UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-18672
ZOOM TELEPHONICS, INC.
(Exact Name of Registrant as Specified in its Charter)
Canada 04-2621506
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
207 South Street, Boston, Massachusetts 02111
(Address of Principal Executive Offices in the U.S.) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 423-1072
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
The number of shares outstanding of the registrant's Common Stock, No Par
Value, as of October 11, 1999 was 7,479,731 shares.
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the Three
Months Ending September 30, 1999 and 1998 4
Consolidated Statements of Operations for the Nine
Months Ending September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the Nine
Months Ending September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7 - 9
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations 10 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
CONSOLIDATED BALANCE SHEETS
09/30/99 12/31/98
<S> <C> <C>
(Unaudited) (Audited)
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 5,864,873 $ 5,324,579
Investment securities 3,970,086 13,529,052
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of
$4,878,606 at 9/30/99 and $5,687,751 at 12/31/98 10,025,850 7,244,374
Inventories 11,316,926 8,893,269
Refundable income taxes 594,369 63,378
Net deferred tax assets 3,215,336 3,226,233
Prepaid expenses and other current assets 725,436 230,355
------------- -------------
Total current assets 35,712,876 38,511,240
------------- -------------
Property, plant and equipment, net 4,072,481 3,748,303
Goodwill, net of accumulated amortization of $790,153 4,520,241 1,226,184
at 9/30/99 and $408,728 at 12/31/98
Other assets 6,662 74,668
------------- -------------
Total assets $ 44,312,260 $ 43,560,395
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,894,534 $ 3,326,391
Accrued expenses 2,699,384 1,808,637
------------- -------------
Total current liabilities 6,593,918 5,135,028
Long-term liabilities:
Other non-current liabilities 681,745 -
------------- -------------
Total liabilities 7,275,663 5,135,028
Stockholders' equity:
Common stock, no par value. Authorized 25,000,000
shares; issued and outstanding 7,479,371 shares at
September 30, 1999 and 7,474,871 shares at December
31, 1998 25,213,614 25,190,579
Retained earnings 11,870,669 13,180,234
Accumulated other comprehensive income (47,686) 54,554
------------- -------------
Total stockholders' equity 37,036,597 38,425,367
------------- -------------
Total liabilities and stockholders' equity $ 44,312,260 $ 43,560,395
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Operations
(Unaudited)
<S> <C> <C>
Three Months Ending September 30,
1999 1998
------------- -------------
Net sales $ 18,195,655 $ 14,465,826
Costs of goods sold 11,114,653 11,167,604
------------- -------------
Gross profit 7,081,002 3,298,222
Operating expenses:
Selling 3,641,433 2,957,122
General and administrative 1,619,574 1,321,847
Research and development 1,546,310 1,209,865
------------- -------------
Total operating expenses 6,807,317 5,488,834
------------- -------------
Income (loss) from operations 273,685 (2,190,612)
Other income, net 96,784 364,226
------------- -------------
Income (loss) before income taxes 370,469 (1,826,386)
Income tax (benefit) expense 275,641 (675,762)
------------- -------------
Net income (loss) $ 94,828 $ (1,150,624)
============= =============
Earnings (loss) per share:
Basic $ 0.01 $ (0.15)
============= =============
Diluted $ 0.01 $ (0.15)
============= =============
Weighted average number of common
shares outstanding:
Basic 7,475,018 7,474,871
============= =============
Diluted 7,541,438 7,474,871
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Operations
(Unaudited)
Nine Months Ending September 30,
1999 1998
<S> <C> <C>
------------- -------------
Net sales $ 45,420,621 $ 45,339,435
Costs of goods sold 28,410,171 34,754,944
------------- -------------
Gross profit 17,010,450 10,584,491
Operating expenses:
Selling 9,859,287 8,636,299
General and administrative 4,626,571 3,562,092
Research and development 4,855,994 3,237,020
------------- -------------
Total operating expenses 19,341,852 15,435,411
------------- -------------
Loss from operations (2,331,402) (4,850,920)
Other income, net 490,846 844,714
------------- -------------
Loss before income taxes (1,840,556) (4,006,206)
Income tax benefit (530,991) (1,482,296)
------------- -------------
Net loss $ (1,309,565) $ (2,523,910)
============= =============
Loss per share:
Basic $ (0.18) $ (0.34)
============= =============
Diluted $ (0.18) $ (0.34)
============= =============
Weighted average number of common
shares outstanding:
Basic 7,474,920 7,474,203
============= =============
Diluted 7,474,920 7,474,203
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<S> <C> <C>
Nine Months Ending September 30,
1999 1998
