Proxy Statement/Prospectus filed pursuant to Rule 424(b)(3)
ZOOM TELEPHONICS, INC., A CANADIAN CORPORATION
PROXY STATEMENT
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ZOOM TECHNOLOGIES, INC. (A TO-BE-FORMED DELAWARE CORPORATION)
10,556,812 SHARES OF COMMON STOCK
PROSPECTUS
We are furnishing this proxy statement/prospectus to shareholders of
Zoom Telephonics, Inc., a Canadian corporation referred to as Zoom Canada in
this proxy statement/prospectus, in connection with our board of directors'
solicitation of proxies for use at a special meeting of the shareholders of Zoom
Canada.
The meeting will be held on February 15, 2002, at 9:30 a.m., Eastern
Standard Time, at our principal executive offices located at 207 South Street,
Boston, Massachusetts 02111. The meeting will be simultaneously held (linked by
telephone conference call) at Suite 1525, 625 Howe Street, Vancouver, B.C.
V6C2TC. You may attend the meeting at either location.
The specific purpose of the special meeting is to obtain shareholder
approval to change our jurisdiction of incorporation from Canada to the State of
Delaware. The process necessary to accomplish this change is called a
continuance in Canada and a domestication in Delaware. This process is described
more fully in this proxy statement/prospectus and in the accompanying notice of
special meeting of shareholders of Zoom Canada. The specific items to be voted
on to complete this continuation are detailed in the form of proxy attached to
this proxy statement/prospectus and in Exhibit "C" to the proxy
statement/prospectus.
This proxy statement/prospectus is also a prospectus of Zoom
Technologies, Inc., a to-be-formed Delaware corporation referred to as Zoom
Delaware in this proxy statement/prospectus, relating to the offer and sale of
shares of its common stock issuable upon the continuation of Zoom Canada as a
Delaware corporation. When we complete the continuation, we will continue our
legal existence in Delaware as if we had been originally incorporated under
Delaware law. Each outstanding share of common stock of Zoom Canada will
automatically convert into a share of common stock of Zoom Delaware.
Our common stock is currently traded on the Nasdaq Stock Market under
the symbol "ZOOM". On December 14, 2001, the last reported sale price of our
common stock on the Nasdaq National Market was $1.15 per share. Following the
continuation, shares of our common stock will continue to trade on the Nasdaq
Stock Market.
To be approved, at least two-thirds of the votes cast by our
shareholders in person or by proxy at the meeting must vote in favor of the
proposed continuation. We plan to complete the proposed continuation as soon as
possible following approval by our shareholders. Our board of directors may,
however, decide to delay the continuation or not to proceed with the
continuation if they determine that the continuation is no longer advisable.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF RISKS
RELATING TO THE CONTINUATION AND THE OWNERSHIP OF SHARES OF COMMON STOCK OF ZOOM
DELAWARE.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This proxy statement/prospectus is dated December 28, 2001 and
is first being mailed to shareholders on or about December 28, 2001.
SOURCES OF ADDITIONAL INFORMATION
This proxy statement/prospectus is accompanied by copies of our annual
report on Form 10-K for the fiscal year ended December 31, 2000, attached to
this proxy statement/prospectus as Exhibit "A", and our quarterly report on Form
10-Q for the fiscal quarter ended September 30, 2001, attached to this proxy
statement/prospectus as Exhibit "B". This proxy statement/prospectus also
incorporates important business and financial information about our company from
documents that are not included in or delivered with this proxy statement/
prospectus. This information is available to you without charge upon your
written or oral request. You can obtain the documents incorporated by reference
in this proxy statement/prospectus by requesting them in writing or by telephone
from
Zoom Telephonics, Inc.
Investor Relations
207 South Street
Boston, Massachusetts 02111
Phone: (617) 423-1072
TO OBTAIN TIMELY DELIVERY OF REQUESTED DOCUMENTS IN ADVANCE OF THE
SHAREHOLDER MEETING, YOU SHOULD MAKE YOUR REQUEST NO LATER THAN FEBRUARY 8,
2002.
For more information on the matters incorporated by reference in this
proxy statement/prospectus, please see "Where You Can Find More Information" on
page 51.
ZOOM TELEPHONICS, INC.
207 SOUTH STREET
BOSTON, MA 02111
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Zoom
Telephonics, Inc., a Canadian corporation ("Zoom Canada"), will be held on
February 15, 2002 at 9:30 a.m., Eastern Standard Time, at our principal
executive offices located at 207 South Street, Boston, Massachusetts 02111, and
simultaneously (linked by telephone conference call) at Suite 1525, 625 Howe
Street, Vancouver, B.C. V6C 2TC, for the following purposes:
1. To consider and act upon a special resolution authorizing Zoom
Telephonics, Inc., a Canadian corporation, to change its jurisdiction of
incorporation from Canada to the State of Delaware in the United States through
a process called a continuance in Canada and a domestication in Delaware.
2. To transact such other business as may properly come before the meeting
or any adjournments of the meeting.
The text of the special resolutions to be voted upon at the meeting are
set forth in Exhibit "C" to the accompanying proxy statement/prospectus.
The special resolution will be approved if passed by at least
two-thirds of the votes cast at the meeting. If the special resolution is
passed, our board of directors will be authorized in their discretion to delay
or abandon the continuation. THE BOARD OF DIRECTORS RECOMMENDS THAT THE
SHAREHOLDERS VOTE "FOR" THE ADOPTION OF THE SPECIAL RESOLUTION AUTHORIZING ZOOM
CANADA TO CHANGE ITS JURISDICTION OF INCORPORATION FROM CANADA TO DELAWARE.
A dissenting shareholder is entitled to be paid the fair value of his
or her shares in accordance with Section 190 of the Canadian Business
Corporations Act. A summary of the procedures to exercise your dissent rights
are set forth in the accompanying proxy statement/prospectus.
The board of directors has fixed the close of business December 28,
2001 as the record date for determining the shareholders entitled to notice of
and to vote at the meeting and any adjournments or postponements thereof. If you
were a registered Zoom Canada shareholder at the close of business on the record
date, you are entitled to vote at the meeting. If you became a new owner of Zoom
Canada common stock after the record date but on or before February 5, 2002, you
may elect to vote your shares at the meeting in lieu of the previous owner.
Shareholders who are unable to attend the meeting in person are
requested to complete, sign, date and return the enclosed form of proxy in the
envelope provided. A proxy will not be valid unless it is deposited and received
at the office of Georgeson Shareholder Communications, Inc., 111 Commerce Road,
Carlstadt, NJ 07072 no later than 5:00 p.m., Eastern Standard Time, on the
business day prior to the meeting or if the meeting is adjourned or postponed,
no later than 5:00 p.m., Eastern Standard Time, on the second business day prior
to the adjourned or postponed meeting. If you attend the meeting, sending your
proxy will not prevent you from voting in person. If you are a non-registered
shareholder of the Corporation and received these materials through a broker, a
financial institution or other nominee (the "Intermediary"), please complete and
return the materials in accordance with the instructions provided to you by the
Intermediary. Shareholders who have any questions about items being voted on at
the meeting may telephone the Georgeson Shareholder Communications at
1-866-324-8875.
By Order of the Board of Directors
Philip J. Flink
Secretary
Boston, Massachusetts
December 28, 2001
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YOUR VOTE IS IMPORTANT:
YOU ARE URGED TO SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING FORM OF PROXY
IN THE ENVELOPE PROVIDED, SO THAT IF YOU ARE UNABLE TO ATTEND THE MEETING YOUR
SHARES MAY NEVERTHELESS BE VOTED. YOUR PROXY MAY BE REVOKED AT ANY TIME PRIOR TO
EXERCISE BY WRITTEN REVOCATION, BY EXECUTING A PROXY AT A LATER DATE, OR BY
ATTENDING AND VOTING AT THE MEETING. THANK YOU FOR ACTING PROMPTLY.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
SUMMARY...........................................................................................................1
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA...................................................................5
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WARNINGS REGARDING FORWARD-LOOKING STATEMENTS.....................................................................6
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RISK FACTORS......................................................................................................7
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THE SPECIAL MEETING..............................................................................................19
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MOVING THE JURISDICTION OF INCORPORATION OF ZOOM CANADA..........................................................21
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TAX CONSEQUENCES OF THE CONTINUATION.............................................................................23
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COMPARISON OF SHAREHOLDERS' RIGHTS...............................................................................32
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DISSENTING SHAREHOLDERS' RIGHTS..................................................................................41
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DESCRIPTION OF CAPITAL STOCK.....................................................................................43
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ACCOUNTING TREATMENT OF CONTINUATION.............................................................................43
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................44
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OUR DIRECTORS AND EXECUTIVE OFFICERS.............................................................................45
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DIRECTOR COMPENSATION............................................................................................46
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EXECUTIVE COMPENSATION...........................................................................................47
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SHAREHOLDER PROPOSALS............................................................................................50
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TRANSFER AGENT AND REGISTRAR.....................................................................................50
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LEGAL MATTERS....................................................................................................50
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EXPERTS..........................................................................................................50
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WHERE YOU CAN FIND MORE INFORMATION..............................................................................51
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Exhibit A - Form 10-K for the fiscal year ended December 31, 2000
Exhibit B - Form 10-Q for the fiscal quarter ended September 30, 2001
Exhibit C - Special Resolutions
Exhibit D - Section 190 of the Canada Business Corporations Act
Exhibit E - Zoom Delaware Proposed Certificate of Incorporation
Exhibit F - Certificate of Domestication of Zoom Delaware
-i-
Exhibit G - Proposed By-laws of Zoom Delaware
-ii-
SUMMARY
This summary highlights selected information contained in this proxy
statement/prospectus and may not contain all of the information that is
important to you. We urge you to read this entire proxy statement/prospectus
carefully, including the attached exhibits. As used in this proxy
statement/prospectus, the terms "we," "our", "us" and "Zoom Canada" refer to
Zoom Telephonics, Inc., a Canadian corporation and the term "Zoom Delaware"
refers to Zoom Technologies Inc., the Delaware corporation to-be-formed.
o ZOOM CANADA. We design, produce and market dial-up and broadband
modems, wireless local area network products, and other communications products.
