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, 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) (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. [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 27, 2000 (computed by
reference to the closing price of such stock on The Nasdaq National Market on
such date) was approximately $93,368,024.
The number of shares outstanding of the registrant's Common Stock, No Par
Value, as of March 27, 2000 was 7,734,547 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the registrant's 2000 annual
meeting of shareholders to be filed with the SEC in April 2000 are incorporated
by reference into Part III, Items 10-12 of this Form 10-K.
<PAGE>
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" 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 such as DSL
modems, cable modems, 11 Mbps wireless LAN products, and modems that meet the
V.92 standards; 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.
The Company is a leading designer, producer and marketer of modems and
other communications products for the home and office. Analog modems link
personal computers ("PCs") and other devices to the local telephone line for
transmission of data, fax, voice, and video through the worldwide telephone
network, and enable PCs and other devices to connect to other computers and
networks, including the Internet and local area networks ("LANs"). DSL modems
provide a high-bandwidth connection to the Internet through a standard
telephone line that connects to compatible DSL equipment in or near the central
telephone office. Cable modems provide a high-bandwidth connection to the
Internet through a cable-TV cable that connects to compatible equipment at or
near the cable service provider. Zoom expects to begin shipping DSL modems and
cable modems in the year 2000.
The Company offers a broad line of analog 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 which can 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's analog modems and ISDN
products have telephone line interfaces appropriate to North America, Europe,
and many other countries throughout the rest of the world.
Since 1983 the Company has sold its modems primarily under the Zoom brand
name. In 1999 the Company acquired the trademark rights and substantially all
the product rights for Hayes(tm) brand modems. Hayes is a well-known brand that
is associated with "Hayes compatible" software, the de facto standard for modem
command compatibility. The Company plans to continue marketing under both the
Zoom and Hayes names, as well as under various other private-label brands
developed for some of the Company's large accounts.
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 at a 2 megabits per second
("Mbps") data rate using 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 recently
introduced the ZoomAir AP128, a hardware access point with ISDN capability. In
February 2000 the Company announced plans to ship 11 Mbps PCMCIA and PCI
models, network-to-network wireless bridges, and gateways to the Internet. The
Company has focused significant effort on products to connect broadband cable
modem or DSL modem Internet access to PCs and other devices through advanced
local area networking including wireless networking.
In March 1999 Zoom began shipping the Zoom/HomeLANtm network interface
card, which links a PC to other networked devices through a standard phoneline,
even while this phoneline is being used for a voice or data call. Zoom's
initial product had a maximum data rate of 1 Mbps. In the year 2000 Zoom
expects to expand its line by introducing one or more 10 Mbps models and by
incorporating home phoneline networking into new Internet gateway products.
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 to the PC through a parallel port.
Zoom's objective is to build upon its position as a leading supplier of
Internet access devices and to capitalize on a number of current and emerging
trends in computer connectivity including Internet access, higher data rates,
bandwidth-hungry applications, 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, (ii) the growing installed base of PCs and
other portable information devices, (iii) a significant increase in the use of
PCs and portable information devices for remote access to the Internet and
corporate networks, and (iv) advances in technology, which have improved the
ability of PCs and portable information devices to create, capture, transfer,
and manipulate data-intensive information, including graphic images and sound.
These trends have resulted in substantial 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 some 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 300 million PCs are installed worldwide. 56K modems are often bundled
with a new PC, particularly in North America. However, some of the installed
PCs have no modem, have a modem with a speed below 56K, or have a 56K modem
with inadequate performance or features. The Company believes there should
continue to be substantial demand for after-market modems two primary reasons.
First, there is a trend toward bundling very basic modems into PCs, and the
data throughput and multi-tasking capabilities of the PC can be improved by
buying a Zoom or Hayes brand modem in the after-market, which have more
functionality and faster speeds than bundled modems. Second, it is likely that
a new standard, V.92, will be set in the year 2000, and that this will increase
the percentage of people upgrading their modem. V.92 will increase upstream
data rates, lower the connection time at the beginning of the call, and allow
people with Call Waiting to answer an incoming voice call while online, suspend
their Internet session without closing it, participate in their voice call, and
then re-activate their Internet session when the voice call is complete. The
Company believes that modems will continue to achieve increasing penetration of
the PC installed base as applications requiring data connectivity proliferate.
The Company can provide no assurance that the V.92 standard will be developed
or that it will develop modems that meet the V.92 standard.
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 and 1999. 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 "broadband" modems in the future,
including Digital Subscriber Line ("DSL") modems and cable modems, particularly
as after-market upgrades or as options for a new PC.
Zoom Strategy
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. The Company's Zoom and Hayes brands
are widely recognized and respected, and the Company's marketing channels are
extensive. 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 February 2000 the Company's 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, by advertising
and promoting its products, 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 sales channels. The Company was one of the first
high-volume producers of faxmodems, voice faxmodems, and video-capture-enabled
faxmodems. A major focus of the Company is to provide broadband Internet access
and advanced local area networking products to allow people to share that
bandwidth. This is an over-arching theme for the Company's development plans
for cable modems, DSL modems, wireless networking, home phoneline networking,
and gateway products.
Expand Distribution Channels. Zoom's existing marketing channels are
strong, and will continue to be an asset as Zoom expands its product line.
However, Zoom plans to grow its channels to fit its new products. An increased
emphasis is being placed on selling to cable companies, telephone companies,
and Internet Service Providers.
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 over 50 countries. The Company's
international sales (excluding sales to OEMs) have increased from 8% of net
sales in 1994 to 30% of net sales in 1999. The Company plans to continue to
expand its international product line and distribution network.
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, broadband products, and wireless LAN products. In addition,
Zoom sometimes sells packaged modems private-labeled for its customers and
channels.
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 analog 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 Intersil 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 to contract manufacturers, primarily in mainland China and Mexico,
aspects of its manufacturing processes including board stuffing, wave
soldering, in-circuit test, and for some products component purchasing. This
reduces the Company's labor costs and capital expenditures, and provides the
Company with flexibility in its capacity planning.
Explore Acquisitions. Zoom acquired the products and certain other assets
of Tribe Computer Works ("Tribe") in mid-1996, and in 1999 acquired trademarks
and substantially all of the modem product lines 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
The vast majority of Zoom's products facilitate communication of data
through the Internet. Zoom's analog modems and ISDN modems link PCs and
portable information devices through the telephone network and connected
networks, including the Internet and local area networks. Similarly, the
Company believes its cable modems and DSL modems will use the cable-TV cable
and local telephone line, respectively, to provide a high-speed link to the
network. Even Zoom's video cameras are used primarily to communicate videos
through the Internet. Zoom's advanced networking products, including wireless
LAN, home phoneline LAN, and gateway products, help to link PCs and other
computing devices to each other and to the Internet. 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.
Zoom has a broad line of analog modems with top data speeds of 56,000 bps,
available in internal, external and PCMCIA models. PC-oriented internal modems
are designed primarily for installation in the PCI or ISA slot of IBM
PC-compatibles. Embedded internal modems are designed to be embedded in non-PC
equipment such as point-of-purchase terminals, kiosks, and set-top boxes. The
Company's 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. Zoom's 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. V.90 is now widely deployed in equipment
made by central site manufacturers. 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.