------------- -------------
Cash flows from operating activities:
Net loss $ (1,309,565) $ (2,523,910)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation and amortization 1,050,197 900,849
Deferred income taxes 10,897 -
Changes in assets and liabilities:
Accounts receivable (1,178,115) 5,336,627
Inventories (1,366,535) 2,972,041
Refundable income taxes (530,991) 2,696,856
Prepaid expenses and other assets (55,989) (63,492)
Accounts payable and accrued expenses 131,215 (1,377,173)
Tax benefit from exercise of non-qualified
Stock options 2,645 809
------------- -------------
Net cash provided by (used in) operating activities (3,246,241) 7,942,607
------------- -------------
Cash flows from investing activities:
Cash paid for the acquisition of Hayes, net of cash
acquired (4,912,258) -
Sale of investment securities 9,481,963 -
Additions to licenses (40,000) (148,000)
Additions to property, plant and equipment (715,225) (383,928)
------------- -------------
Net cash provided by (used in) investing activities 3,814,480 (531,928)
------------- -------------
Cash flows from financing activities:
Proceeds from exercise of stock options 20,390 20,312
------------- -------------
Net cash provided by financing activities 20,390 20,312
------------- -------------
Effect of exchange rate changes on cash (48,335) -
------------- -------------
Net increase in cash and cash equivalents 540,294 7,430,991
Cash and cash equivalents, beginning of period 5,324,579 11,281,337
------------- -------------
Cash and cash equivalents, end of period $ 5,864,873 $ 18,712,328
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 0 $ 0
============= =============
Income taxes $ 0 $ 0
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The consolidated financial statements of Zoom Telephonics, Inc., (the
"Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do
not include all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year
ending December 31, 1998 included in the Company's 1998 Annual Report on Form
10-K.
The consolidated balance sheet as of September 30, 1999, the consolidated
statements of operations for the three months and nine months ending September
30, 1999 and 1998, and the consolidated statements of cash flows for the nine
months ending September 30, 1999 and 1998 are unaudited, but, in the opinion of
management, include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results for these interim
periods.
The results of operations for the nine months ending September 30, 1999
are not necessarily indicative of the results to be expected for the entire
fiscal year ending December 31, 1999.
(2) Earnings Per Share
The reconciliation of the numerators and denominators of the basic and
diluted net loss per common share computations for the Company's reported net
income (loss) is as follows:
<TABLE>
<CAPTION>
Three months ending September 30, Nine months ending September 30,
1999 1998 1999 1998
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Basic:
Net income (loss) $ 94,828 $ (1,150,624) $ (1,309,565) $ (2,523,910)
Weighted average shares
outstanding 7,475,018 7,474,871 7,474,920 7,474,203
--------------- --------------- ---------------- ---------------
Net income (loss)
per share $ .01 $ (.15) $ (.18) $ (.34)
=============== =============== ================ ===============
Diluted:
Net income (loss) $ 94,828 $ (1,150,624) $ (1,309,565) $ (2,523,910)
Weighted average shares
outstanding 7,475,018 7,474,871 7,474,920 7,474,203
=============== =============== ================ ===============
Net effect of dilutive
stock options based on
the treasury stock
method using average
market price 66,420 - - -
Weighted average shares
outstanding 7,541,438 7,474,871 7,474,920 7,474,203
=============== ================ ================ ================
Net income (loss)
per share $ .01 $ (.15) $ (.18) $ (.34)
================ ================ ================ ================
(3) Inventories
Inventories consist of the following: 09/30/99 12/31/98
------------- -------------
Raw materials $ 5,006,871 $ 5,021,373
Work in process 2,368,994 1,764,123
Finished goods 3,941,061 2,107,773
------------- -------------
$ 11,316,926 $ 8,893,269
============= =============
</TABLE>
(4) Acquisition
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"). 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") for the District
of Delaware.
In March 1999 Zoom Telephonics acquired most of the modem assets of Hayes
Corporation for $5.0 million in cash. The purchase included the Hayes,
Practical Peripherals, Accura, Optima, Century 2, and Cardinal brands and
product rights for the USA, Canada, South & Central America, Europe, and the
Middle East. In July 1999 the Company finalized the purchase of Hayes Asia
Pacific for $1.1 million in cash. The acquisitions were accounted for as
purchases. The excess of cost over fair value of net assets acquired is being
amortized on a straight-line method over five years.