Our primary objective is to build upon our position as a leading supplier of
Internet access devices and to take advantage of a number of emerging trends in
computer connectivity including Internet access, higher data rates, broadband
applications, and alternatives to traditional wired local area networks. We are
a Canadian holding company. Our operations are primarily carried out by our
wholly owned subsidiary incorporated in Delaware. Our principal executive
offices are located at 207 South Street, Boston, MA 02111. Our telephone number
is (617) 423-1072.
o ZOOM DELAWARE. Zoom Delaware is a yet to-be-formed Delaware corporation
which will continue the operations of Zoom Canada once the continuation is
completed. Following the continuation, our principal executive offices and phone
number of Zoom Delaware will be the same as those for Zoom Canada.
o THE CONTINUATION. Our board of directors is proposing that we change
our jurisdiction of incorporation from Canada to the State of Delaware by means
of a process called a "continuation" under Canadian law and a "domestication"
under Delaware law. As a result of the continuation we will cease to be a
Canadian company governed by the provisions of the Canada Business Corporations
Act and will become a Delaware corporation governed by the provisions of the
Delaware General Corporation Law as if we had originally been incorporated in
that jurisdiction. As used in this proxy statement/prospectus, the terms
"continuation" and "continuance" refer to the entire continuation and
domestication process we will undertake to change our jurisdiction of
incorporation from Canada to Delaware.
o BOARD OF DIRECTORS' RECOMMENDATION. Our board of directors recommends
that you vote in favor of the special resolution authorizing the continuation
from Canada to Delaware.
o REASONS FOR THE CONTINUATION. Our board of directors believes that
continuing into Delaware is in the best interest of Zoom Canada and its
shareholders because they believe that the continuation will provide us with a
number of benefits including:
o Increasing our access to United States capital;
o Reducing tax costs associated with engaging in certain
types of transactions;
o Reducing the cost and burden of complying with securities
and corporate laws in both Canada and the U.S.;
o Allowing us to take advantage of the comprehensive, modern
and flexible corporate laws that Delaware and its courts
have developed in dealing with corporate issues;
o Allowing us to better compete with our peers located in
the United States;
o Increasing our ability to effectively structure
acquisitions, divestitures and mergers with other United
States companies; and
o Increasing our flexibility with regard to the selection of
individuals to serve on our board of directors through the
removal of the requirement that a majority of our
directors be residents of Canada.
o BOARD DISCRETION TO EFFECT THE CONTINUATION. In the event that the
shareholders approve the special resolution, our board of directors may, at its
option, elect to delay or abandon the continuation. Reasons that may cause our
board of directors not to complete the continuation include:
o if Zoom Canada were to incur significant tax liabilities;
o if more than 1% of shareholders elect to exercise their
dissenters' rights; or
1
o if there arises any other circumstance which, in the
discretion of the board of directors, would cause the
continuation not to be in the best interests of Zoom
Canada and its shareholders.
o EFFECTS OF THE CONTINUATION. The continuation will not result in any
change in our business or assets, liabilities, net worth or management, nor will
the continuation impair any of our creditors' rights. The continuation itself
will not change your ownership percentage in Zoom Canada, although there could
be a slight change resulting from shareholders who exercise their dissent
rights. The continuation is not, in itself, a corporate reorganization,
amalgamation or merger.
o THE SPECIAL MEETING. The meeting of shareholders will be held on
February 15, 2002 at 9:30 a.m., Eastern Standard Time, at our principal
executive offices located at 207 South Street, Boston, Massachusetts 02111 and
simultaneously, linked by telephone conference call, at Suite 1525, 625 Howe
Street, Vancouver, B.C. V6C 2TC. You may attend the meeting at either location.
o RECORD DATE; SHARES ENTITLED TO VOTE. The record date for the meeting
is December 28, 2001. Shareholders of record at the close of business on the
record date or transferees of such shares who produce proper evidence of
ownership of such shares before February 5, 2002 and request that their name be
included on the list of shareholders entitled to vote are entitled to vote at
the meeting. On the record date, there were 7,860,866 outstanding shares of
common stock. Each share of common stock is entitled to one vote on each matter
to be acted upon or which may properly come before the meeting.
o QUORUM; VOTE REQUIRED. The approval of the continuation will require
the affirmative vote of at least two-thirds of the votes represented in person
or by proxy and entitled to vote at the meeting. The presence, in person or by
proxy, of at least one-third of the outstanding shares of common stock of Zoom
Canada is necessary to constitute a quorum at the meeting.
o SHARE OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATES OF ZOOM
CANADA. As of the date of this proxy statement/prospectus, directors and
executive officers of Zoom Canada owned and were entitled to vote 1,224,744
(about 15.6%) outstanding shares of our common stock. These directors and
officers have expressed an intention to vote in favor of the continuation.
o REGULATORY APPROVALS. To complete the continuation, we need approvals
from, and we must make filings with, governmental authorities. Specifically, the
Director of the Canada Business Corporations Act must issue a letter of
satisfaction that the proposed continuance will not adversely affect our
creditors or shareholders. We must file a certificate of incorporation and a
certificate of domestication with the Secretary of the State of Delaware to
complete the continuation. Once the continuance is complete, the Director of the
Canada Business Corporations Act will issue a certificate of discontinuance.
o RIGHTS OF DISSENTING SHAREHOLDERS. Under Canadian law, you may dissent
with respect to the proposal to change our jurisdiction of incorporation from
Canada to Delaware and be paid the fair value of your shares. To dissent and be
paid, you must strictly follow the procedures described on pages 41 and 42. A
copy of the section of Canadian law relating to dissenters' rights is set forth
in full in Exhibit "D" to this proxy statement/prospectus. If you do not
strictly follow the proper procedures, you will lose your right to dissent. You
can lose your right to dissent, for example, by:
o Voting in favor of the special resolution;
o Failing to send in a dissent notice prior to the meeting;
or
o Failing to make a demand for payment within a twenty-day
period after the meeting.
o CONVERSION OF SHARES. The existing share certificates representing
shares of our common stock will represent an equivalent number of shares of
common stock of Zoom Delaware without any action on your part. You will not have
to exchange any share certificates. We will issue new certificates to you
representing shares of common stock of Zoom Delaware upon transfers of shares of
common stock or at your request.
2
o CONVERSION OF OPTIONS. The current outstanding options to purchase
shares of our common stock will represent options to purchase an equivalent
number of shares of common stock of Zoom Delaware for the equivalent purchase
price per share without other action by our option holders. Option holders will
not have to exchange their options. Option holders who are not shareholders will
not have a right to vote on the special resolution.
o CANADIAN INCOME TAX CONSEQUENCES. For Canadian tax purposes, on the
date of continuance, we will be treated as though we sold all of our property
and received the fair market value for those properties. We will be taxed on any
income or gain realized on that "sale." We could be subject to an additional tax
if the fair market value of our assets, net of liabilities, exceeds the paid-up
capital of our issued and outstanding shares. We believe that we will not owe
any Canadian federal income taxes as a result of the continuation. For a more
complete discussion of the Canadian Income Tax Consequences, please see "Tax
Consequences of the Transaction; Canadian Income Tax Consequences" on page 28.
o U.S. INCOME TAX CONSEQUENCES. Neither Zoom Canada nor Zoom Delaware
should recognize any gain or loss for U.S. federal income tax purposes as a
result of the continuation. Any U.S. holder whose Zoom Canada stock represents
less than 10% of Zoom Canada shares outstanding and has a fair market value of
less than $50,000 on the date of the continuation will likewise recognize no
gain or loss as a result of the continuation. A U.S. holder whose Zoom Canada
stock represents less than 10% of Zoom shares outstanding but has a fair market
value of at least $50,000 on the date of the continuation must generally
recognize gain (but not loss) on the continuation equal to the difference
between the fair market value of the Zoom Delaware stock received at the time of
the continuation over the holder's adjusted basis in the Zoom Canada stock
exchanged therefor. Such a holder, however, instead of recognizing gain, may
elect to include in income the "all earnings and profits amount" attributable to
his or her stock in Zoom Canada, within the meaning of Treasury Regulation
Section 1.367(b)-2(d). The income so included pursuant to this election
generally is treated as dividend income, which in the case of individuals is
taxed at the higher rates applicable to ordinary income. A U.S. holder's
adjusted basis in the shares of Zoom Delaware received in the exchange will be
equal to such holder's adjusted basis in the shares of Zoom Canada surrendered
in the exchange, increased by the amount of gain (if any) recognized on the
exchange. A U.S. holder's holding period in the shares of Zoom Delaware received
in the exchange should include the period of time during which such holder held
his or her shares in Zoom Canada. For a more complete discussion of the U.S.
Income Tax Consequences, please see "Tax Consequences of the Transaction; United
States Federal Income Tax Consequences" on page 24.
o COMPARISON OF ZOOM CANADA SHARES AND ZOOM DELAWARE SHARES. The
principal attributes of the capital stock of Zoom Delaware will be similar to
those of our existing shares of common stock, other than certain differences in
shareholders' rights between the Canada Business Corporations Act and the
Delaware General Corporation Law. You should read "Moving the Jurisdiction of
Incorporation of Zoom Canada-Effects of the Continuation," on page 21,
"Description of Capital Stock" on page 43 and "Comparison of Shareholders'
Rights" on page 32.
o DIFFERENCES IN SHAREHOLDER RIGHTS IN CANADA AND DELAWARE. While many
rights and privileges of shareholders of a Delaware corporation are similar to
those of shareholders of a corporation organized under the Canada Business
Corporations Act, there are some material differences between the laws in Canada
and the State of Delaware, including:
o Votes required for extraordinary transactions
o Amendment to governing documents
o Dissenters' rights
o Oppression remedies
o Derivative actions
o Shareholder consent in lieu of a meeting
o Shareholder quorum
o Director qualifications
o Fiduciary duties of directors
o Indemnification of officers and directors
o Director liability
o Anti-takeover provisions and interested shareholder
transactions
3
o Access to corporate records
o Requisition of meetings
o Form of Proxy and Information Circular,
You should read "Comparison of Shareholders' Rights" commencing on page 32 for
details regarding these differences.
4
ZOOM TELEPHONICS, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The table below presents selected historical consolidated financial
data for Zoom Telephonics, Inc. We derived the selected historical consolidated
financial data as of and for the five-years ended December 31, 2000 from our
audited consolidated financial statements, which have been audited by KPMG LLP,
independent certified public accountants. We derived the selected historical
consolidated financial data as of and for the nine months ended September 30,
2000 and 2001 from our unaudited consolidated financial statements. In the
opinion of management, our unaudited consolidated financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial condition and results of operations for
these periods. Operating results for the nine months ended September 30, 2001
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2001.
The selected historical consolidated financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of Zoom Telephonics, Inc., a Canadian corporation and related notes
thereto included in our annual reports, quarterly reports and other information
on file with the Securities and Exchange Commission. The following selected
historical consolidated financial data should be read in conjunction with our
most recent annual report on Form 10-K for the year ended December 31, 2000,
incorporated by reference in, and included in, this proxy statement/prospectus
as Exhibit "A", and our most recent quarterly report on Form 10-Q for the
quarter ended September 30, 2001, incorporated by reference in, and included in,
this proxy statement/prospectus as Exhibit "B".