During the year 2000 a new 56K standard, ITU V.92, is likely to be set.
This will provide enhanced functionality as discussed earlier. V.92 should also
help to grow the Company's sales through the after-market. The Company expects
to ship V.92 products soon after the standard is set. This market opportunity
will provide a host of challenges, including new product designs, new packaging
designs, and inventory issues. The Company believes that it is well-suited to
handle these challenges, and that the opportunity more than offsets the risk.
Modem Product Features. The following sets forth some of the key features
incorporated in one or more of the Company's modems:
o ZoomGuard(tm). 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. For most modem
manufacturers, lightning is the number one cause of field failures.
o PC Card Guard(tm). PC Card Guard represents the protective circuitry
added to Zoom's PCMCIA modems to protect against destruction caused by plugging
the modem into a digital PBX phone jack. Zoom was one of the first companies to
develop this useful feature.
o Voice Mail. Voice mail capability allows a PC to serve as an answering
machine with message storage and local or remote message retrieval.
o Channel 2(tm). Channel 2 is Zoom's trademark for a feature that works
with the optional Call Waiting feature available from some phone companies.
Channel 2 permits the modem to recognize an incoming call when the modem is
on-line, so that the user can determine how to handle the call.
o 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.
o 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.
o 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, including the ZoomAir AP128 wireless access point.
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. The Hayes Century product
line provides up to 16 modems in a single enclosure.
Broadband Modems. In the year 2000 Zoom expects to begin shipping a line
of broadband modems, including cable modems and DSL modems. Zoom's first cable
modem will incorporate the DOCSIS standard, the standard used in the United
States and many other countries, and will connect to the Ethernet port of a
computer or other device. Zoom will seek Cablelabs certification for these
cable modems, since it is extremely beneficial to selling cable modems,
particularly in the United States of America. Obtaining certification is
difficult and there is no certainty when Zoom will obtain certification. Zoom
will later expand its cable modem line with a DOCSIS-compatible model that
plugs into a USB port.
Zoom's ADSL modems will incorporate the standards that are most popular
with U.S. telephone companies and Internet Service providers, including G.DMT
and G.Lite. Zoom's first DSL modems are expected to be an external USB model
and an internal PCI model. Zoom's product plan ties Zoom's broadband products
to Zoom's advanced networking products.
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. Zoom recently began shipping the ZoomAir AP128, a wireless access
point with ISDN capability. In the year 2000 Zoom expects to continue to expand
its wireless product line, adding 802.11b 11 Mbps products and a gateway that
links wireless PCs to a cable modem, DSL modem, or other Internet access
device.
Remote Access, SOHO Router, and Internet Gateway Products. Zoom has a
significant Research and Development effort aimed at development of business
products that provide remote users access to the resources of a LAN, and
connect the users of the LAN to the Internet and to remote LANs and computers.
Some of these products incorporate technology acquired from Tribe Computer
Works in 1996. In 1997 Zoom extended the product line to include support for
Windows, to incorporate analog modem and leased line options, and to add new
features. Zoom plans to continue to expand this product line.
Full-color Live-motion Cameras and Other Video Products. In late 1997 Zoom
shipped the Zoom/Video Cam, a full-color live-motion camera. The Zoom/Video Cam
can be used for video phone calls, video conferences, video mail, and still
image capture. Zoom has continued to expand the product line, which now
includes a parallel port camera and USB cameras for both Windows and the
Macintosh. 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 commenced
shipping a new generation of dialers incorporating proprietary technology.
Dialer 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, such as cable and DSL modems, 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. As Zoom expands its product offering, particularly in broadband
modems, Zoom plans to expand and strengthen its market channels to include
cable companies, phone companies, and Internet Service Providers.
During 1999 Best Buy Co., Inc. and Ingram Micro, Inc. accounted for 17%
and 10%, 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, Costco, Fry's,
Future Shop, MEI Micro Center, Micro Warehouse, Office Depot, PC Connection,
and Staples. Personal Technology Research reported that in February 2000 Zoom
brands had the second greatest amount of retail shelf space for modems in North
America, and had gained share overall and relative to the leading brand in the
prior year.
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 D&H Distributing,
Gates-Arrow, Ingram Micro, Merisel, 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. 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, Celo Spa,
Computer 2000, Criterium, Engineering Supplies, Infotide International,
Northamber, Olusum, Pouliadis Associates Corp., Siltek Ltd., Stylus, UMD, and
Yutron Tech. The Company's major European high-volume retailers include
Compustore, Dixons/PC World, Exel, 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 30% in 1999. The Company's revenues from international sales
were $12.3 million, $13.5 million, and $18.5 million in 1997, 1998, and 1999,
respectively. The increase in 1999 was primarily attributable to sales of Hayes
products. 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
Zoom's sales, support, and marketing are primarily managed from Zoom's
headquarters in Boston, MA. 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. The Company maintains a
sales, support, and logistics office in the United Kingdom. Warehousing,
customs clearance, shipping, and invoicing for Europe are now primarily done
under contract with an unaffiliated specialist in these services located in
England. Technical support for Europe is handled by Zoom's UK operation,
including an independent technical support company, and by Zoom's distributors.
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 staff in the USA and UK,
who are at times assisted by Zoom's sales staff or commissioned sales
representatives. (See note 16 to Consolidated Financial Statements.)
The Company believes that Zoom and Hayes are widely recognized brand
names. 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 funds
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 significant World Wide Web
support facility that includes email, firmware and software downloads, and the
SmartFactstm Q&A search engine. Other support vehicles include 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 14, 2000 the Company
had 56 employees engaged primarily in research and development. This research
and development team performs electronics hardware design and layout,
mechanical design, prototype construction and testing, component specification,
firmware development, product testing, foreign and domestic regulatory approval
efforts, end-user and internal documentation, and third-party software
selection and testing. During 1997, 1998, and 1999 the Company expended $4.2
million, $4.4 million and $6.4 million, respectively, on research and
development activities. The increase in costs expended on research and
development is primarily due to the company's initiatives in the broadband,
advanced networking, and gateway product areas.
Manufacturing and Suppliers
The Company's products are currently designed for high-volume automated
assembly in the United States of America, Mexico or China to help assure low
cost, rapid market entry, short lead times, and reliability. For North America
the Company supplies large kits of parts to one of several automated contract
assemblers. In China the contract manufacturer procures certain material
required to assemble the products based upon a Zoom Telephonics Approved Vendor
List and Parts List. The contract assemblers insert parts onto the printed
circuit board, with most parts automatically inserted by machine, solder the
circuit board, in-circuit test, and functionally test the completed assemblies.
These assemblies are then typically shipped to the Company for testing as
required. 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, most of the
Company's products include a sole-sourced chipset as the most critical
component of the product. Currently Lucent and Conexant are the Company's only
modem chipset suppliers, and Intersil is the Company's only wireless chipset
supplier. 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
a chipset supplier will, in the future, sell chipsets to the Company in
quantities sufficient to meet the Company's needs. An interruption in a 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
could have a material adverse effect on the Company's results of operations.
