UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-18672
ZOOM TELEPHONICS, INC.
(Exact Name of Registrant as Specified in its Charter)
Canada 04-2621506
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
207 South Street, Boston, Massachusetts 02111
(Address of Principal Executive Offices in the U.S.) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 423-1072
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
The number of shares outstanding of the registrant's Common Stock, No Par
Value, as of May 10, 2000 was 7,474,547 shares.
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the Three
Months Ending March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three
Months Ending March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management Discussion and Analysis of
Financial Condition and Results of Operations 9 - 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
PART I - FINANCIAL INFORMATION
ZOOM TELEPHONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
03/31/00 12/31/99
(Unaudited) (Audited)
Assets
Current assets:
Cash and cash equivalents $ 8,118,943 $ 7,218,500
Investment securities 3,316,870 3,189,074
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of $4,013,208 at
3/31/00 and $4,855,850 at 12/31/99 7,579,472 7,324,307
Inventories 9,964,299 12,388,866
Net deferred tax assets 4,827,197 3,968,970
Prepaid expenses and other current assets 540,522 560,869
----------- ----------
Total current assets 34,347,303 34,650,586
Property, plant and equipment, net 4,157,361 4,211,921
Goodwill, net of accumulated amortization of
$1,210,797 at 3/31/00 and $1,005,273 at 12/31/99 3,717,621 3,898,410
Other assets 256,000 311,487
Total assets $ 42,478,285 $ 43,072,404
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,892,865 $ 2,703,729
Accrued expenses 2,096,924 2,373,817
--------- ---------
Total current liabilities 3,989,789 5,077,546
--------- ---------
Other non-current liabilities 454,234 480,775
--------- ---------
Total liabilities 4,444,023 5,558,321
--------- ---------
Stockholders' equity:
Common stock, no par value. Authorized 25,000,000
shares; issued and outstanding 7,744,547 shares
at March 31, 2000 and 7,560,296 shares at
December 31, 1999 27,233,477 25,780,231
Retained earnings 10,830,063 11,771,478
Accumulated other comprehensive income (loss) (29,278) (37,626)
---------- ----------
Total stockholders' equity 38,034,262 37,514,083
Total liabilities and stockholders'equity $ 42,478,285 $ 43,072,404
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending March 31,
2000 1999
------ ------
<S> <C> <C>
Net sales $ 13,618,052 $ 11,387,407
Costs of goods sold 9,237,239 7,326,255
----------- -----------
Gross profit 4,380,813 4,061,152
Operating expenses:
Selling 2,942,538 2,499,399
General and administrative 1,345,922 1,375,255
Research and development 1,591,544 1,503,550
----------- -----------
Total operating expenses 5,880,004 5,378,204
----------- -----------
Operating loss (1,499,191) (1,317,052)
Other income, net 114,896 278,396
Loss before income taxes (1,384,295) (1,038,656)
Income tax benefit (442,880) (348,601)
------------ ------------
Net loss $ (941,415 $ (690,055)
=========== ============
Net loss per common share:
Basic $ (.12) $ (.09)
=========== ============
Diluted $ (.12) $ (.09) $
=========== ============
Weighted average common and common equivalent shares:
Basic 7,640,064 7,474,871
=========== ===========
Diluted 7,640,064 7,474,871
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending March 31,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (941,415) $ (690,055)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 378,364 332,689
Deferred income taxes (442,880) (348,959)
Equity in losses of affiliates 20,000 -
Changes in assets and liabilities:
Accounts receivable (281,354) 1,910,580
Inventories 2,421,575 (4,569,906)
Prepaid expenses and other assets 44,603 (136,363)
Accounts payable and accrued expenses (1,084,430) 1,770,811
---------- ----------
Net cash provided by (used in) operating
activities 114,463 (1,731,203)
---------- ----------
Cash flows from investing activities:
Cash paid for the acquisition of Hayes - (5,028,479)
Cash acquired in the purchase of Hayes - 1,216,221
Sale (purchase)of investment securities (124,836) 4,833,331
Additions to licenses - (20,000)
Additions to property, plant and equipment (144,820) (269,104)
-------- ----------
Net cash provided by (used in)
investing activities (269,656) 731,969
--------- ----------
Cash flows from financing activities:
Exercise of nonqualified stock options 1,035,255 -
--------- ----------
Net cash provided by financing activities 1,035,255 -
--------- ----------
Effect of exchange rate changes on cash 20,381 -
--------- ----------
Net increase (decrease) in cash and cash equivalents 900,443 (999,234)
Cash and cash equivalents, beginning of period 7,218,500 5,324,579
--------- ----------
Cash and cash equivalents, end of period $ 8,118,943 $ 4,325,345
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 0 $ 0
========= ==========
Income taxes $ 0 $ 0
========= ==========
Supplemental disclosures of non-cash operating activities:
Tax benefit from exercise of nonqualified stock options $ 415,347 $ 0
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The consolidated financial statements of Zoom Telephonics, Inc., (the
"Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do
not include all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year
ending December 31, 1999 included in the Company's 1999 Annual Report on Form
10-K.
