $ 17,146 $ 24,135 $ 41,557 $ 35,064 $ 33,376
Total assets 26,816 49,595 56,782 48,515 43,560
Long-term debt - -
- - -
Total stockholders' equity 19,303 27,274 47,355 40,503 38,425
</TABLE>
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTs
OF OPERATIONS
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. Sales of 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.
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 1996, 1997 and 1998 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.
<PAGE>
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>
--------------------------------
1996 1997 1998
---- ---- ----
Net sales..................................................... 100.0% 100.0% 100.0%
Cost of goods sold............................................ 79.7 87.3 72.8
---- ---- ----
Gross profit.............................................. 20.3 12.7 27.2
Operating expenses:
Selling................................................... 10.2 17.2 19.2
General and administration................................ 3.7 7.7 8.1
Research and development.................................. 2.9 6.5 7.2
--- --- ---
Total operating expenses.................................. 16.8 31.4 34.5
---- ---- ----
Operating income (loss)....................................... 3.5 (18.7) (7.3)
Other income (expense), net.............................. 0.3 1.1 1.7
--- --- ---
Income before income taxes.................................... 3.8 (17.6) (5.6)
Income tax expense 1.3 (6.5) (2.1)
--- ----- -----
(benefit)................................................
Net income (loss)............................................. 2.5% (11.1)% (3.5)%
=== ====== =====
</TABLE>
Year Ending December 31, 1998 Compared to Year Ending December 31, 1997
Net Sales. Net sales decreased 5.0% to $61.4 million in 1998 from $64.5 million
in 1997. Unit sales of modems in 1998 increased 7.3% over 1997, but the average
selling price for modems declined by more than 10%. In 1998 as compared to 1997,
the Company's sales to retailers and distributors in the United States decreased
by 6.0% to $42.8 million and the Company's worldwide sales to OEM customers
decreased by 9% to $5.2 million. The Company's international sales to retailers
and distributors held constant at $13.4 million in 1998 and 1997.
Gross Profit. Gross profit as a percentage of net sales increased to 27.2% in
1998 from 12.7% in 1997. Although average selling prices for modems declined
year over year, the cost of materials and manufacturing costs, including
obsolescence and scrap expense, declined to a greater extent, yielding increased
gross margins. In addition, channel price protection was less of a negative
impact on gross profit in 1998 than in 1997. Gross profit for 1998 included the
favorable impact of advantageously negotiated purchases of modem materials.
These purchases continued in the first quarter of 1999. The impact of these
favorable purchases is expected to be realized as units are sold during 1999.
The net impact in gross margin in 1999 is unclear because of expected continued
erosion of analog modem selling prices.
Selling Expenses. Selling expenses increased 6.3% to $11.8 million or 19.2% of
net sales in 1998 from $11.1 million or 17.2% of net sales in 1997. The dollar
increase was primarily the result of increases in advertising and promotions in
Zoom's direct sales channel, added technical support personnel and services, and
increased commission expenses.
General and Administrative Expenses. General and administrative expenses were
relatively unchanged from 1997 to 1998. General and administrative expenses were
$5.0 million or 8.1% of net sales in 1998 compared to $5.0 million or 7.7% of
net sales in 1997. Lower personnel costs and bad debt expenses were offset by
increased legal expenses.
Research and Development Expenses. Research and development expenses increased
6.4% to $4.5 million or 7.3% of net sales in 1998 from $4.2 million or 6.5% of
net sales in 1997. The increase in expenses was primarily due to additional
personnel consistent with the broadening of the Company's non-modem and
international modem product lines and the integration of Lucent Technologies
modem chipsets into some of the Company's 56K modem product line. Amortization
of licenses and higher costs for recruiting and consulting increased in 1998
while the costs of foreign and domestic government approvals decreased.
Interest Income. Net interest income increased to $840,044 in 1998 from a net
interest income of $503,680 in 1997. The increase was the result of the
Company's higher average cash balances and higher interest rates during 1998
compared to 1997.
Other Income Net. Other income and non-interest income decreased slightly
to $233,979 in 1998 from $237,273 in
1997.
Provision for Income Taxes. The Company's effective tax rate
remained unchanged from 1997 at approximately 37.0%.
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 26.0% to $45.4
million in 1997, non-OEM sales outside North America decreased 28.0% to $13.4
million, and worldwide OEM sales decreased 70.0% 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 35.0% 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
42.0% 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.
Liquidity and Capital Resources
On December 31, 1998, the Company had working capital of $33.4 million,
including $18.9 million in cash and investment securities. The Company also has
a secured $5 million line of credit expiring October 1, 1999. No amounts were
outstanding under this line of credit as of December 31, 1998. This line of
credit bears interest at the bank's prime rate (7.75% on December 31, 1998). The
line of credit is secured and contains certain financial and other covenants. On
December 31, 1998 the Company was in full compliance with all covenants.
In 1998 the Company's net cash provided by operating activities was
approximately $8.2 million. During that period inventory and accounts receivable
decreased by $3.1 million and $6.1 million, respectively. The decrease in
inventory was primarily due to lower sales in the fourth quarter of 1998 as
compared to sales in the fourth quarter of 1997 and the Company's efforts to
reduce inventory levels. The decrease in accounts receivable was primarily
attributable to lower sales and improved collections in 1998 as compared to
sales in 1997. These sources of cash were partially offset by the reduction of
accounts payable and accrued expenses of $2.9 million, and the Company's $2.1
million net loss. In 1998 the Company also recovered approximately $3.7 million
in previously paid income taxes as a result of carrying back available net
operating losses.
The Company's capital expenditures in 1998 of approximately $0.7 million
consisted primarily of the Company's computer hardware and software, purchases
of other equipment and tooling, and continued renovations to its headquarters.
Subsequent to the year ended December 31, 1998 the Company has entered into
agreements with Hayes Microcomputer Products, Inc. to purchase various assets,
rights and inventory in a public bankruptcy auction for approximately $5.0
million. As of March 19, 1999 the Court has filed the acceptance of the majority
of the Company's bids.
See Note 15 to the Consolidated Financial Statements.
The Company believes that its existing cash and investment securities, together
with funds generated from operations and available sources of financing, will be
sufficient to meet its normal working capital requirements for the foreseeable
future.
Year 2000 Readiness Statement
The year 2000 issue is the potential for system and processing failure of
date-related data and the result of computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. Systems that do not properly recognize
date-sensitive information when the year changes to 2000 could generate system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar ordinary business activities.
The Company is evaluating the year 2000 issue with respect to its financial and
management information systems, its products and its suppliers. At this point in
its assessment, the Company is not currently aware of any year 2000 problems
that are reasonably likely to have a material effect on the Company's business,
mission critical systems, results of operations or financial condition, without
taking into account the Company's efforts to avoid such problems.