Competition
The PC communication 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 analog modem competitors include 3Com, Action Tec,
Best Data, Creative Labs, Elsa, GVC, S3, and Viking. The Company's primary
cable modem competitors include 3Com, Com21, Motorola, and Terayon. The
Company's primary DSL modem competitors include 3Com and Efficient Networks.
The Company's primary wireless LAN competitors include 3Com, Lucent, Proxim,
and Aironet, a company recently acquired by Cisco Systems. Many of the
Company's competitors and potential competitors have more extensive financial,
engineering, product development, manufacturing, and marketing resources than
the Company.
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 cable and
DSL 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 cable and DSL
modems is currently impeded by a number of technical and infrastructure
limitations. The Company expects to begin shipping both cable modems and DSL
modems in the year 2000. In the year 2000, these products are likely to be sold
in the greatest number through cable companies, phone companies, and Internet
Service Providers. Until 2001 large quantities of cable modems and DSL modems
are not likely to be sold through retailers and distributors, Zoom's strongest
market channels. There can be no assurance that the Company will develop these
modems on a timely basis, if at all; or that once developed, these modems will
compete effectively.
Intellectual Property Rights
Zoom relies primarily on a combination of copyrights, trademarks, trade
secrets and patents to protect its proprietary rights. The Company has
trademarks and copyrights for its firmware (software on a chip), printed
circuit board artwork, instructions, packaging, and literature. The Company
also has four patents and one pending patent application in the United States.
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 chipsets
that incorporate sophisticated technology. 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.
Seasonality
The Company believes its sales are seasonal, with increased sales
generally occurring in the third and fourth quarters reflecting holiday sales.
The Company expects that its quarterly results will continue to fluctuate in
the future as a result of seasonality and other factors.
Backlog
The Company's backlog at March 25, 2000 and March 25, 1999 was $2.1
million and $1.6 million, respectively, most of which was for delivery of
products within 120 days or less. Orders included in backlog generally may be
canceled or rescheduled by customers without significant penalty. Backlog as of
any particular date should not be relied upon as indicative of the Company's
net sales for any future period.
Employees
As of December 31, 1999 Zoom had 342 full-time employees (including
employees hired on a temporary basis). Of this total, 61 were engaged in
research and development, 161 were involved in purchasing, assembly, packaging,
shipping and quality control, 75 were engaged in sales, marketing and technical
support, and the remaining 45 performed accounting, administrative, management
information systems, and executive functions. The Company's temporary employees
were comprised of 18 individuals at December 31, 1999. Most of these temporary
employees were employed in manufacturing. None of the Company's employees are
represented by a labor union.
Executive Officers Of The Registrant
The names of the current executive officers of Zoom, and certain
biographical information furnished by them, are set forth below:
Name Age Position with Zoom
----------------- --- -------------------------------------
Frank B. Manning 51 Chief Executive Officer, President and
Chairman of the Board
Peter R. Kramer 48 Executive Vice President and Director
Robert A. Crist 56 Vice President of Finance and Chief Financial Officer
Terry J. Manning 48 Vice President of Sales and Marketing
Dean N. Panagopoulos 42 Vice President of Information Systems
Deena Randall 46 Vice President of Operations
Dana Whitney 37 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. Frank Manning has been
a director of MicroTouch Systems, a NASDAQ-listed leader in touchscreen
technology. Since 1998 Mr. Frank Manning has also been a director of the
Massachusetts Technology Development Corporation, a public purpose venture
capital firm that 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, including Assistant Corporate Controller, Corporate Director of
Business Planning and Analysis, and Corporate Manufacturing & Engineering
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. From 1993 to 1995, Mr. Panagopoulos worked as an
Independent Consultant. From 1991 to 1993, Mr. Panagopoulos served as Director
of Technical Services for Ziff Information Services, a major outsourcer of
computing services. He attended the Massachusetts Institute of Technology from
1975 to 1978 and earned his BS degree in Information Systems from Northeastern
University in 1983.
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. In March, 1999, the Company assumed an office
lease from Hayes Microcomputer Products, Inc. at 430 Frimley Business Park,
Camberly Surrey, UK. This is a non-cancelable ten year lease that commenced in
February, 1998.
ITEM 3 - LEGAL PROCEEDINGS
No material litigation.
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, 1998 High Low
First Quarter........................... $ 9.625 $ 6.563
Second Quarter.......................... 8.750 5.813
Third Quarter........................... 6.750 3.125
Fourth Quarter.......................... 8.625 2.250
Fiscal Year Ending December 31, 1999
First Quarter........................... $ 5.500 $ 3.344
Second Quarter.......................... 7.375 3.500
Third Quarter........................... 6.250 4.000
Fourth Quarter.......................... 13.250 4.031
As of March 27, 2000, there were approximately 283 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 Canada
Customs and Revenue Agency, 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 5% for dividends paid or
credited.
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 (other
than treaty-protected 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 60 month 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,
1997, 1998, and 1999 and the balance sheet data as of December 31, 1998 and
1999 have been derived from the Consolidated Financial Statements of the
Company, which have been audited by KPMG 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, 1995 and 1996
and the balance sheet data as of December 31, 1995, 1996, and 1997 have been
derived from consolidated financial statements of the Company, which have been
audited by KPMG 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,
------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In thousands)
Statement of Operations Data:
Net sales.......................... $ 96,997 $100,195 $ 64,478 $ 61,364 $ 63,438
Cost of goods sold................. 73,402 79,803 56,298 44,651 39,900
------ ------- ------ ------ ------
Gross profit................... 23,595 20,392 8,180 16,713 23,538
Operating expenses:
Selling..................... 9,023 10,216 11,103 11,801 13,571
General and administrative.. 2,840 3,674 4,957 4,976 6,276
Research and development.... 1,835 2,940 4,182 4,449 6,425
------ ------- ------ ------ ------
Total operating expenses.... 13,698 16,830 20,242 21,226 26,272
------ ------- ------ ------ ------
Operating income (loss) ....... 9,897 3,562 (12,062) (4,513) (2,734)
Other income (expense) net ........ (33) 293 741 1,074 737
------ ------- ------ ------ ------
Income (loss) before income taxes 9,864 3,855 (11,321) (3,439) (1,997)
Income tax expense (benefit)....... 3,800 1,375 (4,189) (1,287) (588)
------ ------- ------ ------ ------
Net income (loss).............. 6,064 2,480 (7,132) (2,152) (1,409)
====== ======= ====== ====== ======
Earnings (loss) per common and
common equivalent share:
Basic.......................... $ 1.00 $ 0.35 $ (0.95) $ (0.29) $ (0.19)
====== ======= ====== ====== ======
Diluted........................ $ 0.98 $ 0.35 $ (0.95) $ (0.29) $ (0.19)
====== ======= ====== ====== ======
Weighted average common and
common equivalent shares:
Basic.......................... 6,075 7,068 7,469 7,474 7,483
Diluted........................ 6,173 7,162 7,469 7,474 7,483
At December 31,
---------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital $ 24,135 $ 41,557 $ 35,064 $ 33,376 $ 29,573
Total assets 49,595 56,782 48,515 43,560 43,072
Long-term obligations - - - - 481
Total stockholders' equity $ 27,274 $ 47,355 $ 40,503 $ 38,425 $ 37,514
</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 1997, 1998 and to a lesser extent in
1999, 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>
--------------------------------
1997 1998 1999
---- ---- ----
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of goods sold................................. 87.3 72.8 62.9
----- ----- -----
Gross profit................................... 12.7 27.2 37.1
Operating expenses:
Selling........................................ 17.2 19.2 21.4
General and administration..................... 7.7 8.1 9.9
Research and development....................... 6.5 7.2 10.1
----- ----- -----
Total operating expenses....................... 31.4 34.5 41.4
----- ----- -----
Operating income (loss)............................ (18.7) (7.3) (4.3)
Other income (expense), net................... 1.1 1.7 1.2
----- ----- -----
Income before income taxes......................... (17.6) (5.6) (3.1)
Income tax expense (6.5) (2.1) (0.9)
(benefit)................................................