The consolidated balance sheet as of March 31, 2000, the consolidated
statements of operations for the three months ending March 31, 2000 and 1999,
and the consolidated statements of cash flows for the three months ending March
31, 2000 and 1999 are unaudited, but, in the opinion of management, include all
adjustments (consisting of normal, recurring adjustments) necessary for a fair
presentation of results for these interim periods.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2000.
(2) Earnings Per Share
The reconciliation of the numerators and denominators of the basic and
diluted net loss per common share computations for the Company's reported net
loss is as follows:
Three Months Ending March 31,
2000 1999
-------------- ----------------
Basic:
Net loss $ (941,415) $ (690,055)
Weighted average shares
outstanding 7,640,064 7,474,871
--------- ---------
Net loss per share $ (.12) $ (.09)
========= =========
Diluted:
Net loss $ (941,415) $ (690,055)
Weighted average shares
outstanding 7,640,064 7,474,871
Net effect of dilutive
stock options based on
the Treasury stock
method using average
market price - -
Weighted average shares
outstanding 7,640,064 7,474,871
--------- ---------
Net loss per share $ (.12) $ (.09)
========= =========
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 725,416 and 2,089 shares of common stock
at March 31, 2000 and 1999, respectively, were outstanding, but not included in
the computation of diluted earnings per share as their effect would be
antidilutive.
(3) Inventories
<TABLE>
Inventories consist of the following: March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Raw materials $ 5,118,340 $ 6,590,232
Work in process 1,123,553 1,175,463
Finished goods 3,722,406 4,623,171
--------- ----------
$ 9,964,299 $ 12,388,866
========= ==========
</TABLE>
(4) Acquisition
In March 1999 the Company entered into a series of separate agreements
to purchase various assets, licenses, and inventory from Hayes Microcomputer
Products, Inc ("Hayes"). Hayes engaged in the business of design, manufacture,
and support of computer communications products for business, government, and
consumers worldwide. On October 9, 1998 Hayes filed for reorganization under
Chapter 11 of the United States Bankruptcy Code, Case No. 98-2276 through
98-2281, in the United States Bankruptcy Court ("the Court") for the district
of Delaware.
In March 1999 Zoom Telephonics acquired most of the modem assets of Hayes
Corporation for $5.0 million in cash. The purchase included the Hayes,
Practical Peripherals, Accura, Optima, Century 2, and Cardinal brands and
product rights for the USA, Canada, South & Central America, Europe, and the
Middle East. In July 1999 the Company finalized the purchase of Hayes Asia
Pacific for $1.1 million in cash. The acquisitions were accounted for as
purchases. The excess of cost over fair value of net assets acquired is being
amortized on a straight-line method over five years. The following summarizes
the assets acquired and liabilities assumed in the series of transactions:
Assets acquired:
Cash $ 1,216,221
Accounts receivable 1,530,589
Inventory 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
(5) Comprehensive Income
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income" establishes rules for the reporting and display of
comprehensive income and its components; however, it has no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires all changes
in equity from non-owner sources to be included in the determination of
comprehensive income (loss).
The components of comprehensive loss, net of tax, are as follows:
Three Months Ending March 31,
2000 1999
----------- ----------
Net loss $ (941,415) $ (690,055)
Foreign currency
translation adjustment 5,389 -
Net unrealized holding
gain (loss) on investment 2,959 (36,792)
securities ----------- ----------
Comprehensive loss $ (933,067) $ (726,847)
=========== ==========
(6) Bank Credit Facility
The Company has received a commitment for a new secured $5 million line
of credit that would expire on April 1, 2003. The line of credit would bear
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.