NINE MONTHS ENDING
YEARS ENDING DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- -------------
1996 1997 1998 1999 2000 2000 2001
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 97,762 $ 63,816 $ 61,894 $ 64,088 $ 59,750 $ 43,478 $ 33,408
Cost of goods sold........................ 77,370 55,636 45,181 40,550 39,404 28,326 26,855
------ ------ ------ ------ ------ ------ ------
Gross profit......................... 20,392 8,180 16,713 23,538 20,346 15,152 6,553
Operating expenses:
Selling............................ 10,216 11,103 11,801 13,571 12,714 9,335 7,254
General and administrative......... 3,674 4,957 4,976 6,276 6,228 4,401 4,572
Research and development........... 2,940 4,182 4,449 6,425 6,249 4,661 4,155
----- ----- ----- ----- ----- ----- -----
Total operating expenses........... 16,830 20,242 21,226 26,272 25,191 18,397 15,981
------ ------ ------ ------ ------ ------ ------
Operating income (loss) ............. 3,562 (12,062) (4,513) (2,734) (4,845) (3,245) (9,428)
Other income (expense) net ............... 293 741 1,074 737 469 419 (134)
--- --- ----- --- --- --- -----
Income (loss) before income taxes.... 3,855 (11,321) (3,439) (1,997) (4,376) (2,826) (9,562)
Income tax expense (benefit).............. 1,375 (4,189) (1,287) (588) (1,299) (898) 3,800
----- ------- ------- ----- ------- ----- ------
Net income (loss).................... 2,480 (7,132) (2,152) (1,409) (3,077) (1,928) (13,362)
===== ======= ======= ======= ======= ======= ========
Earnings (loss) per common and
common equivalent share:
Basic................................ $ 0.35 $ (0.95) $ (0.29) $ (0.19) $ (0.40) $ (0.25) $ (1.70)
==== ====== ====== ====== ====== ====== ======
Diluted.............................. $ 0.35 $ (0.95) $ (0.29) $ (0.19) $ (0.40) $ (0.25) $ (1.70)
==== ====== ====== ====== ====== ====== ======
Weighted average common and
common equivalent shares:
Basic................................ 7,068 7,469 7,474 7,483 7,757 7,643 7,861
Diluted.............................. 7,162 7,469 7,474 7,483 7,757 7,643 7,861
NINE MONTHS ENDING
AT DECEMBER 31, SEPTEMBER 30,
1996 1997 1998 1999 2000 2000 2001
---- ---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $ 41,557 $ 35,064 $ 33,376 $ 29,573 $ 29,374 $ 30,056 $ 22,950
Total assets 56,782 48,515 43,560 43,072 46,960 45,876 35,527
Long-term obligations - - - 481 369 - 5,780
Total stockholders' equity 47,355 40,503 38,425 37,514 36,747 37,698 23,417
5
WARNINGS REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this proxy statement/prospectus
under the headings "Summary" and "Risk Factors," and in the documents
incorporated by reference, are forward-looking made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. In essence,
forward-looking statements are predictions of future events. Although we would
not make forward-looking statements unless we believe we have a reasonable basis
for doing so, we cannot guarantee their accuracy and actual results may differ
materially from those we anticipated due to a number of uncertainties, many of
which we are not aware. We urge you to consider the risks and uncertainties
discussed under "Risk Factors" and in the other documents filed with the SEC
that we have referred you to in evaluating our forward-looking statements.
You should understand that we have no plans to update our
forward-looking statements unless otherwise required by law. Our forward-looking
statements are accurate only as of the date of this proxy statement/prospectus,
or in the case of forward-looking statements in documents incorporated by
reference, as of the date of those documents.
We identify forward-looking statements with the words "plans,"
"expects," "anticipates," "estimates," "may," "will," "should" and similar
expressions. Examples of our forward-looking statements may include statements
related to:
o our plans, objectives, expectations and intentions;
o the tax consequence of the continuation to you and Zoom Canada;
o our ability to reduce the costs and burdens of complying with the
laws of multiple jurisdictions as a result of continuation;
o our ability to access capital from United States resources;
o our ability to better compete with our peers;
o the timing of, availability, cost of development and functionality
of products under development or recently introduced;
o our anticipated introduction of advanced cable modems and other
broadband access solutions; and
o our ability to expand our dial-up modem market share.
6
RISK FACTORS
In addition to the other information in this proxy statement/prospectus
or incorporated in this proxy statement/prospectus by reference, you should
consider carefully the following factors in evaluating our business before
voting on the proposals presented. The first group of risk factors relate to
risks specific to the continuation. The second group of risk factors relate to
risks relating to our ongoing business operations, both before and after the
continuation is completed. If any of the following risks actually occur, our
business or results of operations could be seriously harmed. In that case, the
trading price of our shares of common stock could decline, and you may lose part
or all of your investment. The risks described below are not the only ones we
face. Additional risks not presently known to us or that we currently deem
immaterial may also impair our business operations.
RISKS RELATING TO THE CONTINUATION
WE MAY OWE TAXES TO CANADIAN TAXING AUTHORITIES AS A RESULT OF THE CONTINUATION
IF OUR CONCLUSIONS AND ASSUMPTIONS RELATING TO OUR BUSINESS CHANGE BEFORE THE
COMPLETION OF THE CONTINUATION.
For Canadian tax purposes, on the date of continuance, we will be
treated as though we sold all of our property and received the fair market value
for those properties. We will be taxed on any income or gain realized on that
"sale." We could be subject to an additional tax if the fair market value of our
assets, net of liabilities, exceeds the paid-up capital of our issued and
outstanding shares.
We reviewed our assets, liabilities and paid-up capital and obtained a
tax opinion from one of our tax advisors. We believe that we will not owe any
Canadian federal income taxes as a result of the continuation. It is possible
that the facts on which we based our assumptions and conclusions could change
before the continuation is completed. We have not applied to the federal tax
authorities for a ruling on this matter and do not intend to do so. We have also
made certain assumptions regarding the tax treatment of this transaction in
order to reach our conclusions and it may be possible for some of these
assumptions to be interpreted in a different manner which would be less
favorable to Zoom Canada. You should understand that it is possible that the
federal tax authorities will not accept our valuations or positions and claim
that we owe taxes as a result of this transaction.
ZOOM CANADA AND OUR SHAREHOLDERS MAY SUFFER ADVERSE TAX CONSEQUENCES IN THE
UNITED STATES AS A RESULT OF THE CONTINUATION.
We believe that the continuation will qualify as a tax-free
reorganization for Zoom Canada, Zoom Delaware, and our U.S. shareholders who own
Zoom Canada shares having a fair market value of less than $50,000 at the time
of the continuation. A U.S. shareholder who owns Zoom Canada shares having a
fair market value of $50,000 or more at the time of the continuation, but whose
stock ownership is less than 10% of Zoom Canada at that time, will recognize
gain (but not loss) to the extent the fair market value of the Zoom Delaware
stock received at the time of the continuation exceeds such holder's adjusted
basis in the Zoom Canada stock exchanged therefor. As an alternative to
recognizing such gain, however, a U.S. shareholder may elect to include in
income, as a dividend, the portion of the "all earnings and profits amount"
attributable to such holder's stock in Zoom Canada. The advisability of making
this election will depend upon a holder's individual facts and circumstances. In
addition, strict conditions and filing requirements must be satisfied in order
to effectively make the election.
A U.S. holder's adjusted basis in the shares of Zoom Delaware received
in the exchange will be equal to such holder's adjusted basis in the Zoom Canada
shares surrendered in the exchange, increased by the amount of gain (if any)
recognized on the exchange. A U.S. holder's holding period in the Zoom Delaware
shares received in the exchange should include the period of time during which
such holder held its shares in Zoom Canada.
We have not asked, nor do we intend to ask, for a ruling from the
Internal Revenue Service that the U.S. Federal income tax consequences will be
as described herein. There is always the risk that the IRS may take a contrary
position and that such position, if asserted, may be upheld.
7
THE CONTINUATION INTO THE STATE OF DELAWARE WILL AFFECT YOUR RIGHTS AS A
SHAREHOLDER.
After the continuation into Delaware, you will become a shareholder of
Zoom Delaware. Currently, we are incorporated in Canada and governed by Canadian
law. After the Delaware continuation, we will be incorporated in the State of
Delaware and governed by Delaware law. We will have a new certificate of
incorporation and bylaws. Your rights as a shareholder of a Delaware corporation
will be different than your current rights as a shareholder of a Canadian
corporation. You should read the section under the heading "Comparison of
Shareholders' Rights" for a description of these differences. The risks of being
a shareholder in Zoom Delaware as compared to a shareholder in Zoom Canada,
include the following:
o A SMALLER VOTE WILL BE REQUIRED TO AMEND GOVERNING DOCUMENTS OR TO
APPROVE IMPORTANT TRANSACTIONS IN DELAWARE;
o YOU WILL NOT HAVE DISSENTERS' RIGHTS THAT ARE AS EXTENSIVE AS
PROVIDED UNDER CANADIAN LAW;
o YOU WILL HAVE LESS FORMAL METHODS FOR RELIEF OF OPPRESSION BY
MAJORITY SHAREHOLDERS IN DELAWARE;
o DELAWARE LAW PROVIDES FOR GREATER INDEMNIFICATION OF DIRECTORS AND
OFFICERS;
o PROVISIONS OF DELAWARE CORPORATE LAW MAY DETER TAKEOVER ATTEMPTS;
AND
o DELAWARE LAW PLACES GREATER LIMITATION ON THE LIABILITY OF
DIRECTORS FOR BREACHES OF FIDUCIARY DUTY.
RISKS RELATING TO OUR CONTINUING OPERATIONS
WE ARE INCURRING AND EXPECT TO CONTINUE TO INCUR SIGNIFICANT LOSSES.
We incurred net losses of approximately $13.4 million for the nine
months ended September 30, 2001, $3.1 million in fiscal 2000, $1.4 million in
fiscal 1999, and $2.2 million in fiscal 1998.
We have taken cost-cutting measures, such as a reduced advertising,
reduction in force, temporary wage freezes and controls on discretionary
spending. These cost-cutting measures have not significantly reduced our losses.
In addition, we anticipate that we will continue to incur significant expenses
in the foreseeable future as we:
o continue to develop our broadband access products, such as cable
modems, and our wireless local area network and Internet gateway
products; and
o continue to make efforts to expand our sales channels to include
cable service providers.
Because we expect to continue to invest in our business ahead of future
revenues, we expect that we will continue to incur operating losses, at least in
the near future. We cannot guarantee that our expenditures will significantly
increase our revenues, if at all. If we fail to significantly increase our
revenues as we implement our strategies, we may not be able to achieve
profitability.
OUR OBLIGATIONS UNDER OUR EXISTING AND ANTICIPATED DEBT FACILITIES COULD PREVENT
US FROM OBTAINING ADDITIONAL FINANCING AND HARM OUR LIQUIDITY.
In January 2001, we obtained a $6 million, 20 year direct reduction
mortgage from a bank, secured by our owned real estate in Boston, Massachusetts.
Our outstanding and anticipated indebtedness could adversely affect our ability
to obtain additional financing for working capital, acquisitions or other
purposes. Our existing indebtedness could also make us more vulnerable to
economic downturns and competitive pressures, make it more difficult to obtain
additional debt financing, and adversely affect our liquidity. In the event of a
cash shortfall, we could be forced to reduce other expenditures to meet our
requirements with respect to our outstanding debt. Our ability to meet our
obligations will be dependent upon our future performance, which will be subject
to financial, business and other factors affecting our operations. Many of these
factors are beyond our control. If we are unable
8
to generate sufficient cash flow from operations in the future to service our
debt, we may be required to refinance all or a portion of these obligations or
obtain additional financing in order to stay in business.
