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 June 30, 2000
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 August 10, 2000 was 7,749,147 shares.
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the Three
Months and Six Months Ending June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Six
Months Ending June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management Discussion and Analysis of
Financial Condition and Results of Operations 9-11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
PART I - FINANCIAL INFORMATION
ZOOM TELEPHONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
06/30/00 12/31/99
(Unaudited) (Audited)
Assets
Current assets:
Cash and cash equivalents $ 6,041,597 $ 7,218,500
Investment securities 4,540,303 3,189,074
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of $3,218,488 at
6/30/00 and $4,855,850 at 12/31/99 7,711,715 7,324,307
Inventories 9,982,970 12,388,866
Net deferred tax assets 5,263,804 3,968,970
Prepaid expenses and other current assets 958,626 560,869
Total current assets 34,499,015 34,650,586
Property, plant and equipment, net 4,318,117 4,211,921
Goodwill, net of accumulated amortization of
$1,416,351 at 6/30/00 and $1,005,273 at 12/31/99 3,487,332 3,898,410
Other assets 245,736 311,487
---------- ----------
Total assets $ 42,550,200 $ 43,072,404
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,902,297 $ 2,703,729
Accrued expenses 2,059,067 2,373,817
--------- ---------
Total current liabilities 4,961,364 5,077,546
--------- ---------
Other non-current liabilities 425,645 480,775
--------- ---------
Total liabilities 5,387,009 5,558,321
--------- ---------
Stockholders' equity:
Common stock, no par value. Authorized 25,000,000
shares; issued and outstanding 7,749,147 shares
at June 30, 2000 and 7,560,296 shares at December
31, 1999 27,256,868 25,780,231
Retained earnings 9,893,066 11,771,478
Accumulated other comprehensive income (loss) 13,257 (37,626)
---------- ----------
Total stockholders' equity 37,163,191 37,514,083
---------- ----------
Total liabilities and stockholders' equity $ 42,550,200 $ 43,072,404
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ending June 30, Six Months Ending June 30,
---------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales $ 13,256,208 $ 15,837,559 $ 26,874,260 $ 27,224,966
Costs of goods sold 8,670,740 9,969,263 17,907,979 17,295,518
---------- ---------- ---------- ----------
Gross profit 4,585,468 5,868,296 8,966,281 9,929,448
Operating expenses:
Selling 2,852,086 3,718,456 5,794,624 6,217,854
General and administrative 1,454,477 1,636,341 2,800,399 3,011,597
Research and development 1,814,165 1,806,134 3,405,709 3,309,684
---------- ---------- ---------- ----------
Total operating expenses 6,120,728 7,160,931 12,000,732 12,539,135
---------- ---------- ---------- ----------
Operating loss (1,535,260) (1,292,635) (3,034,451) (2,609,687)
Other income, net 168,173 115,666 283,069 394,062
---------- ---------- ---------- ----------
Loss before income taxes (1,367,087) (1,176,969) (2,751,382) (2,215,625)
Income tax benefit (430,090) (458,031) (872,970) (806,632)
---------- ---------- ---------- ----------
Net loss $ 936,997 $ (718,938) $ (1,878,412) $ (1,408,993)
========== ========== ========== ==========
Net loss per common share:
Basic $ (.12) $ (.10) $ (.24) $ (.19)
========== ========== ========== ==========
Diluted $ (.12) $ (.10) $ (.24) $ (.19)
========== ========== ========== ==========
Weighted average common and
common equivalent shares:
Basic 7,745,147 7,474,871 7,692,606 7,474,871
========== ========== ========== ==========
Diluted 7,745,147 7,474,871 7,692,606 7,474,871
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<S> <C> <C>
Six Months Ending June 30,
--------------------------
2000 1999
------ ------
Cash flows from operating activities:
Net loss $ (1,878,412) $ (1,408,993)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 754,567 731,611
Deferred income taxes (873,145) (806,989)
Equity in losses of affiliates 70,000 -
Changes in assets and liabilities:
Accounts receivable (461,105) 1,423,477
Inventories 2,405,896 (3,636,903)
Prepaid expenses and other assets (397,373) (317,581)
Accounts payable and accrued expenses (109,103) (479,952)
---------- ----------
Net cash used in operating activities (488,675) (4,495,330)
---------- ----------
Cash flows from investing activities:
Cash paid for the acquisition of Hayes, net of cash acquired - (3,812,258)
Sale (purchase) of investment securities (1,341,168) 8,324,468
Additions to licenses (15,000) (40,000)
Additions to property, plant and equipment (504,815) (490,690)
---------- ----------
Net cash provided by (used in) investing activities (1,860,983) 3,981,520
---------- ----------
Cash flows from financing activities:
Exercise of nonqualified stock options 1,054,948 -
---------- ----------
Net cash provided by financing activities 1,054,948 -
---------- ----------
Effect of exchange rate changes on cash 117,807 (7,243)
---------- ----------
Net decrease in cash and cash equivalents (1,176,903) (521,053)
Cash and cash equivalents, beginning of period 7,218,500 5,324,579
---------- ----------
Cash and cash equivalents, end of period $ 6,041,597 $ 4,803,526
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 0 $ 0
========== ==========
Income taxes $ 0 $ 0
========== ==========
Supplemental disclosures of non-cash operating activities:
Tax benefit from exercise of nonqualified stock options $ 421,690 $ 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, 1999 included in the Company's 1999 Annual Report on Form
10-K.