(7) Segment and Geographic Information
The Company's operations are classified into one reportable segment.
Substantially all of the Company's operations and long-lived assets reside
primarily in the United States. The Company's net sales by major geographic
location for the three months ending March 31, 2000 and 1999, respectively were
comprised as follows:
<TABLE>
Three Months Three Months
Ending Ending
March 31, 2000 % of Total March 31, 1999 % of Total
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
North America $ 9,497,033 70% $ 8,410,100 74%
International excluding
the United Kingdom 1,369,305 10% 2,433,783 21%
United Kingdom 2,751,714 20% 543,524 5%
---------- ----- ---------- -----
Total $ 13,618,052 100% $ 11,387,407 100%
---------- ----- ---------- -----
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Zoom Telephonics, Inc. ("Zoom" or "the Company") recorded net sales
of $13,618,052 and a net loss of $941,415 for the Company's first quarter
ending March 31, 2000 compared to net sales of $11,387,407 and a net loss of
$690,055 for the first quarter ending March 31, 1999. Earnings per share
declined to a loss of $0.12 for the first quarter of 2000 from a loss of $0.09
for the first quarter of 1999.
Net sales for the quarter ending March 31, 2000 were 20% higher
than the prior year's first quarter. The increase was primarily due to higher
unit sales of dial-up modems which was partially offset by a relatively small
average selling price decline of 3%. The average selling price for dial-up
modems was down 7% for Zoom brand modems, but only down 3% for the Company due
to the higher average selling price of Hayes brand modems. The overall net
sales increase compared to the quarter ending March 31, 1999 was comprised of
relatively flat sales in North America and an increase of 34% in markets
outside North America. The significant increase in international sales was
primarily due to the growth in the United Kingdom.
Gross profit as a percentage of net sales decreased to 32.2% in the
quarter ending March 31, 2000 from 35.7% in the quarter ending March 31, 1999.
The decrease was due primarily to the average selling price decline.
Selling expenses in the first quarter of 2000 increased to $2,942,538
or 21.6% of net sales from $2,499,399 or 21.9% of net sales in the first
quarter of 1999. The dollar increase was primarily the result of the selling
expenses in Zoom's U.K. office and increased advertising and promotion expense,
primarily in the form of cooperative advertising programs with the resellers of
Zoom modems.
General and administrative expenses were $1,345,922 or 9.9% of net sales
in the first quarter of 2000 compared to $1,375,255 or 12.1% of net sales in
the first quarter of 1999. Declines in legal and bad debt expenses were offset
by expenses associated with the U.K. office and higher payroll costs.
Research and development expenses increased to $1,591,544 or 11.7% of
net sales in the first quarter of 2000 from $1,503,550 or 13.2% of net sales in
the first quarter of 1999. The increase in expense was primarily due to
increased payroll costs partially offset by reductions in consulting and
outside services. The research and development organization has changed in the
last year reflecting the broadening of the Company's non-modem product line and
the expansion of the modem product line for DSL and cable broadband modems.
Liquidity and Capital Resources
Zoom ended the first quarter of 2000 with a strong balance sheet,
with stockholders' equity of $38,034,262 or $4.91 per share, with cash, cash
equivalents, and investments of $11,435,813, and working capital of
$30,357,514. In addition, the Company has received a commitment for a new
secured $5 million line of credit that would expire on April 1, 2003. The line
of credit would bear 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.
Operating activities provided $114,463 in cash during the first
three months of 2000. Cash was provided by the reduction of inventories of
$2,421,575, the tax benefit from employees exercising stock options of
$415,347, depreciation and amortization of $378,364, and reductions in prepaid
expenses and other assets. Cash was used by the decrease in accounts payable
and accrued expenses of $1,084,430, the net loss of $941,415, the increase in
deferred income taxes of $442,880, and the increase of accounts receivable of
$281,354.
Cash from investing activities was primarily used to fund Zoom's
capital expenditures of $144,820 during the first three months of 2000, which
included purchases of recurring investments in computer software, computer
equipment and continuing renovation of the Zoom headquarters, and the purchase
of investment securities of $124,836. The Company does not have any significant
capital commitments and it anticipates that it will continue with modest
investments in equipment and in improvements to its facilities during the year.