TO STAY IN BUSINESS WE MAY REQUIRE FUTURE ADDITIONAL FUNDING WHICH WE MAY BE
UNABLE TO OBTAIN ON FAVORABLE TERMS, IF AT ALL.
Over the next twelve months, we may require additional financing for
our operations or potential acquisitions. We currently do not have a debt
facility from which we can borrow. We had a $5 million line of credit that was
due to expire on April 1, 2003. We never borrowed under that line of credit. We
were recently notified by the lender that it was terminating the line of credit
because the lender considered an event of default to have occurred as a result
of our operating performance. We have contested the lender's default assertion.
An alternative lender with whom we were negotiating a replacement facility
notified us that in light of current market conditions and the economic
uncertainties following the September 11, 2001 terrorist attacks, it was
withdrawing its commitment to provide us with financing. We may be unable to
replace or reinstate our line of credit. Additional financing may not be
available to us on a timely basis if at all, or, on terms acceptable to us. If
we fail to obtain acceptable additional financing when needed, we may be
required to further reduce planned expenditures or forego acquisition
opportunities, which could reduce our revenues, increase our losses, and harm
our business. Moreover, additional equity financing could dilute the per share
value of our common stock held by current shareholders, while additional debt
financing could restrict our ability to make capital expenditures or incur
additional indebtedness, all of which would impede our ability to succeed.
THE SEPTEMBER 11, 2001 TERRORIST ATTACKS ON THE UNITED STATES HAD A NEGATIVE
IMPACT ON SALES OF OUR PRODUCTS.
The September 11, 2001 terrorist attacks on the United States had a
negative effect on the level of demand for our products. The potential near- and
long-term impact these attacks may have on our suppliers and customers, markets
for our products and the U.S. economy are uncertain. There may be other
potential or additional adverse effects on our operating results due to this
significant event that we cannot foresee. It is too early to predict the full
impact that the terrorist attacks will have on our business and results of
operations. We plan to closely monitor our business operations in light of this
uncertainty.
OUR FAILURE TO EFFECTIVELY MANAGE OUR INVENTORY LEVELS COULD MATERIALLY AND
ADVERSELY AFFECT OUR LIQUIDITY AND HARM OUR BUSINESS.
During fiscal 2000, in anticipation of future sales of our recently
introduced broadband access products, particularly cable modems, we
significantly increased our inventory for these products. We also built up this
inventory in response to shortages of components for these products earlier in
that year. Since that time, most of these component shortages have been
alleviated. We have also had difficulty in generating significant orders for
some of our products, particularly broadband products; and as a result we
experienced a significant increase in our inventory, to $21.9 million on
December 31, 2000 from $14.3 million on December 31, 1999. During fiscal 2001,
we have been able to reduce our inventory levels to $9.5 million as a result of
sales and raw material returns to suppliers. We have also had to write down the
value of our some of inventory by $3.4 million. Our failure to effectively
manage our inventory may adversely affect our liquidity and increases the risk
of inventory obsolescence, a decline in market value of the inventory, or losses
from theft, fire or other casualty.
OUR FAILURE TO MANAGE OUR CHANGING BUSINESS EFFECTIVELY WOULD HARM OUR BUSINESS.
We are managing a changing business as we attempt to grow our customer
base and develop and seize market opportunities in the broadband access
industry. Our changing business could place a significant strain on our senior
management team and on operational and financial resources. To manage our
changing business, we may need to:
o adapt, improve or replace our existing operational and financial
systems, procedures and controls;
o hire, train, retain, motivate and manage the required personnel;
o maintain close coordination among our sales and marketing, research
and development, finance, administrative and operations personnel;
and
o identify, manage, and benefit from existing and potential strategic
relationships and market opportunities.
9
We cannot guarantee that we will be successful in any of these
endeavors. If we do not effectively manage the planning and other process
control issues presented by our changing business, our business will suffer.
Furthermore, if we are unable to undertake new business due to a shortage of
staff or technology resources, our growth will be impeded. Therefore, there may
be times when our opportunities for revenue growth may be limited by the
capacity of our internal resources rather than by the absence of market demand.
CONTINUED FLUCTUATIONS IN OUR OPERATING RESULTS COULD CAUSE THE MARKET PRICE OF
OUR COMMON STOCK TO FALL.
Our operating results have fluctuated in the past and are likely to
fluctuate in the future. It is possible that our revenues and operating results
will be below the expectations of securities analysts and investors in future
quarters. If we fail to meet or surpass the expectations of securities analysts
or investors, the market price of our common stock will most likely fall.
Factors that have affected and may in the future affect our operating results
include:
o the overall demand for dial-up, cable and ADSL modems, wireless
local area network products, Internet gateway products, and other
communications products;
o the timing of new product announcements and releases, such as our
cable modems, by us and our competitors;
o successful testing and qualification of our products, such as
Cablelabs and @Home qualification of cable modems and telephone
company qualification of ADSL modems;
o variations in the number and mix of products we sell;
o the timing of customer orders and adjustments of delivery schedules
to accommodate our customers' programs;
o the availability of components, materials and labor necessary to
produce our products;
o the timing and level of expenditures in anticipation of future
sales;
o pricing and other competitive conditions; and
o seasonality.
OUR CUSTOMER BASE IS CONCENTRATED AND THE LOSS OF ONE OR MORE OF OUR CUSTOMERS
COULD HARM OUR BUSINESS.
Relatively few customers have accounted for a significant portion of
our net sales. In the nine months ended September 30, 2001, 24% of our net sales
were attributable to two customers. In fiscal 2000, 26% of our net sales were
attributable to two customers and in fiscal 1999, two customers represented 27%
of our net sales. Because our customer base is concentrated, a loss of one or
more of these significant customers or a reduction or delay in orders or a
default in payment from any of our top customers could significantly reduce our
sales which would materially harm our business, results of operations and
financial condition.
OUR FAILURE TO MEET CHANGING CUSTOMER REQUIREMENTS AND EMERGING INDUSTRY
STANDARDS WOULD ADVERSELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS.
The market for PC communications products and high-speed broadband
access products is characterized by rapidly changing customer demands and short
product life cycles. Some of our product developments and enhancements have
taken longer than planned and have delayed the availability of our products,
which adversely affected our sales and profitability in the past. Any
significant delays in the future may adversely impact our ability to sell our
products, and our results of operations and financial condition may be adversely
affected. Our future success will depend in large part upon our ability to:
o identify and respond to emerging technological trends in the
market;
o develop and maintain competitive products that meet changing
customer demands;
o enhance our products by adding innovative features that
differentiate our products from those of our competitors;
o bring products to market on a timely basis;
o introduce products that have competitive prices; and
o respond effectively to new technological changes or new product
announcements by others.
10
OUR FUTURE SUCCESS DEPENDS IN PART ON OUR ABILITY TO ENHANCE OUR EXISTING
PRODUCTS AND TO DEVELOP NEW PRODUCTS.
We have developed and marketed a limited number of different product
types. To date our product introductions have focused on the development and
enhancement of our dial-up, cable and ADSL modems, wireless products, and other
communications products. Because of the difficulties we have faced in the ADSL
market, we are placing less emphasis on our ADSL products. We believe that our
future success will depend in large part on our ability to enhance our existing
products and to continue to develop new products, such as cable modems, which
meet regulatory and customer requirements. The successful development of new
products and product enhancements are subject to numerous risks, both known and
unknown, including:
o unanticipated delays;
o high entry barriers;
o budget overruns;
o technical problems;
o component shortages;
o regulatory approval from the Federal Communications Commission and
other regulatory authorities;
o successful testing and qualification of our products, such as
Cablelabs and @Home qualification of cable modems and telephone
company qualification of ADSL modems; and
o other difficulties that could result in the abandonment or
substantial change in the commercialization of these enhancements
or new products.
Our failure to introduce new products or to enhance our existing
products on a timely basis has in the past and may in the future cause our stock
price to fluctuate.
THE SALES CYCLE FOR SOME OF OUR PRODUCTS IS LENGTHY.
The sales cycle associated with our cable and ADSL modems and other
broadband access products has been and may in the future be lengthy. In some
cases, the sales cycle for our cable modems has lasted for six months to a year.
Our customers generally conduct technical evaluations of competing technologies
prior to the commitment of capital and other resources. In addition, purchasing
decisions may be delayed because of our customers' internal budget approval
procedures. Sales may also be subject to customer trials, which could last
several months. Because of the lengthy sales cycle and the large size of
customers' order, if orders forecasted for a specific customer for a particular
quarter do not occur in that quarter, our operating results for that quarter
could suffer and our business would be harmed.
OUR PRODUCT CYCLES TEND TO BE SHORT, AND WE MAY INCUR SIGNIFICANT
NON-RECOVERABLE EXPENSES OR DEVOTE SIGNIFICANT RESOURCES TO SALES THAT DO NOT
OCCUR WHEN ANTICIPATED.
In the rapidly changing technology environment in which we operate,
product cycles tend to be short. Therefore, the resources we devote to product
development, sales and marketing may not generate material revenues for us. In
addition, short product cycles has resulted in and may in the future result in
excess and obsolete inventory, which has had and may in the future have an
adverse affect on our results of operations. We have incurred and expect in the
future to incur substantial development, sales, marketing, and inventory costs.
If we are unable to recover these costs, our financial condition and operating
results could be adversely affected. In addition, if we sell our products at
reduced prices in anticipation of cost reductions and we still have higher cost
products in inventory, our business would be harmed and our results of
operations and financial condition would be adversely affected.
OUR AVERAGE SELLING PRICES FOR OUR DIAL-UP MODEMS HAVE DECLINED, WHICH HAS HAD
AN ADVERSE AFFECT ON OUR OPERATING RESULTS.
The dial-up modem industry has been characterized by declining average
selling prices. The decline in average selling prices is due to a number of
factors, including technological change and competition. As industry standards
for cable and ADSL modems continue to evolve, it is likely that there will be an
increased retail
11
distribution of cable and ADSL modems, which could put further price pressure on
our dial-up modems and any cable or ADSL modems that we introduce in the future.
Decreasing average selling prices could result in decreased revenue even if the
number of units sold increase. As a result of decreased average selling prices,
we have experienced and we may in the future experience substantial period to
period fluctuations in operating results.
OUR OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BECAUSE OF PRICE PROTECTION
PROGRAMS.
In 1998 and, to a lesser extent in each year since 1998, our operating
results have been adversely affected by reductions in average selling prices
because we gave credits given to some of our customers as a result of
contractual price protection guarantees. Specifically, when we reduce the price
for a product, the customer receives a credit for the difference between the
customer's original purchase price and our reduced price for the product, for
all unsold product at the time of the price reduction. For the nine months ended
September 30, 2001, we gave approximately $145,000 in credits as a result of
price protection.
WE MAY BE SUBJECT TO PRODUCT RETURNS RESULTING FROM DEFECTS IN OR OVERSTOCKING
OF OUR PRODUCTS. PRODUCT RETURNS COULD RESULT IN THE FAILURE TO ATTAIN MARKET
ACCEPTANCE OF OUR PRODUCTS, WHICH WOULD HARM OUR BUSINESS.