The following summarizes the assets acquired and liabilities assumed in
the series of transactions:
Assets acquired:
Cash $ 1,216,221
Accounts receivable 1,530,589
Inventory 1,043,307
Property and equipment 278,479
Goodwill (excess of cost over fair value
of assets) 3,675,481
Other assets 400,993
-----------
$ 8,145,070
Liabilities assumed:
Cash paid 6,128,479
Accounts payable 554,861
Accrued expenses 704,140
Negative Goodwill - other non-current
liabilities 757,590
-----------
$ 8,145,070
The negative goodwill resulted from the purchase of the Hayes U.K.
business, where the net assets acquired exceeded the cost. This transaction was
independent of other Hayes purchases. The negative goodwill is reflected on the
Consolidated Balance Sheet as a non-current liability. The negative goodwill is
being amortized on a straight-line method over five years.
(5) Comprehensive Income
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income" establishes rules for the reporting and display of
comprehensive income and its components; however, it has no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires all changes
in equity from nonowner sources to be included in the determination of
comprehensive income.
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
Three months ending September 30, Nine Months ending September 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ 94,828 $ (1,150,624) $ (1,309,565) $ (2,523,910)
Foreign currency
translation adjustment (90,042) - (25,237) -
Net unrealized holding loss
on investment securities (4,967) - (77,003) -
--------------- --------------- --------------- ---------------
Comprehensive loss $ (181) $ (1,150,624) $ (1,411,805) $ (2,523,910)
=============== =============== =============== ===============
</TABLE>
(6) Bank Credit Facility
The Company had a secured $5 million line of credit which expired on
October 1, 1999. No amounts were outstanding under this line of credit at
September 30, 1999. On September 30, 1999 the Company was in full compliance
with all covenants.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
Zoom Telephonics, Inc. ("Zoom" or the "Company") recorded net sales of
$18,195,655 and a net income of $94,828 for the third quarter ending September
30, 1999 compared to net sales of $14,465,826 and a net loss of $1,150,624 for
the third quarter ending September 30, 1998. Earnings per share improved to a
profit of $0.01 for the third quarter of 1999 compared with a loss of $0.15 for
the third quarter of 1998. Zoom's net sales for the nine months ending
September 30, 1999 were $45,420,621 with a net loss of $1,309,565 or $.18 per
share versus net sales of $45,339,435 and a net loss of $2,523,910 or $.34 per
share for the nine months ending September 30, 1998.
Net sales for the quarter ending September 30, 1999 were 26% higher than
the prior year's third quarter. The sales increase resulted from a 45% increase
in modem unit volume partially offset by a 20% decline in average selling
prices. The overall 26% net sales increase was primarily attributable to a
sales increase of 15% in North America and a sales increase of 72% in markets
outside North America.
The acquisition of the Hayes assets had a favorable impact on the
Company's sales for the third quarter. Zoom's sales for the third quarter of
1999 included approximately 20% of Hayes product sales, with two thirds of the
Hayes sales occurring in markets outside North America. Hayes had shut down its
manufacturing operations prior to the Zoom purchase of the Hayes assets. The
production of key products was restarted by Zoom in the second quarter of 1999
for European delivery, late in the second quarter for sales in the U.S., and
late in the third quarter for sales in China.
Net sales for the nine months ending September 30, 1999 were approximately
the same as in the comparable period in the prior year, comprised of a sales
decline of 10% in North America and a sales increase of 48% in markets outside
North America. Zoom's sales for the nine months included approximately 14% of
Hayes product sales, with 80% of the Hayes sales in markets outside North
America.
Gross profit as a percentage of net sales increased to 39% in the quarter
ending September 30, 1999 from 23% in the quarter ending September 30, 1998.
Gross profit as a percentage of net sales increased to 38% in the nine months
ending September 30, 1999 from 23% in the nine months ending September 30,
1998. The increase primarily was due to the favorable impact of advantageously
negotiated modem materials purchased in the second half of 1998 and the first
three quarters of 1999, and reduced channel price protection and customer
rebates. The gross margin impact of the favorable material purchases is
realized when units are sold and is expected to continue with a lower impact
through 2000. The net result of this favorability on gross margin for the
remainder of 1999 and for 2000 is unclear.
Selling expenses in the third quarter of 1999 increased in dollar amount
to $3,641,433 or 20% of net sales from $2,957,122 or 20% of net sales in the
third quarter of 1998. Selling expenses in the first nine months of 1999
increased in dollar amount to $9,859,287 or 22% of net sales from $8,636,299 or
19% of net sales in the nine months ending September 30, 1998. The dollar
increase in the third quarter of 1999 compared to the third quarter of 1998 was
primarily the result of the selling expenses in our new Hayes European
operation and increased advertising expenses, primarily in the form of
cooperative advertising programs with the resellers of Zoom modems. The dollar
increase in the first nine months of 1999 compared to the first nine months of
1998 was primarily due to the selling expenses in our new Hayes European
operation.