The Company is completing its review of its management and information systems
for year 2000 compliance and has identified application software and hardware
which must be upgraded to become year 2000 compliant. The Company intends to
generally upgrade its management and information systems in conjunction with its
upgrade to become year 2000 compliant by September 1999. The Company believes
that the cost of this upgrade will be approximately $100,000 to $300,000, the
majority of which will be capitalized. There is a risk that, notwithstanding its
internal review, if the Company has not properly identified all year 2000
compliance issues with respect to its management and information systems, the
Company may not be able to implement all necessary changes to these systems on a
timely basis and within budget. Such a failure could result in a material
disruption to the Company's business, including the inability to track and
timely fill orders, which could have a material adverse effect on its business,
results of operations and financial condition.
The Company has evaluated its current products and believes that they are year
2000 compliant. The Company has also undertaken a general review of modems
previously sold by it that may continue to be under warranty to determine
whether those products are year 2000 compliant. Based upon its preliminary
assessment, the Company believes that the proper operation of its modems are not
date dependent and therefore should continue to function properly on and after
the year 2000. In order to assure that this is the case, the Company is seeking
information from its major suppliers, particularly of its modem chipsets, to
confirm that they have been year 2000 compliant. The Company has sent a year
2000 Readiness Letter/Questionnaire to its major suppliers and initial responses
from the Company's chipset manufacturers have confirmed the Company's
understanding that the chipsets used by the Company are not date sensitive and
are therefore year 2000 compliant. However, the Company cannot assure that its
chipset manufacturers will provide the Company with accurate information
regarding their year 2000 compliance. Should any critical components
incorporated in the Company's products fail to be year 2000 compliant, such
failure could result in warranty claims and have a material adverse effect on
its business, results of operations and financial condition.
The Company's products and software are often sold to be integrated into or
interface with third party equipment or software. In addition, the Company often
packages its modems for retail sale with software provided by other vendors. The
Company does not alter this software in any date sensitive way. The Company is
in the process of seeking information from its software vendors to assure that
the software packaged with its products will be year 2000 compliant, and has
sent a year 2000 Readiness Letter/Questionnaire to its major software suppliers.
While it is possible that some of this software may be adversely affected by the
year 2000, the Company is not aware of any packaged software having this
problem. Failure of third-party equipment or software to operate properly with
regard to the year 2000 and thereafter could require the Company to incur
unanticipated expenses to remedy any problems, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company is also exposed to the risk that it could experience material
shipment delays from its major component suppliers or contract assemblers or
material sales delays from its major customers due to year 2000 issues relating
either to their management information or production systems. The Company has
inquired of these suppliers and contract assemblers in an attempt to ascertain
their year 2000 readiness. At this time, the Company is unable to estimate the
nature or extent of any potential adverse impact resulting from the failure of
third parties, such as its suppliers, and contract assemblers and customers, to
achieve year 2000 compliance. Moreover, such third parties, even if year 2000
compliant, could experience difficulties resulting from year 2000 issues that
may affect their suppliers, service providers and customers. As a result,
although the Company does not currently anticipate that it will experience any
material shipment delays from their major product suppliers or any material
sales delays from its major customers due to year 2000 issues, these third
parties could experience year 2000 problems that could have a material adverse
effect on the Company's business, results of operations and financial condition.
Other than its activities described above, the Company does not have and does
not plan to develop a contingency plan to address Y2K issues. Should any
unanticipated significant Y2K issues arise, the Company's failure to implement
such a contingency plan could have a material adverse affect on its business,
financial condition and results of operation.
To the extent that the Company does not identify any material non-compliant year
2000 issues affecting the Company or third parties, such as the Company's
suppliers, service providers and customers, the most reasonably likely worst
case year 2000 scenario is a systemic failure beyond the control of the Company,
such as a prolonged telecommunications or electrical failure, or a general
disruption in United States or global business activities that could result in a
significant economic downturn. The Company believes that the primary business
risks, in the event of such failure or other disruption, would include but not
be limited to, loss of customers or orders, increased operating costs, inability
to obtain inventory on a timely basis, disruptions in product shipments, or
other business interruptions of a material nature, as well as claims of
mismanagement, misrepresentation, or breach of contract, any of which could have
a material adverse effect on the Company's business, results of operations and
financial condition.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established a fixed conversion rates between their existing sovereign currencies
and the euro. As of January 1, 2002, the transition to the euro will be
complete. The Company has significant operations within the European Union and
is currently preparing for the euro conversion. The euro may impact general
economic conditions such as interest and foreign exchange rates within the
participating countries or in other areas where the Company operates. The
Company is in the process of analyzing the impact of the euro with a view to
minimizing the effects on the Company's operations. The Company does not expect
the costs of upgrading its systems to be material.
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. As a result, the impact
of and economic conditions relating to the euro (including fluctuations in
foreign currency exchange rates, particularly with respect to the U.S. dollar)
may have a material adverse affect on the demand for the Company's products as
well as on the Company's business, financial condition and results of
operations.
Recently issued Accounting Standards
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. This Statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The adoption of
this Statement is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
The AICPA Accounting Standards Executive Committee recently issued Statement of
Position (`SOP") 98-1, Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use. This SOP requires that certain costs related to the
development and purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software, and is effective for fiscal
years beginning after December 15, 1998. The SOP also requires that costs
related to the preliminary project stage and post implementation/operations
stage in an internal-use computer software development project be expensed as
incurred. The adoption of this SOP is not expected to have a material impact on
the Company's consolidated financial position or results of operations.
The AICPA Accounting Standards Executive Committee recently issued SOP 98-5,
Reporting on the Costs of Start-up Activities. This SOP requires that costs
incurred during start-up activities, including organization costs, be expensed
as incurred, and is effective for the fiscal years beginning after December 15,
1998. The adoption of this SOP is expected to have no impact on the Company's
consolidated financial position or results of operations.
ITEM 7A.
The Company owns financial instruments that are sensitive to market risks as
part of its investment portfolio. The investment portfolio is used to preserve
the Company's capital until it is required to fund operations, including the
Company's research and development activities. None of these market-risk
sensitive instruments are held for trading purposes. The Company does not own
derivative financial instruments in its investment portfolio. The investment
portfolio contains instruments that are subject to the risk of a decline in
interest rates.
Investment Rate Risk - The Company's investment portfolio includes debt
instruments that are primarily United States government bonds and high grade
corporate bonds of less than three years in duration. These bonds are subject to
interest risk, and could decline in value if interest rates fluctuate. The
Company's investment portfolio also consists of certain commercial paper, which
is also subject to interest rate risk. Due to the short duration and
conservative nature of these instruments, the Company does not believe that it
has a material exposure to interest rate risk.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ZOOM TELEPHONICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Index to Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1998
Consolidated Statements of Operations for the years ending December 31, 1996,
1997 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the years ending
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ending December 31, 1996,
1997 and 1998
Notes to Consolidated Financial Statements
Schedule II: Valuation and Qualifying Accounts for Fiscal Years Ending December
31, 1996, 1997 and 1998
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 1999 annual
meeting which will be filed with the SEC in April 1999 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", in the Company's definitive proxy
statement for its 1999 annual meeting which will be filed with the SEC in April
1999, 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 1999 annual meeting which
will be filed with the SEC in April 1999, 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
(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 1990 Stock Option Plan, as amended, of Zoom Telephonics, Inc.,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1998. *
**10.2 1991 Director Stock Option Plan, as amended, of Zoom Telephonics,
Inc., filed as Exhibit 10.2 to the Quarterly Report on form 10-Q
for the fiscal quarter ended June 30, 1996 ("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, filed as
Exhibit 10.3 to the Annual Report on form 10-K for the fiscal
year ended December 31, 1997 ("the 1997 Form 10-K"). *
10.4 Loan Modification Agreement by and between Zoom Telephonics,Inc
and Fleet National Bank, filed as Exhibit 10.4 to the 1997
Form 10-K. *
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 Promissory Note issued by Zoom Telephonics, Inc. in favor of
Fleet National Bank.