The consolidated balance sheet as of June 30, 2000, the consolidated
statements of operations for the three months and six months ending June 30,
2000 and 1999, and the consolidated statements of cash flows for the six months
ending June 30, 2000 and 1999 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 periods presented are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2000.
(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
loss is as follows:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ending June 30, Six Months Ending June 30,
2000 1999 2000 1999
----------- ---------- ----------- -----------
Basic:
Net loss $ (936,997) $ (718,938) $(1,878,412) $(1,408,993)
Weighted average shares
outstanding 7,745,147 7,474,871 7,692,606 7,474,871
---------- ---------- ---------- ----------
Net loss per share $ (.12) $ (.10) $ (.24) $ (.19)
========== ========== ========== ==========
Diluted:
Net loss $ (936,997) $(718,938) $ (1,878,412) $(1,408,993)
Weighted average shares
outstanding 7,745,147 7,474,871 7,692,606 7,474,871
Net effect of dilutive
stock options based on
the Treasury stock
method using average - - - -
market price
Weighted average shares
outstanding 7,745,147 7,474,871 7,692,606 7,474,871
---------- ---------- ---------- ----------
Net loss per share $ (.12) $ (.10) $ (.24) $ (.19)
========== ========== ========== ==========
</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. Options to purchase 568,361 and 4,564 shares of common stock
at June 30, 2000 and 1999, respectively, were outstanding, but not included in
the computation of diluted earnings per share as their effect would be
antidilutive.
<PAGE>
(3) Inventories
<TABLE>
<S> <C> <C>
Inventories consist of the following: June 30, 2000 December 31, 1999
Raw materials $ 4,714,667 $ 6,590,232
Work in process 2,207,697 1,175,463
Finished goods 3,060,606 4,623,171
--------- ----------
$ 9,982,970 $ 12,388,866
========= ==========
</TABLE>
(4) 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 non-owner sources to be included in the determination of
comprehensive income (loss).
The components of comprehensive loss, net of tax, are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ending June 30, Six Months Ending June 30,
--------------------------------- -------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- -------------
Net loss $ (936,997) $ (718,938) $ (1,878,412) $ (1,408,993)
Foreign currency
translation adjustment 35,433 64,805 40,822 64,805
Net unrealized holding
gain (loss) on investment 7,102 (35,245) 10,061 (72,037)
securities
-------------- --------------- -------------- -------------
Comprehensive loss $ (894,462) $ (689,378) $ (1,827,529) $ (1,416,225)
============== =============== ============== =============
</TABLE>
(5) Bank Credit Facility
In July, 2000 the Company secured a $5 million line of credit that expires
on July 14, 2003. The line of credit bears interest at the bank's prime rate
for funds withdrawn. The line of credit is secured by all of the assets of the
Corporation, except the real property and contains certain financial and other
covenants. There are no balances under any line of credit at June 30, 2000.