If our products contain undetected defects, errors or failures, we
could face:
o delays in the development of our products;
o numerous product returns; and
o other losses to us or to our customers or end users.
Any of these occurrences could also result in the loss of or delay in
market acceptance of our products, either of which would reduce our sales and
harm our business. We are also exposed to the risk of product returns from our
customers as a result of contractual stock rotation privileges and our practice
of assisting some of our customers in balancing their inventories. Overstocking
has in the past led and may in the future lead to higher than normal returns.
WE MAY BE UNABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE WE
DEPEND ON THIRD PARTY MANUFACTURERS. IF THESE THIRD PARTY MANUFACTURERS FAIL TO
PRODUCE QUALITY PRODUCTS IN A TIMELY MANNER, OUR ABILITY TO FULFILL OUR CUSTOMER
ORDERS WOULD BE ADVERSELY IMPACTED.
We use contract manufacturers to partially manufacture our products. We
use these third party manufacturers to help ensure low costs, rapid market entry
and reliability. Any manufacturing disruption could impair our ability to
fulfill orders. Our failure to fulfill orders would adversely affect our sales.
Although we work with more than one third party manufacturer, a significant
number of our products are manufactured by only one manufacturer. Since third
parties manufacture our products and we expect this to continue in the future,
our success will depend, in part, on the ability of third parties to manufacture
our products cost effectively and in sufficient quantities to meet our customer
demand.
We are subject to the following risks because of our reliance on third
party manufacturers:
o reduced management and control of component purchases;
o reduced control over delivery schedules;
o reduced control over quality assurance;
o reduced control over manufacturing yields;
o lack of adequate capacity during periods of excess demand;
o limited warranties on products supplied to us;
o potential increases in prices;
o interruption of supplies from assemblers as a result of a fire,
natural calamity, strike or other significant event; and
o misappropriation of our intellectual property.
12
WE MAY BE UNABLE TO OBTAIN CERTAIN COMPONENTS FOR OUR DIAL-UP AND CABLE MODEMS
BECAUSE OF THE HIGH DEMAND AND RELATIVELY LOW AVAILABILITY OF THESE COMPONENTS.
IF WE FAIL TO OBTAIN THESE COMPONENTS OUR BUSINESS WOULD BE HARMED BECAUSE WE
WOULD BE UNABLE TO MANUFACTURE CERTAIN PRODUCTS.
Periodically, there have been shortages of critical components for our
products. In the first half of 2000, there were shortages of components for our
cable modems, which has since been alleviated. If, in the future, we are unable
to obtain required components in a timely manner or at all, we would be unable
to manufacture some of our modem products and our business would be harmed.
WE MAY BE UNABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE WE
OBTAIN CERTAIN KEY COMPONENTS FROM, AND DEPEND ON, CERTAIN SOLE OR LIMITED
SOURCE SUPPLIERS.
We obtain certain key parts, components and equipment from sole or
limited sources of supply. For example, we obtain modem chipsets from Conexant
Systems (formerly Rockwell) and Agere Systems (formerly Lucent Technologies). In
the past, we have experienced delays in receiving shipments of modem chipsets
from our sole source suppliers. We may experience similar delays in the future.
Any interruption in the operations of our suppliers of sole or limited source
parts could affect our ability to meet our scheduled product deliveries to our
customers.
Our business would be harmed if any of our sole or limited source
suppliers:
o fail to produce chipset enhancements or new chipsets on a timely
basis;
o stop selling their products or components to us at commercially
reasonable prices; or
o refuse to sell their products or components to us at any price.
IF WE ARE UNABLE TO OBTAIN COMPONENTS FROM OUR SOLE OR LIMITED SOURCE SUPPLIERS,
WE WOULD BE UNABLE TO SHIP OUR PRODUCTS IN A TIMELY MANNER AND OUR RELATIONSHIPS
WITH OUR CUSTOMERS WOULD BE HARMED.
If we are unable to obtain a sufficient supply of components from our
current sources, we could experience difficulties in obtaining alternative
sources or in altering product designs to use alternative components. Resulting
delays or reductions in product shipments could damage relationships with our
customers and our customers could decide to purchase products from our
competitors. Inability to meet our customers' demand or a decision by one or
more of our customers to purchase products from our competitors could harm our
operating results.
SALES OF OUR PRODUCTS DEPEND ON THE WIDESPREAD ADOPTION OF BROADBAND ACCESS
PRODUCTS. IF THE DEMAND FOR BROADBAND ACCESS SERVICES DOES NOT DEVELOP, THEN OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED.
Although we are continuing to enhance our existing dial-up modems,
wireless products and other communications products, our growth will be strongly
affected by our sale of cable modems and other broadband access products. We
have invested, and are continuing to invest, substantial resources to produce
and develop our inventory of cable modems and other broadband access products.
We may be unable to generate significant revenues from sales of our broadband
access products and we will have expended significant resources on products for
which we are generating limited or no revenues, if:
o the market for broadband access products, such as cable modems,
does not develop further or develops slower than we expect;
o we do not market our broadband access products effectively;
o we are unable to expand our distribution channels for our broadband
access products; or
o our broadband access products do not obtain market acceptance.
Certain critical factors will likely affect our ability to develop a
market and obtain market acceptance for our broadband access products. These
factors include:
o quality and reliability of service;
13
o availability of cost-effective, high-speed service;
o ability to integrate business applications on the Internet;
o interoperability among multiple vendors' network equipment;
o lack of congestion in service providers' networks;
o adequate security; and
o ability to meet growing demands for increasing bandwidth.
WE MAY BE UNABLE TO RECOUP OUR INVESTMENTS IN RESEARCH AND DEVELOPMENT OF NEW
PRODUCTS.
The technical innovations required for us to remain competitive in the
broadband access industry are complex, require long development cycles, and
entail a significant amount of research and development expenditures. We have
invested and will continue in the future to invest in research and development
to develop new products and to enhance our existing technologies and products.
In fiscal 1998, 1999, and 2000 we incurred $4.4 million, $6.4 million, and $6.2
million in research and development costs. In the nine months ended September
30, 2001, we incurred $4.2 in research and development costs, an 11% decrease
from the same period in fiscal 2000. Overall, growth in our research and
development activities is primarily related to our initiatives in the broadband,
advanced networking and Internet gateway product areas. We will have incurred
and expect to continue to incur most of our research and development expenses
before the technical feasibility or commercial viability of our enhanced or new
products can be ascertained. Revenues from our future or enhanced products may
be insufficient to recover our associated research and development costs.
WE MAY BE UNABLE TO MAINTAIN OR INCREASE OUR SALES THROUGH OUR EXISTING OR NEW
SALES CHANNELS.
We have primarily sold our dial-up modem products through high-volume
retailers, independent distributors, and original equipment manufacturers, also
known as OEMs. Sales to each of these distribution channels subject us to the
following risks which, if they materialize, would significantly reduce sales of
our products.
Retailers:
---------
Our sales to retailers have historically constituted the largest
percentage of our net sales. Due to competition for limited shelf space,
retailers have the ability to negotiate favorable terms of sale, including price
discounts and product return policies. We may be unable to maintain or increase
our sales to retailers on favorable terms, if at all.
Independent Distributors:
------------------------
Our independent distributors generally are not contractually committed
to future purchases of our products and may carry our competitors' products. One
or more of our distributors could discontinue carrying our products at any time.
OEMS:
----
OEMs may require special distribution arrangements and product pricing.
We may be unsuccessful in developing products for sales to OEMs or maintaining
or increasing sales to OEMs on favorable terms.
THE MARKET FOR HIGH-SPEED COMMUNICATIONS PRODUCTS AND SERVICES HAS MANY
COMPETING TECHNOLOGIES AND, AS A RESULT, THE DEMAND FOR OUR PRODUCTS AND
SERVICES IS UNCERTAIN.
The market for high-speed communications products and services has a
number of competing technologies. For instance, Internet access can be achieved
by:
o using a standard telephone line and appropriate service for
dial-up modems, ISDN modems, or ADSL modems, possibly in
combination;
o using a cable modem with a cable TV line and cable modem service;
using a router to service the computers connected to a local area
network; or
o other approaches, including wireless links to the Internet.
14
Although we currently sell or plan to sell products which include these
technologies described the market for high-speed communication products and
services is fragmented and still in its development stage. The introduction of
new products by competitors, market acceptance of products based on new or
alternative technologies, or the emergence of new industry standards could
render and have in the past rendered our products less competitive or obsolete.
If any of these events occur, we may be unable to sustain or grow our business.
In addition, if any of one or more of the alternative technologies gain market
share at the expense of another technology, demand for our products may be
reduced, and we may be unable to sustain or grow our business.
WE FACE SIGNIFICANT COMPETITION, WHICH COULD RESULT IN DECREASED DEMAND FOR OUR
PRODUCTS OR SERVICES.
We may be unable to compete successfully. A number of companies have
developed, or are expected to develop, products that compete or will compete
with our products. Furthermore, many of our current and potential competitors
have significantly greater resources than we do. Intense competition, rapid
technological change and evolving industry standards could decrease demand for
our products or make our products obsolete.
Our competitors by product group include the following:
o DIAL-UP MODEM COMPETITORS: U.S. Robotics, Actiontec, Askey, Best
Data, Creative Labs, Elsa, GVC, Intel, and SONICblue.
o CABLE MODEM COMPETITORS: Ericsson, Motorola, Samsung, Scientific
Atlanta, Toshiba and Thomson.
o ADSL MODEM COMPETITORS: Siemens (formerly Efficient Networks) and
Westell.
o WIRELESS LOCAL AREA NETWORK COMPETITORS: 3Com, Agere, Cisco, Intel,
Linksys, Proxim and D-Link.
The principal competitive factors in our industry include the
following:
o product performance, features and reliability;
o price;
o product availability and lead times;
o size and stability of operations;
o breadth of product line;
o sales and distribution capability;
o ease of use and technical support and service;
o relationships with providers of broadband access services; and
o compliance with industry standards.
OUR BUSINESS IS DEPENDENT ON THE INTERNET AND THE DEVELOPMENT OF THE INTERNET
INFRASTRUCTURE.
Our success will depend in large part on increased use of the Internet
to increase the demand for high-speed communications products. Critical issues
concerning the commercial use of the Internet remain largely unresolved and are
likely to affect the development of the market for our products. These issues
include security, reliability, cost, ease of access and quality of service.
Our success also will depend on the continued growth of the use of the
Internet by businesses, particularly for applications that utilize multimedia
content and that require high bandwidth. The recent growth in the use of the
Internet has caused frequent periods of performance degradation. This has
required the upgrade of routers, telecommunications links and other components
forming the infrastructure of the Internet by Internet service providers and
other organizations with links to the Internet.
Any perceived degradation in the performance of the Internet as a whole
could undermine the benefits of our products. Potentially increased performance
provided by our products and the products of others ultimately is limited by and
reliant upon the speed and reliability of the Internet backbone itself.