10.8 Security Agreement between the Company and Fleet National Bank,
filed as Exhibit 10.8 to the 1997 Form 10-K. *
**10.9 Employment Agreement,filed as Exhibit 10.9 to the 1997
Form 10-K.*
10.10 Second Loan Modification Agreement by and between Zoom
Telephonics, Inc. and Fleet National Bank.
11. Statement re computation of per share earnings.
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.
(b) Reports on Form 8-K.
No current 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.
* 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, 1999
- - --------------------------
Frank B. Manning Chairman of the Board
/s/ Robert A. Crist Principal Financial and Accounting Officer March 31, 1999
- - -----------------------------
Robert A. Crist
/s/ Peter R. Kramer Director March 31, 1999
- - --------------------------
Peter R. Kramer
/s/ Bernard Furman Director March 31, 1999
Bernard Furman
/s/ L. Lamont Gordon Director March 31, 1999
- - --------------------------
L. Lamont Gordon
J. Ronald Woods Director March 31, 1999
- - --------------------------
J. Ronald Woods
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1997
and 1998
Consolidated Statements of Operations for the years ending December 31, 1996,
1997 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the years ending
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ending December 31, 1996,
1997 and 1998 Notes to Consolidated Financial Statements
Schedule II: Valuation and Qualifying Accounts for Fiscal Years Ending December
31, 1996, 1997 and 1998
<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 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1998. 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 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 10, 1999, except for
Note 15, which is as of March 19, 1999
<PAGE>
ZOOM TELEPHONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
<S> <C> <C>
Assets 1997 1998
------ ----- ----
Current assets:
Cash and cash equivalents $ 11,281,337 $ 5,324,579
Investment securities 13,529,052
-
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of
$4,518,206 in 1997 and $5,687,751 in 1998 (note 9) 13,365,413 7,244,374
Inventories (note 3) 12,034,349 8,893,269
Refundable income taxes 3,793,963 63,378
Net deferred tax assets (note 8) 2,388,189 3,226,233
Prepaid expenses and other current assets 212,989 230,355
----- ----------
Total current assets 43,076,240 38,511,240
---------- ----------
Property, plant and equipment, net (note 4) 3,967,767 3,748,303
Goodwill, net of accumulated amortization of $241,039 in 1997 1,393,874 1,226,184
and $408,728 in 1998 (note 11)
Other assets 74,668 77,392
--------- ----------
Total assets $ 43,560,39 $ 48,515,273
========= ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 6,204,370 $ 3,326,391
Accrued expenses 1,808,308 1,808,637
--------- ---------
Total current liabilities 8,012,678 5,135,028
Commitments and contingencies (note 5)
Stockholders' equity (note 7):
Common stock, no par value. Authorized 25,000,000 shares;
issued and outstanding 7,472,371 shares at December 31,
1997 and 7,474,871 shares at December 31, 1998 25,170,267 25,190,579
Retained earnings 15,332,328 13,180,234
Accumulated other comprehensive income - 54,554
---------- ----------
Total stockholders' equity $ 40,502,595 $ 38,425,367
========== ==========
Total liabilities and stockholders' equity $ 43,560,395 $ 48,515,273
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ending December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net sales (notes 9 and 14) $ 100,195,021 $ 64,478,457 $ 61,364,385
Cost of goods sold 79,803,297 56,298,264 44,651,448
----------- ---------- ----------
Gross profit 20,391,724 8,180,193 16,712,937
----------- ----------- ----------
Operating expenses:
Selling 10,215,528 11,103,437 11,800,948
General and administrative 3,674,134 4,956,916 4,976,433
Research and development 2,940,153 4,182,220 4,449,093
------------ ----------- -----------
16,829,815 20,242,573 21,226,474
----------- ---------- ----------
Operating income (loss) 3,561,909 (12,062,380) (4,513,537)
Interest income 233,963 503,680 840,044
Other, net 58,551 237,273 233,979
------------- ------------ ------------
Total other income (expense), net 292,514 740,953 1,074,023
------------ ------------ -----------
Income (loss) before income taxes 3,854,423 (11,321,427) (3,439,514)
Income tax expense (benefit) (note 8) 1,374,501 (4,189,266) (1,287,420)
--------- ------------ ------------
Net income (loss) $ 2,479,922 $ (7,132,161) $ (2,152,094)
=========== =========== ===========
Net income (loss) per share (note 2):
Basic $ .35 $ (.95) $ (.29)
===
Diluted $ .35 $ (.95) $ (.29)
=== ===== =====
Weighted average common and common equivalent shares:
Basic 7,068,314 7,468,758 7,474,371
========= ========= =========
Diluted 7,162,391 7,468,758 7,474,371
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
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
Comprehensive income 2,479,922
Net proceeds from stock offering 800,000 11,573,218 11,573,218
Stock issuance for product
line acquisition (note 11) 102,641 1,590,929 - - 1,590,929
Exercise of stock options (note 7) 343,271 2,825,543 - - 2,825,543
Tax effect of exercises of nonqualified
stock options (notes 7 and 8) - 1,611,201 - - 1,611,201
-------------------- --------- ------------------------------------------------
Balance at December 31, 1996 7,446,842 $ 24,890,468 $ 22,464,489 - $ 47,354,957
Net loss - - (7,132,161) - (7,132,161)
Comprehensive income (loss) - (7,132,161)
Exercise of stock options (note 7) 25,529 204,232 - - 204,232
Tax effect of exercises of nonqualified
stock options (notes 7 and 8) - 75,567 - - 75,567
-------------- ------ --------- ------- ------------
Balance at December 31, 1997 7,472,371 $ 25,170,267 $ 15,332,328 $ 40,502,595
-
Net loss - (2,152,094) (2,152,094)
- -
Unrealized holding gain - 54,554 54,554
Comprehensive income (loss) - (2,097,540)
- - -
Exercise of stock options (note 7) 2,500 - - 20,312
----------- ------------- ------------- --------------- -------------
Balance at December 31, 1998 7,474,871 $ 25,190,579 $ 13,180,234 $ 54,554 $ 38,425,367
========= ============= ============= =============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ending December 31, 1996, 1997 and 1998
<S> <C> <C> <C>
1996 1997 1998
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 2,479,922 $ (7,132,161) $ (2,152,094)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 674,162 1,116,443 1,081,987
Net deferred income taxes (519,222) (355,506) (838,044)
Changes in assets and liabilities:
Accounts receivable 1,426,273 5,604,628 6,121,039
Inventories 5,211,667 7,023,226 3,141,080
Prepaid expenses and other current assets (715,728) 400,118 (15,866)
Refundable income taxes (1,219,000) (2,574,963) 3,730,585
Accounts payable and accrued expenses (10,156,983) (1,414,519) (2,877,649)