(6) Segment and Geographic 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 the three months ending June 30, 2000
and 1999, respectively were comprised as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three Months Three Months Six Months Six Months
Ending % of Ending % of Ending % of Ending % of
June 30, 2000 Total June 30, 1999 Total June 30, 2000 Total June 30, 1999 Total
North America $ 9,123,456 69% $ 11,532,492 73% $ 18,620,489 69% $ 19,942,592 73%
International 1,906,616 14% 2,618,691 16% 3,275,921 12% 5,187,149 19%
UK-Zoom/Hayes 2,226,136 17% 1,686,376 11% 4,977,850 19% 2,095,225 8%
---------- ---- ---------- ---- ---------- ---- ---------- ----
Total $ 13,256,208 100% $ 15,837,559 100% $ 26,874,260 100% $ 27,224,966 100%
========== ==== ========== ==== ========== ==== ========== ====
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Zoom Telephonics, Inc. ("Zoom" or the "Company") recorded net sales of
$13,256,208 and a net loss of $936,997 for the second quarter ending June 30,
2000 compared to net sales of $15,837,559 and a net loss of $718,938 for the
second quarter ending June 30, 1999. The loss per share was $0.12 for Q2 2000
versus $0.10 for Q2 1999. The Company recorded net sales of $26,874,260 and a
net loss of $1,878,412 for the six months ending June 30, 2000 compared to net
sales of $27,224,966 and a net loss of $1,408,993 for the six months ending
June 30, 1999. The loss per share was $0.24 for the first six months of 2000
versus $0.19 for the first six months of 1999.
Net sales for Q2 2000 were 16.3% lower than net sales for Q2 1999. The
decrease was primarily due to lower unit sales of dial-up modems combined with
a reduction in dial-up modem average selling prices. The overall decrease was
comprised of a 21% decline in North America non-OEM sales, a 14% decrease in
International non-OEM sales, and a 68% increase in worldwide OEM sales. OEM
sales were 8% of total sales in Q2 2000, up from 4% in Q2 1999, with the growth
primarily due to a new embedded modem. Zoom gained market share for dial-up
modems at major U.S. retailers tracked by PC Data, as Zoom's share of revenues
went from 8.8% in Q2 1999 to 10.3% in Q2 2000.
Net sales for the six months ending June 30, 2000 were 1.3% lower than the
comparable period in the prior year. The overall decrease was comprised of a
sales decline of 11% in North America non-OEM sales, a sales increase of 5.8%
in International non-OEM sales, and an increase of 78% in worldwide OEM sales.
Gross profit as a percentage of net sales decreased to 34.6% in Q2 2000
compared to 37.1% in Q2 1999. The decrease was due primarily to the fact that
fixed overhead expenses were covered by lower revenues, and to increased
obsolescence expenses.
Gross profit as a percentage of net sales decreased to 33.4% in the six
months ending June 30, 2000 compared to 36.5% in the six months ending June 30,
1999. The decrease was due to the year over year increase in obsolescence
expense and to the reduced favorable impact of purchases of advantageously
negotiated modem materials purchased primarily in the second half of 1998 and
the first half of 1999. The favorable gross margin impact of the favorable
material purchases is realized when units are sold. The favorable impact
continued to a lesser extent in the first half of 2000.
Selling expenses in Q2 2000 decreased to $2,852,086 or 21.5% of net sales
compared to $3,718,456 or 23.5% of net sales in Q2 1999. The dollar decrease
was primarily the result of reduced advertising and promotion expenses,
partially due to a higher mix of OEM sales in Q2 2000.
Selling expenses for the six months ending June 30, 2000 decreased to
$5,794,624 or 21.6% of net sales compared to $6,217,854 or 22.8% of net sales
in the six months ending June 30, 1999. The dollar decrease was primarily due
to lower revenues, which generated lower freight delivery costs and lower
commission expenses.
General and administrative expenses decreased to $1,454,477 or 11.0% of
net sales in Q2 2000 compared to $1,636,341 or 10.3% of net sales in Q2 1999.
The dollar decrease was primarily due to a decline in legal expenses for
defending the Company's trademarks and reduced G&A expenses in Zoom's U.K.
office.
General and administrative expenses declined in dollar terms to $2,800,399
or 10.4% of net sales for the six months ending June 30, 2000 from $3,011,597
or 11.1% of net sales for the six months ending June 30, 1999. The reduced
expense was primarily due to reduced legal fees.
Research and development expenses were relatively unchanged at $1,814,165
for Q2 2000 versus $1,806,134 for Q2 1999. R&D expenses as a percentage of
sales increased from 11.4% for Q2 1999 to 13.7% for Q2 2000 due to lower
revenues in Q2 2000.
Research and development expenses were also relatively unchanged in dollar
terms at $3,405,709 for the six months ending June 30, 2000 versus $3,309,684
for the six months ending June 30, 1999. R&D expenses as a percentage of sales
increased from 12.2% for the first half of 1999 to 12.7% for Q2 2000 due to
lower revenues in the first half of 2000.
Liquidity and Capital Resources
Zoom ended the second quarter of 2000 with a strong balance sheet, with
cash, cash equivalents, and investments of $10,581,900, working capital of
$29,537,651, and stockholders' equity of $37,163,191 or $4.80 per share. In
addition, the Company has a new secured $5 million line of credit that expires
in 2003. The line of credit bears interest at the bank's prime rate for funds
withdrawn. The line of credit contains certain financial and other covenants.