----- ----- -----
Net income (loss).................................. (11.1)% (3.5)% (2.2)%
===== ===== =====
</TABLE>
Year Ending December 31, 1999 Compared to Year Ending December 31, 1998
Net Sales. Net sales increased 3.4% to $63.4 million in 1999 from $61.4
million in 1998. The Company's net sales to retailers and distributors in the
United States were unchanged at $42.7 million in both 1998 and 1999. The
Company's worldwide net sales to OEM customers decreased by 53.9% to $2.4
million, reflecting the Company's de-emphasis of the extremely price
competitive analog modem OEM business. The Company's international sales to
retailers and distributors increased by 36.6% to $18.5 million in 1999. The
significant increase in international sales was primarily due to the purchase
of the Hayes European modem business in March 1999.
Gross Profit. Gross profit as a percentage of net sales increased to 37.1%
in 1999 from 27.2% in 1998. Although average selling prices for modems declined
year over year, the cost of materials and manufacturing costs, including
product obsolescence, scrap expense, and manufacturing overhead, declined to a
greater extent, yielding increased gross margin. In addition, channel price
protection and consumer rebates were less of a negative impact on gross profit
in 1999 than in 1998. Gross margin for all of 1999 and part of 1998 included
the favorable impact of advantageously negotiated purchases of modem materials.
This advantage continued to a lesser degree in the first quarter of 2000. The
impact of the favorable purchases is realized as units are sold. The net impact
on gross margin in 2000 is unclear.
Selling Expenses. Selling expenses increased 15.0% to $13.6 million or
21.4% of net sales in 1999 from $11.8 million or 19.2% of net sales in 1998.
The dollar increase was primarily the result of the selling expenses in Zoom's
new Hayes European operation and increased advertising and promotion expense,
primarily in the form of cooperative advertising programs with the resellers of
Zoom modems.
General and Administrative Expenses. General and administrative expenses
increased 26.1% to $6.3 million or 9.9% of net sales in 1999 from $5.0 million
or 8.1% of net sales in 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. Research and development expenses
increased 44.4% to $6.4 million or 10.1% of net sales in 1999 from $4.5 million
or 7.3% of net sales in 1998. The increase in expenses was primarily due to
additional personnel and related expenses consistent with development of the
Company's new and planned wireless and broadband product lines.
Interest Income. Net interest income decreased to $546,329 in 1999 from
$840,044 in 1998. The decrease was the result of the Company's lower average
cash balances during 1999 compared to 1998.
Other Income Net. Other income and non-interest income decreased to
$190,999 in 1999 from $233,979 in 1998.
Provision for Income Taxes. The Company's tax benefit of $587,935 in 1999
represents an effective tax rate of 29.4% compared to the 37% rate in 1998. The
tax benefit rate decreased because Management has determined that it is more
likely than not that certain state tax benefits will not be realized. In
assessing the realizability of deferred tax 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 management recorded a valuation allowance against
its deferred tax asset of $770,116. The valuation allowance was the result of
management's assessment that some portion of the benefits from the net
operating losses for state tax purposes incurred by the Company might not be
realized in future periods.
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.
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%.
Liquidity and Capital Resources
On December 31, 1999 the Company had working capital of $29.6 million,
including $10.4 million in cash and investment securities. The Company has
received a commitment for a new secured $5 million line of credit that expires
on April 1, 2003. The line of credit bears interest at the bank's prime rate.
The line of credit outlined in the commitment letter is secured and contains
certain financial and other covenants. The Company anticipates that the line of
credit agreement will be signed by the end of the second quarter. The Company
is in full compliance with all covenants. No amounts were outstanding under any
lines of credit at December 31, 1999.
In 1999 the Company's net cash used in operating activities was
approximately $2.6 million (Note that the discussion of operating activities
for cashflow purposes excludes the impact of acquired assets and liabilities in
the Hayes acquisition). During that period accounts receivable decreased by
$1.5 million. The decrease in accounts receivable was primarily due to improved
collections in 1999 as compared to 1998. Other sources of cash in 1999 were
depreciation and amortization of $1.3 million. These sources of cash were
offset by the increase of inventories of $2.6 million, the reduction of
accounts payable and accrued expenses of $0.8 million, the increase of $0.6
million of refundable income taxes, and the Company's $1.4 million net loss.
The Company's capital expenditures in 1999 of approximately $0.9 million
consisted primarily of the Company's purchases of computer hardware and
software, purchases of other equipment and tooling, and continued renovations
to its headquarters.
During the year ended December 31, 1999 the Company entered into
agreements with Hayes Microcomputer Products, Inc. to purchase various assets,
rights, and inventory in a public bankruptcy auction for approximately $4.9
million, net of cash acquired. These purchases were primarily funded by the
sales of investment securities sold during the year. See Note 6 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 next twelve months. There are no significant capital commitments.
Impact of Year 2000
Year 2000 problems are the result of computer programs being written using
two digits rather than four to define the applicable year. If not corrected,
many computer applications could fail or create erroneous results by not
recognizing "00" to mean the year 2000. In 1999, the Company completed its
testing of all critical software and hardware systems and determined that all
are Year 2000 compliant. Vendor certifications were received from all critical
vendors indicating that they were either currently compliant or that they would
be compliant by December 31, 1999. To date, the Company has not needed to
implement any major system or software replacements due to the Year 2000 issue.
The Company has not incurred and does not expect to incur any material direct
costs associated with Year 2000 issues. The Company has not experienced and
does not expect to experience any significant Year 2000 problems or
interruptions. The Company cannot assure you that critical vendors and
customers will not incur a Year 2000 problem or interruption, but the Company
believes it has adequate computer file backup procedures and manual operating
procedures that will enable it to continue the critical processes of our
business.
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
As of January 1, 1999 the Company adopted Statement of Position 98-1 ("SOP
98-1"), "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." This statement provides guidance on accounting for the costs
of computer software developed or obtained for internal use and applies to all
non-governmental entities. The adoption of SOP 98-1 had no material impact on
the Company's financial statements.