Income taxes payable (236,493) -
-
Tax benefit from exercise of nonqualified
stock options 1,611,201 75,567
----------- ------------ ---------
Net cash provided by (used in)
operating activities (1,444,201) 2,742,833 8,191,038
----------- ---------- ---------
Cash flows from investing activities:
Purchases of investment securities - - (13,474,498)
- - - (13,474,498)
Purchase of certain assets of a business product line (81,375) - -
Additions to licenses - -( 133,000)
Additions to property, plant and equipment (1,351,670) (837,914) (560,610)
---------- --------- -------------
Net cash used in investing activities (1,433,045) (837,914) (14,168,108)
----------- ----------- ------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving
bank line of credit (note 6) (2,500,000) -
-
Net proceeds from issuance of common stock 11,573,218 -
-
Exercise of nonqualified stock options 2,825,543 204,232 20,312
----------- ------------ -------------
Net cash provided by financing activities 11,898,761 204,232 20,312
---------- ------------ -------------
Net increase (decrease) in cash and cash equivalents 9,021,515 2,109,151 (5,956,758)
---------- ----------- ------------
Cash and cash equivalents at beginning of year 150,671 9,172,186 11,281,337
----------- ----------- ----------
Cash and cash equivalents at end of year $ 9,172,186 $ 11,281,337 $ 5,324,579
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
Years Ending December 31, 1996, 1997 and 1998
(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
Theconsolidated financial statements are prepared in accordance with
United States generally accepted accounting principles and are stated
in US dollars. Any differences between US and Canadian generally
accepted accounting principles would have an insignificant impact on
the consolidated financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results may
differ from those estimates.
(b) Principles of Consolidation
Theconsolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Zoom US, and all of its
wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
(c) Cash and Cash Equivalents
TheCompany considers all investments with original maturities of less
than 90 days to be cash equivalents.
(d) Investment Securities
On December 31, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Previously, the
Company's investments had maturities of less than ninety days. The
Company's investment securities are classified as available-for-sale.
Available-for-sale securities are stated at fair value and unrealized
gains and losses are excluded from earnings, and are reported as a
separate component of other comprehensive income until realized. The
cost of securities sold is based on the specific identification
method and interest earned is included in Other Income
(e) Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method.
(f) 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.
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(g) 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.
(h) Income Taxes
TheCompany accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax 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.
(i) Earnings (Loss) Per Common Share
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding
during the period. Diluted loss 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 beginning 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1997 1998
---- ---- ----
Basic weighted
average shares outstanding 7,068,314 7,468,758 7,474,371
Net effect of dilutive
Potential common
Shares outstanding, based
on the treasury stock method 94,077 - -
---------- ------------- -----------
Diluted weighted
average shares outstanding 7,162,391 7,468,758 7,474,371
========= ========= =========
</TABLE>
Potential common shares for which inclusion would have the effect of
increasing diluted earnings per share (i.e., antidilutive) are excluded
from the computation. Anti-dilutive potential common shares outstanding
at December 31, 1996, 1997 and 1998 were 252,786, 83,573, and 744,111
respectively.
(j) Revenue Recognition
Sales are recognized upon shipment of products to customers, at which
time the Company records provisions for returns, warranty and price
protection.
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(k) Financial Instruments
Financial instruments of the Company consist of cash and cash
equivalents, investment securities, accounts receivable, accounts
payable and accrued expenses. The carrying amount of these financial
instruments approximates fair value.
(l) Stock Based Compensation
The Company applies Accounting Principles Board Opinion No. 25 (APB
25), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock option plans. No
compensation cost has been recognized for these plans in the
accompanying financial statements.
(m) Advertising Costs
Advertising costs are expenses as incurred and 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.
<TABLE>
<CAPTION>
(3) Inventories
Inventories consist of the following at December 31:
<S> <C> <C> <C>
1997 1998
---- ----
Raw materials $ 7,261,914 $ 5,021,373
Work in process 2,542,260 1,764,123
Finished goods 2,230,175 2,107,773
--------- ---------
$ 12,034,349 $ 8,893,269
=========== =========
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31:
Estimated
1997 1998 useful lives
---- ---- ------------
Land $ 309,637 $ 309,637 -
Buildings and improvements 2,097,043 2,205,439 31.5 years
Leasehold improvements 470,777 470,777 5 years
Computer hardware and software 1,919,412 2,156,984 3 years
Machinery and equipment 444,126 523,971 5 years
Molds, tools and dies 961,968 1,129,028 5 years
Office furniture and fixtures 523,936 491,673 5 years
------- -------
6,726,899 7,287,509
Less accumulated depreciation 2,759,132 3,539,206
--------- ---------
$ 3,967,767 $ 3,748,303
========= =========
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(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 at a fair market value.
The Company also leases office space in Dallas, Texas. Under
non-cancelable operating leases, rent expense was $275,673, $392,010
and 334,469 for the years ending December 31, 1996, 1997 and 1998,
respectively. Future minimum rental payments, excluding executory
costs, required under these operating leases are as follows:
Year Total
1999 $ 348,426
2000 348,426
2001 $ 203,249
(6) Credit Lines
TheCompany has a secured $5 million line of credit expiring on October
1, 1999. No amounts were outstanding under this line of credit at
December 31, 1999 or 1998. The line of credit bears interest at the
bank's prime rate (7.75% at December 31, 1998). The line of credit
contains certain financial and other covenants. On December 31, 1998
the Company was in full compliance with all covenants. The Company
anticipates that it will renew the line of credit prior to
expiration.