During the first three months of 2000, the Company received cash from
financing activities of $1,035,255 by the exercise of nonqualified stock
options by employees and outside directors.
The Company believes that its existing cash, together with funds
generated from operations and available sources of financing, will be
sufficient to meet normal working capital requirements for the rest of 2000.
Additional financing may be needed in the event sales increase substantially or
if significant losses are incurred.
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
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 believe that
our revenue recognition policy is in compliance with SAB 101 and the adoption
of SAB 101 had no material impact on the Company's financial statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company owns financial instruments that are sensitive to market
risks as part of its investment portfolio. The investment portfolio is used to
preserve the Company's capital until it is required to fund operations,
including the Company's research and development activities. None of these
market-risk sensitive instruments are held for trading purposes. The Company
does not own derivative financial instruments in its investment portfolio. The
investment portfolio contains instruments that are subject to the risk of a
decline in interest rates.
Investment Rate Risk - The Company's investment portfolio includes debt
instruments that are primarily United States government bonds and high grade
corporate bonds of less than three years in duration. These bonds are subject
to interest risk, and could decline in value if interest rates fluctuate. The
Company's investment portfolio also consists of certain commercial paper, which
is also subject to interest rate risk. Due to the short duration and
conservative nature of these instruments, the Company does not believe that it
has a material exposure to interest rate risk.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995
This report contains forward-looking information relating to Zoom's
plans, expectations and intentions, including without limitation the financial
and other contributions expected, in connection with Zoom's acquisition of the
Hayes modem assets referenced in this report, the future impact of
advantageously negotiated modem materials, Zoom's anticipated introduction of
its advanced cable and DSL modems and other broadband Internet access
solutions, its potential as a significant player in the cable and DSL markets,
Zoom's anticipation to continue to make modest investments in equipment and in
improvements to its facilities during fiscal year 2000, and the sufficiency of
Zoom's cash, together with funds generated from operations and available
sources of financing, to meet normal working capital requirements for the
remainder of fiscal year 2000.
Actual results may be materially different than those expectations as a
result of known and unknown risks, including: uncertainty of new product
development and introduction, including budget overruns, project delays and the
risk that newly introduced products may contain undetected errors or defects or
otherwise not perform as anticipated; uncertainties inherent in financial
projections that, by their nature, are based upon assumptions, many of which
are not in the control of the company; Zoom's dependence on one or a limited
number of suppliers for certain key components; early stage of development of
the cable and DSL data communications markets, uncertainty of market growth of
those markets; rapid technological change; competition; and other risks set
forth in Zoom's filings with the Securities and Exchange Commission. Zoom
cautions readers not to place undue reliance upon any such forward-looking
statements, which speak only as of the date made. Zoom expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
such statements to reflect any change in the Zoom's expectations or any change
in events, conditions or circumstance on which any such statement is based.
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and reports on Form 8-K
(a) Exhibit Description Page
27. Financial Data Schedule 14
(b) No reports on Form 8-K were filed by the Company during the
quarter ending March 31, 2000
<PAGE>
ZOOM TELEPHONICS, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZOOM TELEPHONICS, INC.
Date: May 12, 2000 By: /s/ Frank Manning
----------------------------------------
Frank B. Manning, President
Date: May 12, 2000 By: /s/ Robert Crist
----------------------------------------
Robert Crist, Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27. Financial Data Schedule
ZOOM TELEPHONICS, INC.
March 31, 2000
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 8,118,943
<SECURITIES> 3,316,870
<RECEIVABLES> 7,579,472
<ALLOWANCES> 4,013,208
<INVENTORY> 9,964,299
<CURRENT-ASSETS> 34,347,303
<PP&E> 4,157,361
<DEPRECIATION> 199,380
<TOTAL-ASSETS> 42,478,285
<CURRENT-LIABILITIES> 3,989,789
<BONDS> 0
0
0
<COMMON> 27,233,477
<OTHER-SE> 10,830,063
<TOTAL-LIABILITY-AND-EQUITY> 42,478,285
<SALES> 16,638,960
<TOTAL-REVENUES> 13,618,052
<CGS> 9,237,239
<TOTAL-COSTS> 5,880,004
<OTHER-EXPENSES> 18,793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (133,689)
<INCOME-PRETAX> (1,384,295)
<INCOME-TAX> (442,880)
<INCOME-CONTINUING> (941,415)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (941,415)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