Consequently, the emergence and growth of the market for our products will
depend on improvements being made to the entire Internet infrastructure to
alleviate overloading.
15
CHANGES IN CURRENT OR FUTURE LAWS OR GOVERNMENTAL REGULATIONS THAT NEGATIVELY
IMPACT OUR PRODUCTS AND TECHNOLOGIES COULD HARM OUR BUSINESS.
The jurisdiction of the Federal Communications Commission, or the FCC,
extends to the entire United States communications industry including our
customers and their products and services that incorporate our products. Our
products are also required to meet the regulatory requirements of Industry
Canada and other countries throughout the world where our products are sold.
Obtaining government regulatory approvals is time-consuming and very costly. In
the past, we have encountered delays in the introduction of our products, such
as our cable modems, as a result of government certifications. We may face
further delays if we are unable to comply with governmental regulations. Delays
caused by the time it takes to comply with regulatory requirements may result in
cancellations or postponements of product orders or purchases by our customers,
which would harm our business.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO A NUMBER OF RISKS INHERENT IN
INTERNATIONAL ACTIVITIES.
Our international sales accounted for approximately 29% of our revenues
in fiscal 1999, 28% in fiscal 2000 and 35% in the nine months ended September
30, 2001. The revenues we received from international sales were significantly
impacted by our Hayes European operation, which we began operating in March
1999. Currently our operations are significantly dependent on our international
operations and may be materially and adversely affected by many factors
including:
o international regulatory and communications requirements and policy
changes;
o favoritism towards local suppliers;
o difficulties in inventory management, accounts receivable
collection and the management of distributors or representatives;
o difficulties in staffing and managing foreign operations;
o political and economic changes and disruptions;
o governmental currency controls;
o shipping costs;
o currency exchange rate fluctuations; and
o tariff regulations.
We anticipate that our international sales will continue to account for
a significant percentage of our revenues. If foreign markets for our current and
future products develop more slowly than currently anticipated or if foreign
countries decide not to construct the infrastructure necessary to operate
broadband access products, our future results of operations may be harmed.
FLUCTUATIONS IN THE FOREIGN CURRENCY EXCHANGE RATES IN RELATION TO THE U.S.
DOLLAR COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS.
Changes in currency exchange rates that increase the relative value of
the U.S. dollar may make it more difficult for us to compete with foreign
manufacturers on price or otherwise have a material adverse effect on our sales
and operating results. A significant increase in our foreign denominated sales
would increase our risk associated with foreign currency fluctuations.
OUR FUTURE SUCCESS WILL DEPEND ON THE CONTINUED SERVICES OF OUR EXECUTIVE
OFFICERS AND KEY RESEARCH AND DEVELOPMENT PERSONNEL WITH EXPERTISE IN HARDWARE
AND SOFTWARE DEVELOPMENT.
The loss of any of our executive officers or key research and
development personnel, the inability to attract or retain qualified personnel in
the future or delays in hiring skilled personnel could harm our business.
Competition for personnel, particularly hardware and software engineers and
other technical personnel, is extremely intense. We may be unable to attract and
retain all the personnel necessary for the development of our business. In
addition, the loss of Frank B. Manning, our president and chief executive
officer, or Peter Kramer, our executive vice president, some other member of the
management team, a key engineer or other key individual contributors, could harm
our relations with our customers, our ability to respond to technological
change, and our business.
16
OUR BUSINESS MAY BE HARMED BY ACQUISITIONS WE MAY COMPLETE IN THE FUTURE.
We may pursue acquisitions of related businesses, technologies, product
lines or products. Our identification of suitable acquisition candidates
involves risk inherent in assessing the values, strengths, weaknesses, risks and
profitability of acquisition candidates, including the effects of the possible
acquisition on our business, diversion of our management's attention, risk of
increased leverage, shareholder dilution, and risk associated with unanticipated
problems or latent liabilities.
WE HAVE HAD AND MAY IN THE FUTURE HAVE DIFFICULTY PROTECTING OUR INTELLECTUAL
PROPERTY.
Our ability to compete is heavily affected by our ability to protect
our intellectual property. We rely primarily on trade secret laws,
confidentiality procedures, patents, copyrights, trademarks, and licensing
arrangements to protect our intellectual property. The steps we take to protect
our technology may be inadequate. Existing trade secret, trademark and copyright
laws offer only limited protection. Our patents could be invalidated or
circumvented. The laws of some foreign countries in which our products are or
may be developed, manufactured or sold may not protect our products or
intellectual property rights to the same extent as do the laws of the United
States. This may make the possibility of piracy of our technology and products
more likely. We cannot assure that the steps that we have taken to protect our
intellectual property will be adequate to prevent misappropriation of our
technology.
WE COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Particular aspects of our technology could be found to infringe on the
intellectual property rights or patents of others. Other companies may hold or
obtain patents on inventions or may otherwise claim proprietary rights to
technology necessary to our business. We cannot predict the extent to which we
may be required to seek licenses. We cannot assure that the terms of any
licenses we may be required to seek will be reasonable.
OUR EXECUTIVE OFFICERS AND DIRECTORS MAY CONTROL CERTAIN MATTERS TO BE VOTED ON
BY THE SHAREHOLDERS. THESE OFFICERS AND DIRECTORS MAY VOTE IN A MANNER THAT IS
NOT IN YOUR BEST INTERESTS.
Our executive officers and directors beneficially own, in the
aggregate, approximately 22.4% of our outstanding common stock. As a result, in
practicality, these shareholders control certain matters to be voted on by the
shareholders. These matters include the election of directors, amendments to our
articles of continuance and approval of significant corporate transactions, such
as the continuation contemplated by this proxy statement/prospectus. These
executive officers and directors may vote as shareholders in a manner that is
not in your best interests.
THE VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT YOUR INVESTMENT IN OUR
COMMON STOCK.
The market price of our common stock has been and may continue to be
highly volatile. We believe that a variety of factors have caused and could in
the future cause the stock price of our common stock to fluctuate, including:
o announcements of developments related to our business,
including announcements of certification by the FCC or other
regulatory authorities of our products or our competitors
products;
o quarterly fluctuations in our actual or anticipated operating
results and order levels;
o general conditions in the worldwide economy;
o announcements of technological innovations;
o new products or product enhancements introduced by us or our
competitors;
o developments in patents or other intellectual property rights
and litigation; and
o developments in our relationships with our customers and
suppliers.
In addition, in recent years the stock market in general and the
markets for shares of small capitalization and "high-tech" companies in
particular, have experienced extreme price fluctuations which have often been
unrelated to
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the operating performance of affected companies. Any fluctuations
in the future could adversely affect the market price of our common stock and
the market price of our common stock may decline.
BECAUSE WE CURRENTLY ARE A CANADIAN CORPORATION, WE ARE SUBJECT TO LAWS THAT MAY
HAVE THE EFFECT OF DELAYING OR PREVENTING A CHANGE IN CONTROL OF OUR COMPANY.
An investment in our common stock that results in a change of control
may be subject to the review and approval of the Canadian governmental
authorities. If the Canadian governmental authorities have to approve and review
an investment that may result in a change of control, the investment will be
delayed and possibly prevented.
Generally, under the Canada Business Corporations Act, at least
one-third of our directors and any committees of the board of directors must be
Canadian residents. If we earn more than five percent of our gross revenues in
Canada, then a majority of our directors and any committees of the board of
directors must be Canadian residents.
If the continuation is completed, this will no longer be a risk to you
or our company.
18
THE SPECIAL MEETING
GENERAL
This proxy statement/prospectus is being furnished to our shareholders
in connection with the solicitation by our board of directors of proxies for use
at the special meeting to be held at our principal executive offices located at
207 South Street, Boston, Massachusetts 02111, at 9:30 a.m., Eastern Standard
Time, on February 15, 2002. The meeting will be simultaneously held (linked by
telephone conference call) at Suite 1525, 625 Howe Street, Vancouver, B.C. V6C
2TC. You may attend the meeting at either location. The approximate date of
mailing this proxy statement/prospectus and the accompanying proxy card to our
shareholders is December 28, 2001.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE CONTINUATION OF
ZOOM CANADA FROM CANADA TO DELAWARE. THE BOARD RECOMMENDS THAT YOU VOTE IN FAVOR
OF THE SPECIAL RESOLUTION AUTHORIZING ZOOM CANADA TO CHANGE ITS JURISDICTION OF
INCORPORATION FROM CANADA TO DELAWARE BY WAY OF A CONTINUATION IN CANADA AND A
DOMESTICATION IN DELAWARE.
RECORD DATE
The board has set the close of business on December 28, 2001, as the
record date for the special meeting. The only holders entitled to vote at the
meeting will be holders of shares of record as of December 28, 2001 or
transferees of such shares who produce proper evidence of ownership of such
shares before February 5, 2002 and request that their name be included on the
list of shareholders entitled to vote at the meeting. If you are included on
that list, you may vote your shares at the meeting, but the previous owners may
not.
QUORUM AND REQUIRED VOTE
As of December 28, 2001, 7,860,866 shares of common stock of Zoom
Canada were issued and outstanding. Each share has the right to one vote on each
matter that properly comes before the meeting.
The presence, in person or by proxy, of at least one-third of the
outstanding shares of common stock of Zoom Canada is necessary to constitute a
quorum at the meeting. If your proxy indicates that you wish to abstain from
voting on approval of any matter, your shares will be considered present at the
meeting for purposes of determining a quorum, but your votes will not be cast
with respect to that matter. An abstention will therefore reduce the number of
votes required for approval of the continuation.
To approve the continuation, the special resolution must be approved by
at least two-thirds of the votes cast at the meeting by shareholders present in
person or by proxy and entitled to vote at the meeting. A copy of the special
resolution is attached to this proxy statement/prospectus as Exhibit "C". In the
event that the shareholders do not approve the continuation, we will continue to
be a corporation governed by the Canada Business Corporation Act. In the event
that the shareholders approve the special resolution, the board of directors
may, in its discretion, postpone or abandon the continuation. Our board of
directors has not considered any alternative action if the continuation is not
approved.
SOLICITATION AND REVOCATION OF PROXIES
In order to vote your shares at the meeting, you must attend the
meeting or appoint a proxy to vote on your behalf. You will find a form of proxy
that accompanies the notice of special meeting and this proxy
statement/prospectus. In order for your proxy to be valid and used at the
meeting, it must be received by Georgeson Shareholder Communications, Inc., 111
Commerce Road, Carlstadt, NJ 07072, no later than 5:00 p.m., Eastern Standard
Time, on the business day prior to the meeting or, if the meeting is adjourned
or postponed, no later than 5:00 p.m., Eastern Standard Time, on the second
business day prior to the adjourned or postponed meeting.
Proxies will be solicited primarily by mail and may also be solicited
by our directors or officers. The cost of such solicitation will be borne by
Zoom Canada.