(7) Stock Option Plans
At December 31, 1998 the Company had three stock option plans, which are
described below:
Employee Stock Option Plan
TheEmployee 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 2,800,000 shares of common stock for the
granting of employee stock options. Shares of common stock were
registered for issuance under the 1998 Employee Equity Incentive
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>
<S> <C> <C>
Number of shares exercise price
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
-------- ----
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
Balance at December 31, 1997 602,300 8.07
Granted 574,102 6.53
Exercised (2,500) 8.12
Expired (43,900) 8.12
------- ----
Balance at December 31, 1998 1,130,002 $ 8.09
========= ====
</TABLE>
The following table summarizes information about fixed stock options under the
Employee Stock Option Plan outstanding at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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
$ 4.13 to $ 17.50 1,130,002 2.20 $ 7.29 330,729 $ 9.59
================= =========== ==== ==== ======= ==============
</TABLE>
The Company recognized a tax benefit of $1,611,201 and $75,567 in 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. The Directors 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. There
are 198,000 shares authorized for issuance. Each option shall expire two
years from the grant date. Options outstanding under this plan are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Weighted average
Number of shares exercise price
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
Granted 36,000 6.94
Exercised - -
Expired (36,000) 13.96
-------- -----
Balance at December 31, 1998 72,000 $ 7.41
====== ====
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
The following table summarizes information about fixed stock options under the
Directors Plan at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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
$ 6.94 to $8.69 72,000 .8 years $ 7.89 36,000 $ 8.69
</TABLE>
1998 Employee Equity Incentive Stock Option Plan
The1998 Employee Equity Incentive Stock Option Plan (the "1998 Plan")
was adopted to attract and retain employees and provide an incentive
for them to assist Zoom Telephonics, Inc. (the "Company") to achieve
long-range performance goals, and to enable them to participate in
the long-term growth of the Company. Non-employee directors of the
Company and certain officers of the Company are not entitled to
participate under this plan. The 1998 Plan provides for the
availability of 300,00 shares of common stock for the granting of
employee stock options. Under this plan, stock options may be granted
at the discretion of the Stock Option Committee of the Board of
Directors at an option price determined by the Stock Option
Committee. All options under this grant have been at fair market
value on the date of the grant. The options are exercisable in
accordance with terms specified by the Stock Option Committee.
Options outstanding under this plan are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Number of shares exercise price
Balance at December 31, 1997 - $ -
Granted 27,650 4.13
Exercised - -
Expired - -
----------- ---------
Balance at December 31, 1998 27,650 $ 4.13
====== ======
</TABLE>
The following table summarizes information about fixed stock options under the
Employee Stock Option Plan outstanding at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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
$ 4.13 27,650 2.90 $ 4.13 - $ -
====== ====== ===== ==== ====
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
At December 31, 1998, there were 1,182,950 additional shares available for
grant under all three Plans. The per share weighted-average fair value of
stock options granted during 1996, 1997 and 1998 was $4.03, $4.43, and
$3.70, respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1996 -
expected dividend yield 0.0%, risk-free interest rate of 5.05%, volatility
70% and an expected life of 2.9 years; 1997 - expected dividend yield 0.0%,
risk-free interest rate of 5.69%, volatility 70% and an expected life of 3.5
years; 1998 - expected dividend yield 0.00%, risk-free interest rate of
5.50%, volatility 88% and an expected life of 2.8 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>
<S> <C> <C> <C> <C>
1996 1997 1998
---- ---- ----
Net income (loss) As reported $ 2,479,922 $ (7,132,161) $(2,152,094)
Pro forma 2,100,665 (7,718,857) (2,883,787)
Net income (loss) per share As reported-basic $ .35 $ (0.95) $ (.29)
Pro forma-basic .29 (1.03) (.39)
As reported-diluted $ .35 $ (0.95) $ (.29)
Pro forma-diluted .29 (1.03) (.39)
Pro forma net income (loss) reflects only options granted since January 1, 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.
</TABLE>
(8) Income Taxes
Income tax expense (benefit) attributable to income from operations
consists of:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Current Deferred Total
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)
=========== ======== ===========
Year ending December 31, 1998:
US federal $ 181,609 $(1,295,053)$ (1,113,444)
State and local (630,985) 457,009 (173,976)
-------- ---------- ---------
$ (449,376) $ (838,044) $ (1,287,420)
========= ======== ===========
</TABLE>
<PAGE>
(Continued)
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
Income tax expense (benefit) was $1,374,501, ($4,189,266), and
($1,287,420) for the years ending December 31, 1996, 1997 and 1998,
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>
<S> <C> <C> <C>
1996 1997 1998
---- ---- ----
Computed "expected" US tax expense (benefit) $ 1,310,504 $ (3,849,285) $(1,169,435)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit 112,604 (547,555) (114,824)
Tax benefit from foreign sales corp. (66,271) - -
Other, net 17,664 207,574 (3,161)
------ -------- ----------
$ 1,374,501 $ (4,189,266) $ (1,287,420)
=========== ============ ==========
Total income tax expense (benefit) was allocated as follows: 1996 1997 1998
---- ---- ----
Income (loss) from operations $ 1,374,501 $ (4,189,266) $ (1,287,420)
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial statement purposes (1,611,201) (75,567) -
----------- -------- --------------
$ (236,700) $ (4,264,833) $ (1,287,420)
========= =========== ===========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1998 are presented below:
1997 1998
---- ----
Deferred tax assets:
Inventories, primarily non-deductible reserves $ 541,266 $ 1,186,445
Accounts receivable, primary returns and allowances 705,046 1,276,054
Accrued expenses, principally provisions not
currently deductible 335,489 234,473
Net operating loss carryforwards and credits 714,035 316,558
Other 118,732 212,703
Total current gross deferred tax assets 2,414,568 3,226,233
---------
Total gross deferred tax assets $ 2,414,568 $ 3,226,233
========= =========
Deferred tax liability:
Property, plant and equipment, principally due to differences in
depreciation (26,379) -
-------- --------------
Net deferred tax assets $ 2,388,189 $3,226,233
========= ==========
</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 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.
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(9) Significant Customers
Onecustomer accounted for approximately 15% of net sales for the year
ending December 31, 1996 and 17% of net sales for the year ending
December 31, 1997. Two customers accounted for approximately 20% and
14% of net sales for the year ending December 31, 1998. At December
31, 1997, two customers comprised approximately 42% of net accounts
receivable. At December 31, 1998, two customers comprised
approximately 40% of net accounts receivable.
(10) Financial Instruments
TheCompany 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.
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, 1997
and 1998 foreign currency gains and losses were not material. At
December 31, 1998, the Company's foreign currency-denominated net
assets were not material. The Company has no involvement with
derivative financial instruments.
(11) Product Line Acquisition
On June 24, 1996, the Company issued 102,641 shares of common stock to
acquire certain assets, including inventory and property and
equipment, associated with a product line of Tribe Computer Works,
Inc. The acquisition was recorded using the purchase method of
accounting, whereby the net assets acquired were recorded at their
estimated fair values and the excess of cost over the fair value of
the assets acquired of $1,634,913 was allocated to goodwill and is
being amortized over 10 years.
(12) Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1997 1998
---- ---- ----
Cash paid during year for interest $ 169,248 $ - $ -
======= =========== ==========
Cash paid during year for income taxes $ 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 in 1996 and $75,567 in 1997.
These noncash transactions have been excluded from the statement of
cash flows.
(13) Dependence on Key Suppliers
The Company produces its products using components or subassemblies
purchased from third-party suppliers. In 1996 and 1997, the Company
purchased substantially all of its modem chipsets from a single
supplier, Rockwell. In 1998, the Company decided to also purchase
chipsets from Lucent Technologies, with a goal of maintaining good
supply relationships with both Conexant (formerly Rockwell) and
Lucent. This approach has potential strategic and tactical advantages,
but also has risks including the likelihood of degrading Zoom's
business relationship with Conexant, the risk of poor execution of the
transition of some products to Lucent, and other risks associated with
using a new supplier and new product designs for modems that represent
a significant percentage of Zoom's revenues. An interruption in the
delivery of these components could have a material adverse effect on
the Company's results of operations.