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. We are currently
evaluating the impact of SAB 101 on the financial statements and related
disclosures, which will be effective for the year ended December 31, 2000.
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
Page
Index to Consolidated Financial Statements 27
Independent Auditors' Report 28
Consolidated Balance Sheets as of December 31, 1998 and 1999 29
Consolidated Statements of Operations for the years ending
December 31, 1997, 1998 and 1999 30
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the years ending December 31, 1997, 1998 and 1999 31
Consolidated Statements of Cash Flows for the years ending
December 31, 1997, 1998 and 1999 32
Notes to Consolidated Financial Statements 33
Schedule II: Valuation and Qualifying Accounts for
Fiscal Years Ending December 31, 1997, 1998 and 1999 48
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
2000 annual meeting of shareholders which will be filed with the SEC in April
2000 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 2000 annual meeting of shareholders which will be filed with
the SEC in April 2000, 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 2000 annual meeting of
shareholders which will be filed with the SEC in April 2000, 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.)
2.1 Asset Purchase Agreement Between Zoom Telephonics, Inc. and
Hayes Microcomputer Products, Inc. dated March 8, 1999, filed
as Exhibit 2.1 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1999 (the "March 1999 Form
10-Q").*
2.2 Asset Purchase Agreement Between Zoom Telephonics, Inc. and
Hayes Microcomputer Products, Inc. dated March 28, 1999, filed
as Exhibit 2.2 to the March 1999 Form 10-Q. *
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 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 29, 2000
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 29, 2000
- --------------------
Frank B. Manning Chairman of the Board
/s/ Robert A. Crist Principal Financial and Accounting Officer March 29, 2000
- --------------------
Robert A. Crist
/s/ Peter R. Kramer Director March 29, 2000
- --------------------
Peter R. Kramer
/s/ Bernard Furman Director March 29, 2000
- -------------------
Bernard Furman
/s/ L. Lamont Gordon Director March 29, 2000
- --------------------
L. Lamont Gordon
/s/ J. Ronald Woods Director March 29, 2000
- --------------------
J. Ronald Woods
</TABLE>
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Independent Auditors' Report 28
Consolidated Balance Sheets as of December 31, 1998 and 1999 29
Consolidated Statements of Operations for the years ending
December 31, 1997, 1998, and 1999 30
Consolidated Statements of Changes in Stockholders' Equity
for the years ending December 31, 1997, 1998, and 1999 31
Consolidated Statements of Cash Flows for the years ending
December 31, 1997, 1998, and 1999 32
Notes to Consolidated Financial Statements 33
Schedule II: Valuation and Qualifying Accounts for Fiscal
Years Ending December 31, 1997, 1998, and 1999 48
<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, 1998 and 1999, and the
related consolidated statements of operations, changes in stockholders' equity
and comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1999. 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, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Boston, Massachusetts
February 8, 2000
<PAGE>
ZOOM TELEPHONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
<S> <C> <C>
Assets 1998 1999
Current assets:
Cash and cash equivalents $ 5,324,579 $ 7,218,500
Investment securities 13,529,052 3,189,074
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of
$5,687,751 in 1998 and $4,855,850
in 1999 (note 11) 7,244,374 7,324,307
Inventories (note 3) 8,893,269 12,388,866
Refundable income taxes 63,378 -
Net deferred tax assets (note 10) 3,226,233 3,968,970
Prepaid expenses and other current assets 230,355 560,869
---------- ----------
Total current assets 38,511,240 34,650,586
---------- ----------
Property, plant and equipment, net (note 4) 3,748,303 4,211,921
Goodwill, net of accumulated amortization of
$408,728 in 1998 and $1,005,273 in 1999 (note 6) 1,226,184 3,898,410
Other assets 74,668 311,487
---------- ----------
Total assets $ 43,560,395 $ 43,072,404
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,326,391 $ 2,703,729
Accrued expenses 1,808,637 2,373,817
---------- ----------
Total current liabilities 5,135,028 5,077,546
Other non-current liabilities (note 6) - 480,775
---------- ----------
Total liabilities 5,135,028 5,558,321
Stockholders' equity (note 9):
Common stock, no par value. Authorized 25,000,000
shares; issued and outstanding 7,474,871 shares
at December 31, 1998 and 7,560,296 shares at
December 31, 1999 25,190,579 25,780,231
Retained earnings 13,180,234 11,771,478
Accumulated other comprehensive income (loss) 54,554 (37,626)
---------- ----------
Total stockholders' equity 38,425,367 37,514,083
========== ==========
Total liabilities and stockholders'equity $ 43,560,395 $ 43,072,404
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ending December 31, 1997, 1998 and 1999
<S> <C> <C> <C>
1997 1998 1999
Net sales (notes 11and 16) $ 64,478,457 $ 61,364,385 $ 63,438,427
Cost of goods sold 56,298,264 44,651,448 39,899,952
---------- ---------- ----------
Gross profit 8,180,193 16,712,937 23,538,475
---------- ---------- ----------
Operating expenses:
Selling 11,103,437 11,800,948 13,571,083
General and administrative 4,956,916 4,976,433 6,275,827
Research and development 4,182,220 4,449,093 6,425,584
---------- ---------- ----------
Total operating expenses 20,242,573 21,226,474 26,272,494
---------- ---------- ----------
Operating loss (12,062,380) (4,513,537) (2,734,019)
---------- ---------- ----------
Interest income 503,680 840,044 546,329
Other, net 237,273 233,979 190,999
---------- ---------- ----------
Total other income, net 740,953 1,074,023 737,328
Loss before income taxes (11,321,427) (3,439,514) (1,996,691)
Income tax benefit (note 10) (4,189,266) (1,287,420) (587,935)
---------- ---------- ----------
Net loss $ (7,132,161) $ (2,152,094) $ (1,408,756)
========== ========== ==========
Net loss per share (note 2):
Basic $ (.95) $ (.29) $ (.19)
========== ========== ==========
Diluted $ (.95) $ (.29) $ (.19)
========== ========== ==========
Weighted average common and common
equivalent shares:
Basic 7,468,758 7,474,371 7,482,586
========== ========== ==========
Diluted 7,468,758 7,474,371 7,482,586
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<S> <C> <C> <C> <C> <C>
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
Shares Amount Earnings Income (loss) Equity
--------- ---------- ----------- ------------- -----------
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 9) 25,529 204,232 - - 204,232
Tax effect of exercises of
nonqualified stock
options (notes 9 and 10) - 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 9) 2,500 20,312 - - 20,312
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 7,474,871 25,190,579 13,180,234 54,554 38,425,367
Net loss - - (1,408,756) - (1,408,756)
Foreign currency translation
adjustment - - - (11,318) (11,318)
Unrealized holding (loss) - - - (80,862) (80,862)
Comprehensive income (loss) - - - - (1,500,936)
Exercise of stock options (note 9) 85,425 487,330 - - 487,330
Tax effect of exercises of
nonqualified stock
options (notes 9 and 10) - 102,322 - - 102,322
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 7,560,296 $25,780,231 $11,771,478 $ (37,626) $37,514,083
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ZOOM TELEPHONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ending December 31, 1997, 1998 and 1999
<S> <C> <C> <C>
1997 1998 1999
---- ---- ----
Cash flows from operating activities:
Net loss $ (7,132,161) $ (2,152,094) $ (1,408,756)
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Depreciation and amortization 1,116,443 1,081,987 1,318,450