General and administrative expenses were $1,619,574 or 9% of net sales in
the third quarter of 1999 compared to $1,321,847 or 9% of net sales in the
third quarter of 1998. General and administrative expenses were $4,626,571 or
10% of net sales for the nine months ending September 30, 1999 compared to
$3,562,092 or 8% of net sales for the nine months ending September 30, 1998.
The added expense was primarily due to the general and administrative expenses
in our new Hayes European operation, increased legal expenses, Hayes goodwill
amortization, and higher personnel costs.
Research and development expenses increased to $1,546,310 or 9% of net
sales in the third quarter of 1999 from $1,209,865 or 8% of net sales in the
third quarter of 1998. Research and development expenses increased to
$4,855,994 or 11% of net sales for the nine months ending September 30, 1999
from $3,237,020 or 7% of net sales for the nine months ending September 30,
1998. The increase in expenses was due to additional personnel and related
expenses consistent with the broadening of the Company's non-modem product
lines.
The Company recorded a $150,000 valuation reserve on their deferred tax
asset balance at September 30, 1999. This served to increase income tax expense
for the three and nine months ended September 30, 1999. In assessing the
realizability of deferred assets, management considers whether it is more
likely than not that some or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and other matters in
making this assessment. As a result of its evaluation of these factors, at
September 30, 1999, management recorded a valuation reserve for deferred tax
assets of $150,000. The increase was the result of managements assessment that
some portion of the benefits from the net operating losses for state tax
purposes incurred by the Company may not be realized in future periods.
Liquidity and Capital Resources
Zoom ended the third quarter of 1999 with a strong balance sheet, with
stockholders' equity of $37,036,597 or $4.95 per share, with of $9,834,959 of
cash, cash equivalents and investments, and with working capital of
$29,118,958. In addition, the Company had a $5 million secured line of credit
in place throughout the quarter. No amounts were outstanding under this line of
credit as of September 30, 1999. The $5 million line of credit expired on
October 1, 1999. The Company is reviewing competitive offerings and is
currently negotiating to replace the line of credit. No borrowings in the
fourth quarter of 1999 are anticipated.
Operating activities used $3,246,241 in cash during the first nine months
of 1999. Cash was provided by the increase of accounts payable and accrued
expenses of $131,215 and the tax benefit from the exercise of non-qualified
stock options of $2,645. Cash was used by the net loss of $1,309,565 less
$1,050,197 for non-cash depreciation and amortization expense, the increase in
inventories of $1,366,535, the increase in accounts receivable of $1,178,115,
the increase of deferred and refundable income taxes of $520,094, and the
increase in prepaid expenses and other assets of $55,989. The increase in
accounts receivable is primarily attributable to the increase in sales. The
increase in inventory is primarily attributable to the production build-up for
new Hayes products and the purchases of advantageously negotiated modem
materials.
In March 1999 the Company acquired most of the modem assets of Hayes
Microcomputer Products, Inc. ("Hayes") for $5.0 million in cash. The assets
acquired included $1.2 million of cash. The purchase included the Hayes,
Practical Peripherals, Accura, Optima, Ultra, Smartmodem, Century 2, and
Cardinal brands and product rights for the USA, Canada, South & Central
America, Europe, and the Middle East. In July 1999 Zoom finalized the purchase
of some of the remaining Hayes assets, including Hayes Asia Pacific for an
additional purchase price of approximately $1.1 million. With the purchase of
Hayes Asia Pacific, Zoom now owns the worldwide rights to the Hayes name and
the brands listed above.
During the first nine months of 1999 the Company sold $9,481,963 of its
investment securities in order to finance the purchase of most of the modem
assets of Hayes Microcomputers Products, Inc., and to help finance the cash
used in operating activities.
Zoom's capital expenditures of $715,225 during the first Nine months of
1999 included purchases of computer hardware and software, continuing
expenditures for the renovation of the Zoom headquarters, and manufacturing and
engineering equipment. The Company does not have any significant capital
commitments and it anticipates that it will continue during the remainder of
1999 with modest investments in computer, manufacturing, and engineering
equipment, and in improvements to its facilities.
The Company believes that its existing cash, together with funds generated
from operations and available sources of financing, will be sufficient to meet
normal working capital requirements for the next twelve months. Additional
financing may be needed in the event sales increase substantially or if
significant losses are incurred.
Year 2000 Readiness Disclosure
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 has evaluated the year 2000 issue with respect to its
financial and management information systems, its products and its suppliers.
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 results
of operations or financial condition, without taking into account the Company's
efforts to avoid such problems.