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(14) Segment and Geographic Information
During 1998, the Company adopted Financial Accounting Standards Board
Statement of Financial Standards No. 131 ("SFAS 131") "Disclosures
About Segments of an Enterprise and Related Information."" The
Company's operations are classified into one reportable segment.
Substantially all of the Company's operations and long-lived assets
reside primarily in the United States. The Company's domestic net
sales and export sales to Europe and other locations for 1996, 1997,
and 1998 were comprised as follows:
1996 % of Total 1997 % of Total
1998
% of Total
---- ---------- ---- ----------
North America $ 73,085,465 73% $ 52,227,550 81%
$ 50,489,521 82%
Europe 18,227,729 18% 6,447,846 10%
8%
Other 8,881,827 9% 5,803,061 9%
10%
--------- -- --------- --
-------
---
6,264,755
Total $ 64,478,457 100% $ 61,364,385
100%
===========
(15) Subsequent Event
In March 1999, the Company entered into a series of separate agreements
to purchase various assets, licenses, and inventory from Hayes
Microcomputer Products, Inc. Hayes engaged in the business of design,
manufacture, and support of computer communications products for
business, government, and consumers worldwide. On October 9, 1998
Hayes filed for reorganization under Chapter 11 of the United States
Bankruptcy Code, Case No. 98-2276 through 98-2281, in the United
States Bankruptcy Court ("the Court"). The Company has paid
approximately $5.0 million in aggregate for all of the assets of
Hayes Microcomputer Products Inc. Europe Region, product and rights
for the American modem business, ADSL and cable modem equipment, and
some inventory. On March 19, 1999 the Court filed the Company's
acceptance for the American modem business, completing the majority
of the purchases. At this time the proceedings are ongoing and the
Company is involved in the bidding for some remaining assets. The
purchases are not subject to any financing and are being paid for
through the Company's cash balances. The Company intends to continue
production, sales, and support of most of the more popular Hayes
modems under the Hayes name. The acquisition will be accounted for as
a purchase.
<PAGE>
EXHIBIT INDEX
(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 1990 Stock Option Plan, as amended, of Zoom Telephonics, Inc.,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1998. *
**10.2 1991 Director Stock Option Plan, as amended, of Zoom Telephonics,
Inc., filed as Exhibit 10.2 to the Quarterly Report on form 10-Q
for the fiscal quarter ended June 30, 1996 ("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, filed as
Exhibit 10.3 to the Annual Report on form 10-K for the fiscal
year ended December 31, 1997 ("the 1997 Form 10-K"). *
10.4 Loan Modification Agreement by and between Zoom Telephonics,Inc
and Fleet National Bank, filed as Exhibit 10.4 to the 1997
Form 10-K. *
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 Promissory Note issued by Zoom Telephonics, Inc. in favor of
Fleet National Bank.
10.8 Security Agreement between the Company and Fleet National Bank
filed as Exhibit 10.8 to the 1997 Form 10-K. *
**10.9 Employment Agreement,filed as Exhibit 10.9 to the 1997
Form 10-K.*
10.10 Second Loan Modification Agreement by and between Zoom
Telephonics, Inc. and Fleet National Bank.
11. Statement re computation of per share earnings.
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.
(b) Reports on Form 8-K.
No current 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.
* 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 10.7. Amended and Restated Promissory Note issued by the Company in
favor of Fleet National Bank
AMENDED AND RESTATED PROMISSORY NOTE
$5,000,000.00 NOVEMBER 17, 1999
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 (except as
provided in the next sentence) 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) October 1, 1999. 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 One Federal Street, Boston, Massachusetts 02110, 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, replaces and restates in its entirety, but does not repay,
that certain promissory note dated November 13, 1997 in the face principal
amount of $5,000,000 made by the Borrower and payable to the order of the Bank.
This note is secured inter alia 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 LOANS AS CONTEMPLATED IN THE LETTER
AGREEMENT.
<PAGE>
Executed, as an instrument under seal, as of the day and year first
above written.
CORPORATE SEAL ZOOM TELEPHONICS, INC.
ATTEST:
/s/_Peter Kramer
___________________
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 10.10. Second Loan Modification by and between Zoom Telephonics,
INC, and Fleet National Bank
SECOND LOAN MODIFICATION AGREEMENT
This Second Loan Modification Agreement ("this Agreement") is made as
of November 17, 1998 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 between the Borrower and the Bank, as amended by Loan
Modification Agreement dated as of November 13, 1997 (as so amended, the "Letter
Agreement"); (ii) that certain $5,000,000 face principal amount promissory note
dated November 13, 1997 (the "1997 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 dated November 13, 1997 (the "Zoom Security
Agreement") given by the Borrower to the Bank; (vi) that certain Inventory and
Accounts Receivable Security Agreement dated November 13, 1997 (the "Tribe
Security Agreement") given by Tribe to the Bank; (vii) that certain Inventory
and Accounts Receivable Security Agreement dated November 13, 1997 (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
"1998 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 1998 Revolving Note hereinafter collectively referred to as the "Financing
Documents". The aforesaid November 13, 1997 Loan Modification Agreement is
hereinafter referred to as the "First Modification".
2. The Letter Agreement is hereby amended, effective as of the date
hereof:
a. By inserting into the first grammatical paragraph of the Letter
Agreement, immediately after the first sentence thereof, the following:
"This letter agreement provides for (1) a $5,000,000 facility
for Revolving Loans on the terms and conditions set forth
below, plus (2) a $500,000 facility for letters of credit on
the terms and conditions set forth below, plus (3) a $500,000
facility for Foreign Exchange Contracts on the terms and
conditions set forth below."
b. By deleting from the second sentence of Section 1.1 of the Letter
Agreement the words "Aggregate Bank Liabilities" and by substituting in their
stead the following:
"total principal amounts of the Revolving Loans outstanding"
c. 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 17, 1998 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 1998
Revolving Note.
d. By inserting into the first sentence of the second paragraph of
Section 1.9 of the Letter Agreement, immediately after the words "any letter of
credit", the following:
"and/or with respect to any of the other Obligations"
e. By deleting the period at the end of the second sentence of the
second paragraph of Section 1.9 of the Letter Agreement and by substituting in
its stead the following:
"or with respect to any of the other Obligations."