Net deferred income taxes (355,506) (838,044) (742,737)
Changes in assets and liabilities:
Accounts receivable 5,604,628 6,121,039 1,461,240
Inventories 7,023,226 3,141,080 (2,628,265)
Prepaid expenses and other
current assets 400,118 (15,866) 56,315
Refundable income taxes (2,574,963) 3,730,585 63,378
Accounts payable and accrued
expenses (1,414,519) (2,877,649) (911,873)
Tax benefit from exercise of
nonqualified stock options 75,567 - 102,322
---------- ---------- ----------
Net cash provided by (used in)
operating activities 2,742,833 8,191,038 (2,689,926)
---------- ---------- ----------
Cash flows from investing activities:
Cash paid for the acquisition of Hayes,
net of cash acquired - - (4,912,258)
Sales (purchases) of investment securities - (13,474,498) 10,259,116
Net investment in limited liability corporation - - (276,000)
Additions to licenses - (133,000) (40,000)
Additions to property, plant and equipment (837,914) (560,610) (912,400)
---------- ---------- ----------
Net cash provided by (used in)
investing activities (837,914) (14,168,108) 4,118,458
---------- ---------- ----------
Cash flows from financing activities:
Exercise of nonqualified stock options 204,232 20,312 487,330
---------- ---------- ----------
Net cash provided by
financing activities 204,232 20,312 487,330
---------- ---------- ----------
Effect of exchange rate changes on cash - - ( 21,941)
Net increase (decrease) in cash and cash equivalents 2,109,151 (5,956,758) 1,893,921
---------- ---------- ----------
Cash and cash equivalents at beginning of year 9,172,186 11,281,337 5,324,579
---------- ---------- ----------
Cash and cash equivalents at end of year $ 11,281,337 $ 5,324,579 $ 7,218,500
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
Years Ending December 31, 1997, 1998 and 1999
(1) Incorporation and Nature of Operations
Zoom Telephonics, Inc. (the "Company") is incorporated under the federal
laws of Canada (Canada Business Corporations Act). Its principal business
activity, the design, production, and marketing of faxmodems and other
communication peripherals, is conducted through its wholly-owned subsidiary,
Zoom Telephonics, Inc. ("Zoom US"), a Delaware corporation based in Boston,
Massachusetts.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements are prepared in accordance with
United States generally accepted accounting principles and are stated in US
dollars. Any differences between US and Canadian generally accepted accounting
principles would have an insignificant impact on the consolidated financial
statements. 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
The consolidated 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
The Company 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.
<PAGE>
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 the Hayes
acquisition in 1999 and are being amortized on a straight-line basis over 10
years and 5 years, respectively. 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
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(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>
1997 1998 1999
Basic weighted
average shares outstanding 7,468,758 7,474,371 7,482,586
Net effect of dilutive
potential common
shares outstanding, based
on the treasury stock method - - -
Diluted weighted
average shares outstanding 7,468,758 7,474,371 7,482,586
</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 83,573, 744,111 and 661,355 shares of
common stock at December 31, 1997, 1998, and 1999, respectively, were
outstanding, but not included in the computation of diluted earnings per share
as their effect would be antidilutive.
(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 has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by SFAS No. 123, the Company measures compensation
cost in accordance with Accounting Principles Board Opinion (APB) No. 25 (APB
25), "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no accounting recognition is given to stock options granted at
fair market value until they are exercised. Upon exercise, net proceeds,
including tax benefits realized, are credited to equity.
(m) Advertising Costs
Advertising costs are expensed 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 deferred advertising costs in the accompanying
consolidated balance sheets.
(n) Investments in Affiliates
Investments in which the Company has no significant influence over the
investee are accounted for under the cost method of accounting. Investments in
which the Company exercises significant influence but which the Company does
not control are accounted for under the equity method of accounting. Under the
equity method, investments are stated at cost and are adjusted for the
Company's share of earnings and losses, contributions and distributions.
<TABLE>
<CAPTION>
(3) Inventories
Inventories consist of the following at December 31:
<S> <C> <C> <C>
1998 1999
--------- ----------
Raw materials $ 5,021,373 $ 6,590,232
Work in process 1,764,123 1,175,463
Finished goods 2,107,773 4,623,171
--------- ----------
$ 8,893,269 $ 12,388,866
========= ==========
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31:
Estimated
1998 1999 useful
lives
--------- --------- --------
Land $ 309,637 $ 309,637 -
Buildings and improvements 2,205,439 2,255,688 31.5 years
Leasehold improvements 470,777 470,777 5 years
Computer hardware and software 2,156,984 2,673,724 3 years
Machinery and equipment 523,971 1,217,211 5 years
Molds, tools and dies 1,129,028 1,300,991 5 years
Office furniture and fixtures 491,673 250,360 5 years
--------- ---------
7,287,509 8,478,388
Less accumulated depreciation 3,539,206 4,266,467
--------- ---------
$ 3,748,303 $ 4,211,921
========= =========
</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. In March of 1999, the Company
acquired a ten-year lease for an office facility in Camberley, United Kingdom.
Under non-cancelable operating leases, Zoom's total rent expense was $392,010,
$334,469 and $420,086 for the years ending December 31, 1997, 1998, and 1999,
respectively. Future minimum rental payments, excluding executory costs,
required under these operating leases are as follows:
Year Total
2000 $ 491,974
2001 $ 346,797
2002 $ 143,548
2003 $ 156,705
2004 $ 157,902
2005-2008 $ 486,865
(6) Acquisition
In March 1999 the Company entered into a series of independent agreements
to purchase various assets, licenses, and inventory from Hayes Microcomputer
Products, Inc. ("Hayes"). Hayes was 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 865,885
Property and equipment 278,479
Goodwill (excess of cost over fair
value of assets) 3,268,770
Other assets 388,626
----------
$ 7,548,570
==========
Liabilities assumed:
Cash paid 6,128,479
Accounts payable 554,861
Accrued expenses 297,429
Negative Goodwill - other non-current
liabilities 567,801
----------
$ 7,548,570
==========
<PAGE>
(Continued)
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
The negative goodwill resulted from the purchase of the Hayes U.K.
business, where the value of 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.
(7) 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.
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1999
--------- ----------
Net loss $ (2,152,094) $ ( 1,408,756)
Foreign currency translation
adjustment - (11,318)
Net unrealized holding gain (loss)
on investment securities 54,554 (80,862)
--------- ---------
Comprehensive loss $ (2,097,540) $ (1,500,936)
========= =========
</TABLE>
(8) Credit Lines
The Company has received a commitment for a new $5 million line of credit
that expires on April 1, 2003. The line of credit bears interest at the bank's
prime rate. The line of credit outlined in the commitment letter is secured and
contains certain financial and other covenants. The Company anticipates that
the line of credit agreement will be signed by the end of the second quarter.