The Company has performed its review of its management and information
systems for year 2000 compliance and has substantially completed the upgrade of
its application software and hardware to become year 2000 compliant. The
Company's cost for this upgrade has not been significant. 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 review, 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.
However, the Company cannot assure the accuracy of its information regarding
supplier's 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 continuing to review information from its software vendors to
assure that the software packaged with its products will be year 2000
compliant. 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. 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. 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 year 2000 issues. Should
any unanticipated significant year 2000 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 rate 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 has 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, 2000. 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 has 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 did not
have a material impact on the Company's consolidated financial position or
results of operations.
The AICPA Accounting Standards Executive Committee has 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 did not have a material impact on the Company's
consolidated financial position or results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
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 maturity. These bonds are subject
to interest rate 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.
"Safe Harbor" Statement under the Private Securities
----------------------------------------------------
Litigation Reform Act of 1995
-----------------------------
This report contains forward-looking information relating to Zoom's plans,
expectations and intentions, including without limitation the financial and
other contributions expected in connection with Zoom's acquisition of the Hayes
modem assets referenced in this report, Zoom's expected favorable impact from
the sale of modems using materials purchased at advantageous prices, Zoom's
anticipation to continue to make modest investments in equipment and in
improvements to its facilities during fiscal year 1999, and the sufficiency of
Zoom's cash, together with funds generated from operations and available
sources of financing, to meet normal working capital requirements for next 12
months. Actual results may be materially different than those expectations as a
result of known and unknown risks, including those set forth below.
Acquisitions involve numerous risks, including difficulties in the assimilation
of operations and products of acquired businesses, the ability to manage
geographically remote units and the potential loss of key employees of the
acquired companies. Other risks relating to the forward-looking statements
contained in this report, include, without limitation: significant risks and
uncertainties generally applicable to modem and data communications products,
such as rapid technological change and intense competition, uncertainty of new
product development, early stage of development of certain data communications
markets, uncertainty of market growth, and overall product demand and market
prices for 56K modems; the ability to obtain additional financing, if required,
at favorable terms; Zoom's dependence upon a principal supplier for its modem
chipsets and on third-party assemblers; the concentration of Zoom's customers;
risks of product returns and price-protection, sales channel risks and risks
associated with international sales; the risk that Zoom will be unable to
secure a new line of credit on reasonable terms, if at all; and other risks set
forth in Zoom's filings with the Securities and Exchange Commission. Zoom
cautions readers not to place undue reliance upon any such forward-looking
statements, which speak only as of the date made. Zoom expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
such statements to reflect any change in the Zoom's expectations or any change
in events, conditions or circumstance on which any such statement is based.
PART II - OTHER INFORMATION
ITEM 1. - Legal Proceedings
There have been no material developments in the quarter ending
September 30, 1999.
ITEM 6 - Exhibits and reports on Form 8-K
(a) Exhibit Description Page
27 Financial Data Schedule 19
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ending September 30, 1999.
ZOOM TELEPHONICS, INC.
FINANCIAL INFORMATION NOT AUDITED
The preceding financial information, with the exception of the
consolidated balance sheet at December 31, 1998, has not been audited. However,
in the opinion of management, all material adjustments, consisting only of
normal recurring accruals necessary to present a fair statement of the results
for these periods, have been reflected. The results for these periods are not
necessarily indicative of the results for the full fiscal year.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZOOM TELEPHONICS, INC.
Date: November 15, 1999 By: /s/ Frank Manning
Frank B. Manning, President
Date: November 15, 1999 By: /s/ Robert Crist
Robert Crist, Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27. Financial Data Schedule
ZOOM TELEPHONICS, INC.
30-SEP-99
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 5,864,873
<SECURITIES> 3,970,086
<RECEIVABLES> 10,025,850
<ALLOWANCES> 4,878,606
<INVENTORY> 11,316,926
<CURRENT-ASSETS> 35,712,876
<PP&E> 4,072,481
<DEPRECIATION> (4,208,732)
<TOTAL-ASSETS> 44,312,260
<CURRENT-LIABILITIES> 6,593,918
<BONDS> 0
0
0
<COMMON> 25,213,614
<OTHER-SE> 11,870,669
<TOTAL-LIABILITY-AND-EQUITY> 44,312,260
<SALES> 45,420,621
<TOTAL-REVENUES> 45,420,621
<CGS> 28,410,171
<TOTAL-COSTS> 19,341,852
<OTHER-EXPENSES> (490,846)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,840,556)
<INCOME-TAX> (530,991)
<INCOME-CONTINUING> (1,309,565)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,309,565)
<EPS-BASIC> (.18)
<EPS-DILUTED> (.18)
</TABLE>