f. By inserting into each of the first and second sentences of the
third paragraph of Section 1.9 of the Letter Agreement, immediately after the
words "any letter of credit", in each place where same appear, the following:
"and/or with respect to any of the other Obligations"
g. By inserting into the third sentence of the third paragraph of
Section 1.9 of the Letter Agreement, immediately after the words "the Revolving
Note", the following:
"and/or with respect to any letter of credit or any of
the other Obligations"
h. By deleting from the third sentence of the third paragraph of
Section 1.9 of the Letter Agreement the words "75 State Street, Boston, MA
02109" and by substituting in their stead the following:
"One Federal Street, Boston, MA 02110"
i. By deleting in its entirety the fifth sentence of the third
paragraph of Section 1.9 of the Letter Agreement and by substituting in its
stead the following:
"All monies received by the Bank shall be applied first to
fees, charges and expenses payable to the Bank under this
letter agreement, any Note and/or any of the other Loan
Documents and/or with respect to any letter of credit and/or
with respect to any other Obligation, next to interest then
accrued on account of any Loans or letter of credit
reimbursement obligations or any of the other Obligations and
only thereafter to principal of the Loans and letter of credit
reimbursement obligations and other Obligations, being applied
against the Loans, such reimbursement obligations and/or such
other Obligations in such order as the Borrower may designate
(and, failing such designation, being applied first against
the letter of credit reimbursement obligations and such other
Obligations, and thereafter against the Revolving Loans)."
j. By inserting into the last sentence of Section 1.9, immediately
after the words "the Revolving Note", the following:
"and/or with respect to any of the other Obligations"
k. By deleting in its entirety the proviso appearing in the first
sentence of Section 1.10 of the Letter Agreement and by substituting in its
stead the following:
"; provided that at the time of each such issuance and after
giving effect thereto (A) the total Letter of Credit
Liabilities will not exceed $500,000 and (B) the Aggregate
Bank Liabilities will not exceed the then effective Borrowing
Base."
l. By inserting into the second grammatical paragraph of Section 1.11
of the Letter Agreement, immediately after the word "Loan", in each place where
same appears (whether in the introductory clause of said paragraph or in either
of clause (a) or clause (b) thereof), the following:
"(including, without limitation, issuance of any Foreign
Exchange Contract)"
m. By inserting into the first sentence of the last paragraph of
Section 1.11 of the Letter Agreement, immediately after the word "Loan", in each
place where same appears, the following:
"(or the issuance of any Foreign Exchange Contract)"
n. By deleting in its entirety Section 1.12 of the Letter Agreement
(said Section having been inserted by the First Modification) and by
substituting in its stead, the following:
"1.12. Foreign Exchange. The Bank is also providing to the
Borrower 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 October 1, 1999 and will permit Foreign Exchange
Contracts in a maximum aggregate notional amount of $500,000
outstanding at any one time; provided that (i) each such
Foreign Exchange Contract will be at such pricing as the Bank
and the Borrower may agree at the time of execution of such
Foreign Exchange Contract, (ii) the documentation for each
such Foreign Exchange Contract will be in such form as is then
customarily used by the Bank for transactions of this type,
(iii) the Foreign Exchange Contracts will be used by the
Borrower to minimize its exposure to the fluctuation of the
value of those foreign currencies in which payments are
expected to be made to the Borrower by customers or in which
the Borrower is required to make payments to suppliers, and
(iv) the F/X Exposure will at no time exceed $500,000. As used
herein, the `F/X Exposure' as determined at any date means the
sum of (i) all amounts then owed by the Borrower to the Bank
in connection with settlement of any Foreign Exchange
Contract, plus (ii) the maximum two-day settlement amount for
all then outstanding Foreign Exchange Contracts."
o. By inserting into the introductory clause of Section 2.1 of the
Letter Agreement, immediately after the words "letters of credit hereunder", the
following:
"and/or issue Foreign Exchange Contracts"
p. By deleting in their entireties Sections
3.7 - 3.10, inclusive,
of the Letter Agreement and by
substituting in their stead the following:
"3.7. Debt to Capital Base. The Borrower will maintain as at
the end of each fiscal quarter of the Borrower (commencing
with its results as at September 30, 1998) on a consolidated
basis a Leverage Ratio which shall be equal to or less 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
consolidated Indebtedness 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 of the Borrower (commencing with its
results as at September 30, 1998) a consolidated Capital Base
which shall be equal to or greater than $32,800,000.
3.9. Reserved.
3.10. Liquidity. The Borrower will maintain as at the end of
each fiscal quarter of the Borrower (commencing with its
results as at September 30, 1998) a Quick Ratio equal to or
greater than 2.0 to 1. As used herein, the `Quick Ratio', as
determined at any date, is the ratio of (x) Net Quick Assets
at such date to (y) Current Liabilities outstanding as such
date."
q. By deleting the word "and" appearing at the end
of clause (ix) of Section 4.1 of the Letter
Agreement.
r. By deleting the period at the end of Section 4.1 of the
Letter Agreement and by substituting in
its stead the following:
"; and (xi) with the prior written consent of the Bank (such
consent not to be unreasonably withheld so long as there does
not then exist and would not result therefrom any Event of
Default or event or circumstance which, with the passage of
time or the giving of notice or both, could become an Event of
Default (with compliance with each of ss.ss.3.7, 3.8 and 3.10
being measured for this purpose both as at the then most
recent fiscal quarter-end and, on a pro forma basis, as at the
date of incurrence of the relevant Indebtedness)),
Indebtedness which the Borrower may incur from time to time by
financing and/or refinancing its real estate; provided that
such Indebtedness is secured only by a mortgage of such real
estate and the aggregate amount outstanding at any time does
not exceed the fair market value of such real estate."
s. By deleting the word "or" appearing at the end of clause
(v) of Section 4.2 of the Letter
Agreement.
t. By deleting the period at the en
d of clause (vi) of Section 4.2 of the Letter Agreement and by
substituting in its stead the following:
"; or (vii) with the Bank's prior written consent (such
consent not to be unreasonably withheld), mortgages on the
Borrower's real estate securing Indebtedness specifically
permitted by clause (xi) of ss.4.1; provided that no property
of the Borrower other than such real estate is encumbered."
u. By deleting the period at the end of the last grammatical paragraph
of Section 4.2 of the Letter Agreement and by substituting in its stead the
following:
", except that the mortgages described in clause (vii)
above may prohibit junior
encumbrances."
v. By inserting into clause (a) of Section 5.1 of the Letter Agreement,
immediately after the words "issued by the Bank", the following:
"or with respect to any Foreign Exchange Contract"
w. By inserting into clause (b) of Section 5.1 of the Letter Agreement,
immediately after the words "letter of credit", the following:
"or any Foreign Exchange Contract"
x. By adding to Section 5.4 of the Letter Agreement, at the end
of such Section, the following:
"Upon the occurrence of any event described in clause (i) or
clause (ii) of the immediately preceding sentence, the Bank
may also require the Borrower to cash collateralize the
outstanding F/X Exposure."
y. By inserting into the first sentence of Section 6.1 of the Letter
Agreement, immediately after the words "letter of credit issued hereunder", the
following:
"and/or any of the other Obligations"
z. By inserting into the first sentence of Section 6.1 of the Letter
Agreement, immediately after the words "in connection herewith", the following:
"or in connection with any of the other Obligations"
aa. By changing the notice address of the Bank, pursuant to
Section 6.5 of the Letter Agreement, to
the following:
"Fleet National Bank
High Technology Division
Mail Code: MA OF D07A
One Federal Street, 7th Floor
Boston, MA 02110
Attention: Scott D. Wheelock, Vice President"
bb. By inserting into Section 6.6 of the Letter Agreement,
immediately after the third sentence of
such Section, the following:
"Without limitation of the foregoing generality,
(i) The Bank may at any time pledge all or any portion of its
rights under the Loan Documents (including any portion of the
Revolving Note) to any of the 12 Federal Reserve Banks
organized under Section 4 of the Federal Reserve Act, 12
U.S.C. Section 341. No such pledge or the enforcement thereof
shall release the Bank from its obligations under any of the
Loan Documents.