The Company is in full compliance with all covenants. No amounts were
outstanding under any lines of credit at December 31, 1999.
(9) Stock Option Plans
At December 31, 1999 the Company had three stock option plans, which are
described below:
Employee Stock Option Plan
The Employee Stock Option Plan (the "Employee Stock Option Plan") is for
officers and certain full-time and part-time employees of the Company.
Non-employee directors of the Company are not entitled to participate under
this plan. The Employee Stock Option Plan provides for the availability of
2,800,000 shares of common stock for issuance upon the exercise of stock
options granted under the plan. Shares of common stock were registered for
issuance under this 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:
<PAGE>
(Continued)
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C> <C>
Weighted average
Number of shares exercise price
Balance at December 31, 1996 569,217 $ 8.29
Granted 196,650 7.96
Exercised (19,529) 8.00
Expired (144,038) 8.81
--------- -----
Balance at December 31, 1997 602,300 8.07
Granted 574,102 6.53
Exercised (2,500) 8.12
Expired (43,900) 8.12
--------- -----
Balance at December 31, 1998 1,130,002 7.27
Granted 65,000 4.33
Exercised (80,775) 5.80
Expired (82,760) 7.06
--------- -----
Balance at December 31, 1999 1,031,467 $ 7.21
========= =====
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes information about fixed stock options under the
Employee Stock Option Plan outstanding on December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
Weighted Average
Range of Number Remaining Weighted Number Weighted Average
Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------- --------- ---------------- -------------- ----------- ----------------
$ 3.50 to $5.25 475,327 1.70 $ 4.46 181,576 $ 4.48
5.25 to 7.00 36,775 1.30 6.88 32,275 6.88
7.00 to 8.75 429,365 0.80 8.12 296,480 8.11
15.75 to 17.50 90,000 0.30 17.50 90,000 17.50
-------------- --------- ---- ----- ------- -----
$4.13 to $17.50 1,031,467 1.20 years $ 7.21 600,331 $ 8.36
============== ========= ==== ===== ======= =====
</TABLE>
The Company recognized a tax benefit of $75,567 and $102,322 in 1997 and
1999, 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:
<PAGE>
<TABLE>
<CAPTION>
(Continued)
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
<S> <C> <C>
Weighted average
Number of shares exercise price
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 7.39
Granted 36,000 4.95
Exercised - -
Expired (36,000) 7.88
------ -----
Balance at December 31, 1999 72,000 $ 5.93
====== =====
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes information about fixed stock options under
the Directors Plan on December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Average
Range of Number Remaining Weighted Number Weighted Average
Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- -------------- ----------- ----------------
$ 4.38 to 7.75 72,000 .8 years $ 5.93 54,000 $ 6.06
============ ====== === ==== ====== ====
</TABLE>
1998 Employee Equity Incentive Stock Option Plan
The 1998 Employee Equity Incentive Stock Option Plan (the "1998 Plan") was
adopted to attract and retain employees and provide an incentive for them to
assist 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. In 1999 the Board of Directors increased the
authorized number of shares available for grant under the 1998 Plan from
300,000 to 600,000 shares of common stock. 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 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.
In addition, in 1999, the Board of Directors authorized the Chief Executive
Officer of the Company to grant up to an aggregate of 50,000 stock options to
employees who are not executive officers or directors of the Company. 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 or, in certain cases, the Chief Executive Officer.
Options outstanding under this plan are as follows:
<PAGE>
<TABLE>
<CAPTION>
(Continued)
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
<S> <C> <C>
Weighted average
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
Granted 338,350 4.26
Exercised (4,650) 4.13
Expired (33,300) 4.25
Balance at December 31, 1999 328,050 $ 4.25
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes information about fixed stock options under the
Employee Stock Option Plan outstanding on December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Weighted Average
Range of Number Remaining Weighted Number Weighted Average
Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- -------------- ----------- ----------------
$ 4.13 to 4.31 328,050 2.2 years $ 4.25 7,024 $ 4.13
============ ======= === ==== ===== ====
</TABLE>
At December 31, 1999, there were 1,194,660 additional shares available for
grant under all three stock option plans. The per share weighted-average fair
value of stock options granted during 1997, 1998, and 1999 was $4.43, $3.70,
and $4.33, respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 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; 1999 - expected dividend yield 0.00%, risk-free interest rate of 6.16%,
volatility 90% and an expected life of 2.75 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>
<S> <C> <C> <C> <C>
1997 1998 1999
Net income (loss) As reported $(7,132,161) $(2,152,094) $(1,408,756)
Pro forma (7,718,857) (2,883,787) (1,869,478)
Net income (loss) per share As reported-basic $ (0.95) $ (.29) $ (.19)
Pro forma-basic (1.03) (.39) (.25)
As reported-diluted $ (0.95) $ (.29) $ (.19)
Pro forma-diluted (1.03) (.39) (.25)
</TABLE>
<PAGE>
(Continued)
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
Pro forma net 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.
(10) Income Taxes
Income tax benefit attributable to loss from operations consists of:
<TABLE>
<S> <C> <C> <C>
Current Deferred Total
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)
========== ========== ==========
Year ending December 31, 1999:
US federal $ 63,699 $ (532,146) $ (468,447)
State and local (6,571) (112,917) (119,488)
---------- ---------- ----------
$ 57,128 $ (645,063) $ (587,935)
========== ========== ==========
</TABLE>
Income tax expense (benefit) was ($4,189,266), ($1,287,420), and
($587,935) for the years ending December 31, 1997, 1998 and 1999, 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>
<S> <C> <C> <C>
1997 1998 1999
Computed "expected" US tax benefit $ (3,849,285) $ (1,169,435) $ (678,980)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit (547,555) (114,824) (78,862)
Tax benefit from foreign sales corp. - - -
Other, net 207,574 (3,161) 169,907
---------- ---------- ----------
$ (4,189,266) $ (1,287,420) $ (587,935)
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Total income tax benefit was allocated as follows:
<S> <C> <C> <C>
1997 1998 1999
Loss from operations $ (4,189,266) $ (1,287,420) $ (587,935)
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial statement purposes (75,567) - (102,322)
---------- ---------- ----------
$ (4,264,833) $ (1,287,420) $ (690,257)
========== ========== ==========
</TABLE>
<PAGE>
(Continued)
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
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, 1998, and 1999 are presented below:
<S> <C> <C> <C>
1997 1998 1999
Deferred tax assets:
Inventories, primarily
non-deductible reserves $ 541,266 $ 1,186,445 $ 1,832,101
Accounts receivable, primary
returns and allowances 705,046 1,276,054 645,517
Accrued expenses, principally
provisions not currently
deductible 335,489 234,473 367,761
Net operating loss carryforwards
and credits
714,035 316,558 1,542,861
Other 118,732 212,703 350,846
---------- ---------- ----------
Total current gross deferred tax
assets 2,414,568 3,226,233 4,739,086
Less valuation allowance (770,116)
---------- ---------- ----------
Total gross deferred tax assets $ 2,414,568 $ 3,226,233 $ 3,968,970
========== ========== ==========
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 $ 3,968,970
========== ========== ==========
On December 31, 1999 the Company has federal and state net operating
loss carryforwards of approximately $1,174,000 and $13,268,000,
respectively. These federal and state net operating losses are
available to offset future taxable income, and are due to expire
beginning 2018 and 2002, respectively. The Company recorded a deferred
tax asset valuation allowance against a portion of the deferred tax
assets related to state net operating loss carryforwards which
management believes may expire unused. The valuation allowance reduces
deferred tax assets to reflect the estimated amount of deferred tax
assets, which will more likely not be realized. Realization of
deferred tax assets is dependent upon the generation of future taxable
income. The Company has recorded a valuation allowance against its
deferred tax assets because management believes that, after
considering all the available objective evidence, historical and
prospective, with greater weight given to historical evidence, it is
more likely than not that a portion of the asset will not be realized.