Operating activities used $488,675 in cash during the first six months of
2000. Cash was negatively impacted by the net loss of $1,878,412, a $461,105
increase in accounts receivable, a $873,145 increase in deferred income taxes,
a $397,373 increase in prepaid expenses and other assets, and a $109,103
decrease in accounts payable and accrued expenses. Cash was positively impacted
by a $2,405,896 reduction of inventories, non-cash expenses for depreciation
and amortization of $754,567, and a $70,000 non-cash loss in an investment in
affiliates.
Cashflow from investing activities included the purchase of investment
securities of $1,341,168, additions to property, plant, and equipment of
$504,815, and additions to licenses of $15,000. The Company does not have any
significant capital commitments, and it anticipates that it will continue with
modest investments in equipment and in improvements to its facilities during
the year.
During the first six months of 2000, the Company received cash from
financing activities of $1,054,948 from the exercise of nonqualified stock
options by employees and outside directors.
The Company believes that its existing cash, together with funds generated
from operations and available sources of financing, will be sufficient to meet
normal working capital requirements for the rest of 2000. Additional financing
may be needed in the event sales increase substantially or if significant
losses are incurred.
Recently Issued Accounting Standards
In June of 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities," which is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
July of 1999, the FASB issued Statement of Financial Standards No. 137 ("SFAS
137"), "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133," which defers the effective
date to all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company has not yet evaluated the effects of this change on its operations. The
Company will adopt SFAS 133 as required for its first quarterly filing of the
fiscal year 2001.
In December, 1999 the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), Revenue Recognition in Financial Statements. SAB 101 provides guidance
for revenue recognition under certain circumstances. SAB 101 will have an
impact on the manner in which the Company records sales returns reserves. The
Company is currently evaluating the impact on the financial statements of the
adoption of this Staff Accounting Bulletin, which will be required to be adopted
in the fourth quarter of 2000, but does not anticipate that the adoption will
have a material impact on the results of operations or financial position of
the Company.
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 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.
"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 the future impact of
advantageously negotiated modem materials, Zoom's anticipated introduction of
its advanced cable and DSL modems and other broadband Internet access
solutions, its potential as a significant player in the cable and DSL markets,
Zoom's anticipation to continue to make modest investments in equipment and in
improvements to its facilities during fiscal year 2000, 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 the
remainder of fiscal year 2000.
Actual results may be materially different than those expectations as a
result of known and unknown risks, including: uncertainty of new product
development and introduction, including budget overruns, project delays and the
risk that newly introduced products may contain undetected errors or defects or
otherwise not perform as anticipated; uncertainties inherent in financial
projections that, by their nature, are based upon assumptions, many of which
are not in the control of the company; Zoom's dependence on one or a limited
number of suppliers for certain key components; early stage of development of
the cable and DSL data communications markets, uncertainty of market growth of
those markets; rapid technological change; competition; 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 4 - Submission of Matters to a Vote of Security Holders
Zoom Telephonics, Inc. held its Annual Meeting of Shareholders on June 16,
2000. At the meeting, the shareholders approved (a) the re-election of the
Board of Directors of Zoom Telephonics, Inc. and (b) the appointment of KPMG
Peat Marwick LLP as Zoom's independent auditors for the year ending December
31, 2000.
a) Election of Directors:
Nominee For Against Abstain
Frank B. Manning 6,430,730 0 69,995
Peter R. Kramer 6,432,330 0 68,395
Bernard Furman 6,426,920 0 73,805
J. Ronald Woods 6,432,080 0 68,645
L. Lamont Gordon 6,428,860 0 71,865
b) Approval of the appointment of KPMG Peat Marwick as Zoom's independent
auditors for the year ending December 31, 2000:
For Against Abstain
Approval 6,429,547 44,444 26,734
ITEM 6 - Exhibits and reports on Form 8-K
(a) Exhibit Description Page
10.1 Loan and Security Agreement 14-66
10.2 Revolving Credit Note 67-69
27. Financial Data Schedule 70
(b) No reports on Form 8-K were filed by the Company during the quarter
ending June 30, 2000
<PAGE>
ZOOM TELEPHONICS, INC.
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: August 14, 2000 By: /s/ Frank Manning
----------------------------
Frank B. Manning, President
Date: August 14, 2000 By: /s/ Robert Crist
----------------------------
Robert Crist, Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