All shares represented at the meeting by properly executed proxies will
be voted in accordance with the
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instructions specified on the proxy card. IF NO SUCH SPECIFICATION IS MADE, AND
IF THE PROXY CARD NAMES THE MANAGEMENT DESIGNEES, THEY WILL VOTE IN FAVOR OF THE
CONTINUATION. The management designees are our directors and officers and they
have indicated their willingness to represent you.
THE ENCLOSED PROXY CARD, WHEN PROPERLY SIGNED, CONFERS DISCRETIONARY
AUTHORITY TO THE PERSON NAMED WITH RESPECT TO AMENDMENTS OR VARIATIONS OF
MATTERS IDENTIFIED IN THE NOTICE OF MEETING AND ANY OTHER MATTERS WHICH MAY
PROPERLY BE BROUGHT BEFORE THE MEETING. AS OF THE DATE HEREOF, WE ARE NOT AWARE
THAT ANY AMENDMENTS OR OTHER MATTERS ARE TO BE PRESENTED AT THE MEETING.
HOWEVER, IF ANY OTHER MATTERS WHICH ARE NOT CURRENTLY KNOWN TO MANAGEMENT SHOULD
PROPERLY COME BEFORE THE MEETING, THEN THE PROXIES NAMED ON THE PROXY CARD
INTEND TO VOTE IN ACCORDANCE WITH THE JUDGMENT OF MANAGEMENT.
If your proxy indicates that you wish to abstain from voting on
approval of any matter, your shares will be considered present at the meeting
for purposes of determining a quorum, but your votes will not be cast with
respect to that matter. An abstention will therefore reduce the number of votes
required for approval of the continuation.
Each shareholder may vote in person or by proxy. To be valid, a proxy
card must be signed by the shareholder or by the shareholder's attorney, duly
authorized in writing.
YOU HAVE THE RIGHT TO APPOINT A PERSON, WHO DOES NOT NEED TO BE A
SHAREHOLDER, TO ATTEND THE MEETING AND ACT ON YOUR BEHALF AT THE MEETING. YOU DO
NOT NEED TO APPOINT THE PERSONS DESIGNATED IN THE ENCLOSED FORM OF PROXY WHO ARE
OFFICERS OR DIRECTORS OF ZOOM CANADA. You may do so by striking out the names of
the persons designated on the enclosed proxy card and by inserting in the blank
space provided for that purpose the name of the desired person or by completing
another proper form of proxy. A shareholder who has given a proxy may revoke it
at any time before its use by:
o completing, signing, dating and delivering a new form of proxy no
later than 5:00 p.m., Eastern Standard Time, on the day before the
meeting; or
o personally attending the meeting and voting in person; or
o sending an instrument in writing signed by the shareholder or by
his duly authorized attorney to Georgeson Shareholder
Communications, 111 Commerce Road, Carlstadt, NJ 07072 or the
registered office of Zoom Canada, c/o Zoom Telephonics, Inc., Suite
1525, 625 Howe Street, Vancouver, B.C V6C 2TC, prior to the last
business day prior to the meeting or, if the meeting is adjourned
or postponed, no later than the second business prior to the
adjourned or postponed meeting; or
o giving an instrument in writing signed by the shareholder or his
duly authorized attorney to the chairman of the meeting on the day
of the meeting or any adjournment thereof.
PROPERLY EXECUTED PROXIES WITHOUT INSTRUCTIONS ON HOW TO VOTE ON ANY OF
THE PROPOSALS WILL BE VOTED "FOR" THE APPROVAL OF ALL PROPOSALS.
NON-REGISTERED SHAREHOLDERS
Non-Registered shareholders should follow the directions of their
intermediaries with respect to the procedures to be followed for voting.
Generally, non-registered shareholders will not receive the same proxy form as
distributed by Zoom Canada to registered shareholders but will be provided with
either a request for voting instructions or a proxy form executed by the
intermediary but otherwise uncompleted. Intermediaries will then submit votes on
behalf of the non-registered shareholder. If you are a non-registered
shareholder, please submit your voting instructions to your intermediary in
sufficient time to ensure that your votes are received by Zoom Canada on or
before 5:00 p.m., Eastern Standard Time, on February 14, 2002.
20
MOVING THE JURISDICTION OF INCORPORATION OF ZOOM CANADA
THE CONTINUATION
We intend to change our jurisdiction of incorporation from Canada to
the United States by means of a process called a continuance in Canada and a
domestication in the State of Delaware. Domestication is available to non-United
States corporations under Section 388 of the Delaware General Corporation Law.
Simultaneously with the domestication, we will apply for a certificate of
discontinuance under Section 188(7) of the Canada Business Corporations Act,
which will end Zoom Canada's existence in Canada. After the special meeting, we
will file the appropriate documents with both Delaware and Canada and then Zoom
Canada will become a Delaware corporation.
The proposal to be voted on at the meeting relates to the approval of a
special resolution which would authorize us to do the following:
o continue Zoom Canada as Zoom Delaware under Delaware law and
simultaneously discontinue Zoom Canada's existence in Canada under
Canadian law;
o approve the certificate of incorporation, which will be filed with
the Secretary of State of the State of Delaware along with a
certificate of domestication, which are attached as Exhibits "E"
and "F" to this proxy statement/prospectus;
o approve the Bylaws of Zoom Delaware in the form of Exhibit "G"
attached to this proxy statement/prospectus;
o authorize us to apply to the Director of the Canada Business
Corporations Act for a letter of satisfaction and certificate of
discontinuance; and
o authorize our directors, in their discretion, to postpone or
abandon the continuation, following approval by the shareholders
without seeking shareholder consent to such a postponement or
abandonment.
A copy of the special resolution is attached to this proxy
statement/prospectus as Exhibit "C".
PROCEDURES TO COMPLETE THE CONTINUATION
Under Canadian law, a corporation may apply to another jurisdiction
requesting to be continued as if it had been incorporated under the laws of that
other jurisdiction. An application for continuance requires approval by at least
two-thirds of the votes cast by shareholders present in person or represented by
proxy at the meeting and satisfaction of the Director of the Canada Business
Corporations Act that the proposed continuance will not adversely affect
creditors or shareholders of the corporation. For Zoom Canada to change its
jurisdiction of incorporation from Canada to Delaware, it must file in Delaware
a certificate of incorporation that complies with Delaware law and a certificate
of domestication.
Once the Delaware filings have been made, the Director of the Canada
Business Corporations Act will be requested to issue a certificate of
discontinuance. Upon issuance of the certificate of discontinuance, Canadian law
will cease to apply. Upon filing these documents, we become subject to Delaware
law, but retain our original incorporation date in Canada as our official
incorporation date for purposes of Delaware law. In addition, Delaware law
provides explicitly that the change of domicile does not affect any of our
liabilities incurred prior to domestication. Simultaneously with the
domestication in Delaware, the existence of Zoom Canada will be terminated.
EFFECTS OF THE CONTINUATION
APPLICABLE LAW. As of the effective date of the continuation, our legal
jurisdiction of incorporation will be Delaware, and the continuing corporation,
Zoom Delaware, will no longer be subject to the corporate governance provisions
of the Canada Business Corporations Act. All matters of corporate governance of
Zoom Delaware will be determined under the Delaware General Corporation Law.
Zoom Delaware will retain the original incorporation date of Zoom Canada in
Canada as Zoom Delaware's date of incorporation for purposes of the Delaware
General Corporation Law.
21
ASSETS, LIABILITIES, OBLIGATIONS, ETC. Under Delaware Law, as of the
effective date of the continuation, all of our assets, property, rights,
liabilities and obligations immediately prior to the continuation will continue
to be the assets, property, rights, liabilities and obligations of Zoom
Delaware. Canadian law ceases to apply to us on the date shown on the
certificate of discontinuance to be issued by the Director of the Canada
Business Corporations Act. On the effective date of the continuation:
o the property of Zoom Canada will continue to be the property of
Zoom Delaware;
o Zoom Delaware will continue to be liable for the obligations of
Zoom Canada;
o an existing cause of action, claim or liability to prosecution
against Zoom Canada will be unaffected;
o a civil, criminal or administrative action or proceeding pending by
or against Zoom Canada may be continued to be prosecuted by or
against Zoom Delaware; and
o a ruling, order or judgment in favor of or against Zoom Canada may
be enforced by or against Zoom Delaware.
CAPITAL STOCK. Once the change in jurisdiction is completed, holders of
shares of Zoom Canada common stock instead will own one share of Zoom Delaware
common stock for each share of common stock held before the move. The existing
certificates representing Zoom Canada's common stock will not be canceled.
Holders of options to purchase Zoom Canada's common stock on the date of the
move will continue to hold options to purchase an identical number of shares of
Zoom Delaware common stock.
The principal attributes of Zoom Delaware common stock and Zoom Canada
common stock are comparable, but there are material differences in shareholder
rights. See "Comparison of Shareholders' Rights" and "Description of Capital
Stock."
BUSINESS AND OPERATIONS. The continuation, if approved, will effect a
change in the legal jurisdiction of incorporation of Zoom Canada as of the
effective date thereof, but Zoom Canada will not change its business or
operations after the effective date of the continuation as Zoom Delaware.
DIRECTORS AND OFFICERS. The directors and officers of Zoom Delaware
immediately following the continuance will be identical to the current directors
and officers of Zoom Canada. See "Our Directors and Executive Officers." As of
the effective date of the continuation, the election, duties, resignation and
removal of Zoom Canada directors and officers shall be governed by the Delaware
General Corporation Law, the certificate of incorporation and the bylaws of Zoom
Delaware.
NASDAQ LISTING. Zoom Canada's common stock is currently listed and
quoted on the Nasdaq National Market under the symbol "ZOOM." We intend to
continue to use the same symbol following the continuation.
BACKGROUND TO AND PRINCIPAL REASONS FOR THE CHANGE IN JURISDICTION OF
INCORPORATION
Our board of directors believes that it is desirable for us to continue
our corporate existence under the laws of the State of Delaware for the
following reasons:
IMPROVING MARKET ACCESS. Our primary sources of capital in recent years
have been in the United States. We believe that more opportunities and capital
would be available to us if we were a United States corporation.
REDUCED TAX COSTS OF CERTAIN TRANSACTIONS. Currently, if we were to
issue securities such as convertible debt and preferred stock, there is an
additional cost because of a withholding tax on interest and dividend payments
that pass between the United States and Canada. Since all of our assets and
operations are conducted through our wholly owned U.S. subsidiary, any funding
of dividend or interest payments result in the transfer of funds between this
U.S. subsidiary and Zoom Canada. Similarly, even though we do not currently
intend to pay any dividends, there would be a withholding tax on any dividends
declared and paid on our common shares. These costs would be eliminated after
the move to Delaware.
22
BETTER COMPARISON WITH PEERS. Since most of our business is conducted
in the United States, the market generally compares us to similarly-sized United
States companies. By incorporating in Delaware and no longer being a foreign
corporation operating in the United States, we believe we will be able to better
compete with our competitors.