</TABLE>
(11) Significant Customers
One customer accounted for approximately 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. Two customers accounted for
approximately 17% and 10% of net sales for the year ending December 31, 1999.
On December 31, 1998, two customers comprised approximately 40% of net accounts
receivable. On December 31, 1999, two customers comprised approximately 29% of
net accounts receivable.
(12) Financial Instruments
The Company generates a portion of its revenues in international markets
and denominated in foreign currencies, which subjects its operations to
exposure to foreign currency fluctuations. The impact of currency fluctuations
can be positive or negative in any given period.
<PAGE>
(Continued)
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
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, 1997, 1998 and 1999 foreign
currency gains and losses were not material. At December 31, 1999, the
Company's foreign currency-denominated net assets were not material. The
Company has no involvement with derivative financial instruments.
(13) Investment in Limited Liability Company
In September 1999, the Company made an investment in a limited liability
company ("LLC"). The Company granted the LLC the rights to a software license
in exchange for 300,000 Class A shares of the LLC, which were valued by the
Company at $300,000. The value at which the outside investors paid cash for
shares received as part of the same equity infusion was used by the Company to
value their shares received. A gain of $75,000 was recognized on the
transaction, which was reported as other income in fiscal 1999.
(14) Supplemental Disclosure of Cash Flow Information
<TABLE>
<S> <C> <C> <C>
1997 1998 1999
Cash paid during year for interest $ - $ - $ -
========== ========== ==========
Cash paid during year for income taxes $ 3,650 $ - $ -
========== ========== ==========
</TABLE>
The tax effect of the exercise of stock options resulted in increases to
common stock and an increase in refundable income taxes of $75,567 in 1997 and
$102,322 in 1999.
(15) Dependence on Key Suppliers
The Company produces its products using components or subassemblies
purchased from third-party suppliers. In 1997, the Company purchased
substantially all of its modem chipsets from a single supplier, Conexant
(formerly Rockwell). Since 1998, the Company has also purchased chipsets from
Lucent Technologies, with a goal of maintaining good supply relationships with
both Conexant and Lucent. In 1999, the Company purchased substantially all of
its modem chipsets from Lucent. An interruption in the delivery of these
components could have a material adverse effect on the Company's results of
operations.
(16) 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
1997, 1998, and 1999 were comprised as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
% of % of % of
1997 Total 1998 Total 1999 Total
---- ----- ---- ----- ---- -----
North America $ 52,227,550 81% $ 47,855,062 78% $ 44,974,780 71%
International 12,250,907 19% 13,509,323 22% 10,575,545 17%
UK-Zoom/Hayes - - - - 7,888,102 12%
---------- ---- ---------- ---- ---------- ----
Total $ 64,478,457 100% $ 61,364,385 100% $ 63,438,427 100%
========== ==== ========== ==== ========== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C>
2.1 Asset Purchase Agreement Between Zoom Telephonics, Inc. and Hayes
Microcomputer Products, Inc. dated March 8, 1999, filed as Exhibit 2.1 to
the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1999 (the "March 1999 Form 10-Q").*
2.2 Asset Purchase Agreement Between Zoom Telephonics, Inc. and Hayes
Microcomputer Products, Inc. dated March 28, 1999, filed as Exhibit 2.2 to
the March 1999 Form 10-Q.*
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. Report on Financial Statement Schedule and Consent of KPMG 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.
</TABLE>
<PAGE>
xhibit 23. Report on Financial Statement Schedule and Consent of KPMG LLP
REPORT ON FINANCIAL STATEMENT SCHEDULE AND
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors;
Zoom Telephonics, Inc.
The audits referred to in our report dated February 8, 2000, included the
related financial statement schedule for each of the years in the three-year
period ended December 31, 1999, 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, No. 333-60565, No. 33-90191 and No. 333-75575) on
Form S-8 of Zoom Telephonics, Inc. of our report dated February 8, 2000,
relating to the consolidated balance sheets of Zoom Telephonics, Inc. and
subsidiaries as of December 31, 1998 and 1999, 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, 1999, which report appears in the December 31, 1999 annual report on Form
10-K of Zoom Telephonics, Inc.
KPMG LLP
Boston, Massachusetts
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ZOOM TELEPHONICS, INC.
31-DEC-99
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 7,218,500
<SECURITIES> 3,189,074
<RECEIVABLES> 7,324,307
<ALLOWANCES> 4,855,850
<INVENTORY> 12,388,866
<CURRENT-ASSETS> 34,650,586
<PP&E> 4,211,921
<DEPRECIATION> 727,261
<TOTAL-ASSETS> 43,072,404
<CURRENT-LIABILITIES> 5,077,546
<BONDS> 0
0
0
<COMMON> 25,780,231
<OTHER-SE> 11,771,478
<TOTAL-LIABILITY-AND-EQUITY> 43,072,404
<SALES> 74,310,278
<TOTAL-REVENUES> 63,438,427
<CGS> 39,899,952
<TOTAL-COSTS> 26,272,494
<OTHER-EXPENSES> 190,999
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (546,329)
<INCOME-PRETAX> (1,996,691)
<INCOME-TAX> (587,935)
<INCOME-CONTINUING> (1,408,756)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,408,756)
<EPS-BASIC> (.19)
<EPS-DILUTED> (.19)
</TABLE>
<TABLE>
<CAPTION>
Schedule II
ZOOM TELEPHONICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ending December 31, 1997, 1998 and 1999
<S> <C> <C> <C> <C> <C>
Balance at Balance
Beginning Charged to Amount at end
Description of year expense Other written off of year
----------- ----------- ----------- ----------- -----------
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
========= ========== ========== ========== ==========
Reserve for doubtful accounts $ 805,000 $ 1,289,244 (a)$ 761,901 $ 1,897,482 $ 958,663
Reserve for price protection 1,567,115 653,007 - 1,570,436 649,686
Reserve for sales returns 948,587 6,542,971 - 6,472,280 1,019,278
Other allowances 2,367,049 4,714,611 - 4,853,437 2,228,223
--------- ---------- ---------- ---------- ----------
Year ending December 31,1999 $ 5,687,751 $ 13,199,832 $ 761,901 $14,793,635 $ 4,855,850
========= ========== ========== ========== ==========
(a) Represents allowance for doubtful accounts of Hayes Microcomputer Products, Inc. as of
March 9, 1999.
</TABLE>