(ii) The Bank shall have the unrestricted right at any time
and from time to time, and without the consent of or notice to
the Borrower, to grant to one or more banks or other financial
institutions (each, a `Participant') participating interests
in the Bank's obligation to lend hereunder and/or any or all
of the Loans held by the Bank hereunder. In the event of any
such grant by the Bank of a participating interest to a
participant, whether or not upon notice to the Borrower, the
Bank shall remain responsible for the performance of its
obligations hereunder and the Borrower shall continue to deal
solely and directly with the Bank in connection with the
Bank's rights and obligations hereunder. The Bank may furnish
any information concerning the Borrower in its possession from
time to time to prospective assignees and Participants;
provided that the Bank shall require any such prospective
assignee or Participant to agree in writing to maintain the
confidentiality of such information to the same extent as the
Bank would be required to maintain such confidentiality."
cc. By deleting in its entirety the definition of "Expiration
Date" appearing in Section 7.1 of the
Letter Agreement and by substituting in its stead the following:
"`Expiration Date' - October 1, 1999, unless extended by the
Bank, which extension may be given or withheld by the Bank in
its sole discretion."
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 October 1, 1999.
dd. By inserting into Section 7.1 of the Letter Agreement, immediately
before the definition of "F/X Facility" (said definition having been inserted by
the First Modification), the following:
"`F/X Exposure' - As defined in ss.1.12 above."
ee. By inserting into Section 7.1 of the Letter Agreement,
immediately before the definition of
"Loan Documents", the following:
"`Letter of Credit Liabilities' - At any time, the sum of (i)
the then undrawn amounts of all 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.
`Loan' - Any Revolving Loan or any other
extension of credit
by the Bank to or for the
benefit of the Borrower."
ff. By inserting into the definition of "Loan Documents" appearing in
Section 7.1 of the Letter Agreement, immediately after the words "issued
hereunder", the following:
"or to any Foreign Exchange Contract"
gg. By deleting in its entirety the definition of "Maximum
Revolving Amount" appearing in Section
7.1 of the Letter Agreement and by substituting in its stead the following:
"`Maximum Revolving Amount' - $5,000,000."
3. 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.
4. Simultaneously with the execution and delivery of this Agreement,
the Borrower is executing and delivering to the Bank the 1998 Revolving Note, in
substitution for the 1997 Revolving Note. The 1998 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 1998 Revolving Note.
5. Each of Tribe and FSC confirms that the Tribe Guaranty and Tribe
Security Agreement and the FSC Guaranty and FSC Security Agreement,
respectively, remain in full force and effect and that same guarantee and
secure, inter alia, payment and performance of the Letter Agreement (as hereby
amended) and the 1998 Revolving Note. The Borrower confirms that the Zoom
Security Agreement remains in full force and effect and secures, inter alia,
payment and performance of the Letter Agreement (as amended hereby) and the 1998
Revolving Note.
6. 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 and the
1998 Revolving Note 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 have been duly authorized by each of FSC and 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 FSC or 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 FSC or Tribe.
b. The Borrower has duly executed and delivered each of this Agreement
and the 1998 Revolving Note. Each of FSC and Tribe has duly executed and
delivered this Agreement.
c. Each of this Agreement and the 1998 Revolving Note is the legal,
valid and binding obligation of the Borrower, enforceable against the Borrower
in accordance with its respective terms. This Agreement is the legal, valid and
binding obligation of each of FSC and Tribe, enforceable against each of FSC and
Tribe in accordance with its 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. 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 September 30, 1998, heretofore furnished to the Bank.
7. Except as expressly affected hereby, the Letter Agreement and each
of the other Financing Documents remains in full force and effect as heretofore.
8. 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.
BORROWER:
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
GUARANTORS:
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
Accepted and agreed:
FLEET NATIONAL BANK
By: /s/ Scott Wheelock
Name: Scott Wheelock
Title: Vice President
SUPPLEMENTAL DISCLOSURE SCHEDULE
[To be provided by Borrower.]
The Board of Directors;
Zoom Telephonics, Inc.
The audits referred to in our report dated February 10, 1999, except for note
15, which is as of March 19, 1999, included the related financial statement
schedule for each of the years in the three-year period ended December 31, 1998,
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, presents fairly in all material
respects the information set forth therein.
We consent to incorporation by reference in the registration statements (No.
33-42834, No. 33-90930 and No. 333-60565) on Form S-8 of Zoom Telephonics, Inc.
of our report dated February 10, 1999, except for note 15, which is as of March
19, 1999, relating to the consolidated balance sheets of Zoom Telephonics, Inc.
and subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows and
related schedule for each of the years in the three-year period ended December
31, 1998, which report appears in the December 31, 1998 annual report on Form
10-K of Zoom Telephonics, Inc.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 5,324,579
<SECURITIES> 13,529,052
<RECEIVABLES> 7,244,374
<ALLOWANCES> 5,687,751
<INVENTORY> 8,893,269
<CURRENT-ASSETS> 38,511,240
<PP&E> 3,748,303
<DEPRECIATION> 912,987
<TOTAL-ASSETS> 43,560,395
<CURRENT-LIABILITIES> 5,135,028
<BONDS> 0
0
0
<COMMON> 25,190,579
<OTHER-SE> 13,234,788
<TOTAL-LIABILITY-AND-EQUITY> 43,560,395
<SALES> 78,554,140
<TOTAL-REVENUES> 61,364,385
<CGS> 44,651,448
<TOTAL-COSTS> 21,226,474
<OTHER-EXPENSES> 1,074,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (840,044)
<INCOME-PRETAX> (3,439,514)
<INCOME-TAX> (1,287,420)
<INCOME-CONTINUING> (2,152,094)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,152,094)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
<PAGE>
SCHEDULE II
ZOOM TELEPHONICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ending December 31, 1996, 1997, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balance at Balance
Amounts at
beginning Charged to end
Description of written of
year expense off year
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
========= ========== ========== =========
Reserve for doubtful accounts $ 467,030 $ 652,173 $ 314,203 $ 805,000
Reserve for price protection 1,306,478 3,321,809 3,061,172 1,567,115
Reserve for sales returns 1,031,639 10,459,596 10,542,648 948,587
Other allowances 1,713,059 3,268,744 2,614,754 2,367,049
--------- --------- --------- ---------
Year ending December 31, 1998 $ 4,518,206 $ 17,702,322 $ 16,532,777 $ 5,687,751
========= ========== ========== =========
</TABLE>