LESS RESTRICTIVE GOVERNING LAW. Canadian law requires that at least
one-third of our directors be Canadian residents. If we earn more than five
percent of our gross revenues in Canada, then a majority of our directors and
any committees of the board of directors must be Canadian residents. We have
been able to attract qualified Canadian residents to serve on our board, but
this requirement reduces our flexibility with regard to our selection of
directors. Delaware law does not impose a similar requirement, and thus the
continuation will provide us with greater flexibility in the future with respect
to the composition of our board of directors.
Furthermore, since over 50% of our stock is held by United States
residents and we are listed on the Nasdaq Stock Market, we must abide by most
United States securities and stock exchange requirements, as though we were a
United States company. We also expect to realize some savings in administrative
time and expense by a change of our jurisdiction of incorporation to the United
States because we will only have to comply with the laws of the United States
and not the laws of both the United States and Canada.
SELECTION OF THE STATE OF DELAWARE. For many years, Delaware has
followed a policy of encouraging incorporation in that state and, in furtherance
of that policy, has adopted comprehensive, modern and flexible corporate laws
which are periodically updated and revised to meet changing business needs. As a
result of this deliberate policy to provide a hospitable climate for corporate
development, many major corporations have initially chosen Delaware for their
domicile, or have subsequently reincorporated in, continued into or domesticated
in Delaware. In addition, the Delaware courts have developed considerable
expertise in dealing with corporate issues, and a substantial amount of case law
has developed construing Delaware law and establishing specific legal principles
and policies with respect to Delaware corporations. Not only has this served to
provide greater legal predictability with respect to the corporate legal affairs
of Delaware corporations, but it has also given Delaware an important role in
respect of the corporate laws of the United States generally inasmuch as many of
its principles and policies have been adopted by, and become important
precedents for the laws of, other states.
Our board of directors has unanimously approved the continuance out of
Canada and domestication of Zoom Canada under the provisions of the Canada and
Delaware law, and recommends that you vote FOR this proposal.
TAX CONSEQUENCES OF THE CONTINUATION
GENERAL
The following sections summarize material provisions of Canadian and
United States federal income tax laws that may affect us and our shareholders.
Although this summary discusses the material Canadian and United States federal
income tax considerations arising from and relating to the continuance, it does
not purport to discuss all of the United States and Canadian tax consequences
that may be relevant to our shareholders, nor will it apply to the same extent
or in the same way to all shareholders. The summary does not describe the effect
of the U.S. federal estate tax laws or the effects of any state, local, or
provincial tax law, rule or regulation, nor is any information provided as to
the effect of any other U.S. federal or foreign tax law, other than the income
tax laws of the United States and Canada to the extent specifically set forth
herein.
The tax discussion set forth below is based upon the facts set out in
this proxy statement/prospectus and upon additional information possessed by our
management and upon representations of our management. The tax discussion is
included for general information purposes only. It is not intended to be, nor
should it be construed to be, legal or tax advice to any particular shareholder.
The following does not address all aspects of taxation that may be relevant to
you in light of your individual circumstances and tax situation. OUR
SHAREHOLDERS ARE STRONGLY ADVISED AND ARE EXPECTED TO CONSULT WITH THEIR OWN
LEGAL AND TAX ADVISOR REGARDING THE U.S. AND CANADIAN INCOME TAX CONSEQUENCES OF
THE CONTINUATION IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.
This portion of the summary applies to U.S. holders who own common
shares of Zoom Canada as capital assets. U.S. holders include individual
citizens or residents of the United States, and corporations (or entities
treated as corporations for U.S. federal income tax purposes) and partnerships
organized under the laws of the United States or any State thereof or the
District of Columbia. Trusts are U.S. holders if they are subject to the primary
supervision of a U.S. court and the control of one or more U.S. persons with
respect to substantial trust decisions. An estate is a U.S. holder if the income
of the estate is subject to U.S. federal income taxation regardless of the
source of the income. U.S. holders who own interests in Zoom Canada indirectly
through one or more non-U.S. entities or carry on business outside the United
States through a permanent establishment or fixed place of business, or U.S.
holders who hold an interest in Zoom Canada other than as a common shareholder,
should consult with their tax advisors regarding their particular tax
consequences.
This summary also describes certain U.S. federal income tax
consequences to Canadian holders following the continuation, who are
specifically those persons resident in Canada who own common shares of Zoom
Canada as capital assets. The discussion is limited to the U.S. federal income
tax consequences to Canadian holders of their ownership and disposition of the
common shares of Zoom Canada as a result of the continuation and assumes the
Canadian holders have no other U.S. assets or activities.
This discussion is based on the Internal Revenue Code of 1986, as
amended, adopted and proposed regulations thereunder, Internal Revenue Service
("IRS") rulings and pronouncements, reports of congressional committees,
judicial decisions, and current administrative practice, all of which are
subject to change, perhaps with retroactive effect. Any such change could alter
the tax consequences discussed below. No ruling from the IRS will be requested
concerning the U.S. federal income tax consequences of the continuation. The tax
consequences set forth in the following discussion are not binding on the IRS or
the courts and no assurance can be given that contrary positions will not be
successfully asserted by the IRS or adopted by a court.
As indicated above, this discussion does not address all aspects of
U.S. federal income taxation that may be relevant to particular U.S. holders in
light of their personal circumstances or to U.S. holders subject to special
treatment under the U.S. Internal Revenue Code, including, without limitation,
banks, financial institutions, insurance companies, tax-exempt organizations,
broker-dealers, S corporations, individual retirement and other deferred
accounts, application of the alternative minimum tax rules, holders who received
Zoom Canada stock as compensation, persons who hold notes or stock as part of a
hedge, conversion, or constructive sale transaction, straddle, or other
risk-reduction transaction, persons that have a "functional currency" other than
the U.S. dollar, and persons subject to taxation as expatriates. Furthermore,
this discussion does not address the tax consequences applicable to holders that
are treated as partnerships or other pass-through entities for U.S. federal
income tax purposes.
This summary does not address the U.S. federal income tax consequences
to a U.S. holder of the ownership, exercise or disposition of any warrants or
compensatory options. This discussion also does not address the U.S. federal
income tax consequences applicable to U.S. holders who own or owned (directly or
indirectly) 10% or more, by vote or value, of the stock of Zoom Canada at the
time of the Delaware continuation. As of the date of this proxy
statement/prospectus, we are unaware of any shareholder who owns, directly or
indirectly, 10% or more of the stock of Zoom Canada.
U.S. TAX CONSEQUENCES TO ZOOM CANADA
The Delaware continuation of Zoom Canada should be treated as the
transfer by Zoom Canada of its assets to Zoom Delaware in exchange for Zoom
Delaware stock, followed by Zoom Canada's distribution of such stock to its
shareholders, and then the exchange by Zoom Canada's shareholders of their Zoom
Canada stock for Zoom Delaware stock. Neither Zoom Canada nor Zoom Delaware
should recognize any gain or loss for U.S. federal income tax purposes as a
result of the continuation. Note, however, there may be adverse Canadian tax
consequences to Zoom Canada as discussed below under "Canadian Federal Income
Tax Considerations - Zoom Canada Consequences."
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U.S. TAX CONSEQUENCES TO U.S. SHAREHOLDERS
U.S. HOLDERS WHOSE STOCK HAS A FAIR MARKET VALUE OF LESS THAN $50,000.
A U.S. holder whose Zoom Canada stock has a fair market value of less than
$50,000 on the date of the exchange or continuance does not recognize any gain
or loss and is not required to include any part of the "all earnings and profits
amount" (as described below) in income and no election (as described below) is
required. Each such U.S. holder's adjusted basis in the shares of Zoom Delaware
received in the exchange will be equal to such holder's adjusted basis in the
shares of Zoom Canada surrendered in the exchange, and such holder's holding
period in the shares of Zoom Delaware received in the exchange will include the
period of time during which such holder held its shares in Zoom Canada.
U.S. HOLDERS WHOSE STOCK HAS A FAIR MARKET VALUE OF $50,000 OR MORE. A
U.S. holder whose Zoom Canada stock has a fair market value of $50,000 or more
on the date of the exchange or continuance must generally recognize gain (but
not loss) with respect to the stock of Zoom Delaware received in the exchange.
Any such gain should be equal to the excess of the fair market value of the Zoom
Delaware stock received at the time of the continuation over the holder's
adjusted basis in the Zoom Canada stock exchanged therefor. Any such gain should
be capital gain if the holder held the Zoom Canada stock as a capital asset, and
should be long-term capital gain if the holder held the Zoom Canada stock for
longer than twelve months. Long-term capital gains of individual taxpayers
generally are currently subject to a maximum U.S. federal income tax rate of
20%.
A U.S. holder, however, as an alternative to recognizing gain, may
elect to include in income the "all earnings and profits amount" attributable to
his or her stock in Zoom Canada, within the meaning of Treasury Regulation
Section 1.367(b)-2(d). The income so included pursuant to this election
generally is treated as dividend income, which in the case of individuals is
taxed at the higher rates applicable to ordinary income. Corporations that hold
stock, however, are entitled to a dividends received deduction of 70% (if the
corporate holder owns less than 20% of the voting power and value of shares of
Zoom Canada), 80% (if the corporate holder owns at least 20% but less than 80%
of the voting power and value of shares of Zoom Canada), or 100% (if the
corporate holder owns at least 80% of the voting power and value of shares of
Zoom Canada).
There are, however, strict conditions to making this election. The
election must comply with the requirements of Treasury Regulation Sections
1.367(b)-1(c) and 1.367(b)-3(c)(3) and must include, among other things: (i) a
copy of the information that you receive from us substantiating the "all
earnings and profits amount", if any, attributable to your Zoom Canada stock,
(ii) a statement that the U.S. holder is making the election, (iii) a statement
that the exchange is an Internal Revenue Code Section 367(b) exchange, (iv) a
complete description of the exchange, (v) a description of any stock, securities
or other consideration transferred or received in the exchange, (vi) a statement
describing the amounts required to be taken into account for tax purposes, (vii)
a representation that the U.S. holder has notified us that it is making the
election, and (viii) certain other information required to be furnished with the
U.S. holder's tax return or otherwise furnished pursuant to the Internal Revenue
Code or the regulations thereunder. Additionally, the notice/election must be
attached by the U.S. holder to his or her timely filed U.S. federal income tax
return for the year of the exchange, and the U.S. holder must send notice to us
of the election no later than the date it is filed. U.S. holders should consult
with their own tax advisors regarding whether to make this election and, if the
election is determined to be advisable, the appropriate filing requirements with
respect to this notice/election.
Management expects that Zoom Canada's cumulative "all earnings and
profits amount", as the term is defined in Treasury Regulation Section
1.367(b)-2(d), will be in the aggregate less than $100,000 at the time of the
continuation. Following the continuation, upon the request of any U.S. holder,
management will furnish each such requesting U.S. holder with information to
substantiate such holder's "all earnings and profits amount" with respect to
his, her, or its Zoom Canada stock.
A U.S. holder's adjusted basis in the shares of Zoom Delaware received
in the exchange will be equal to the U.S. holder's adjusted basis in the shares
of Zoom Canada surrendered in the exchange, increased by the amount of gain (if
any) recognized on the exchange. A U.S. holder's holding period in the shares of
Zoom Delaware received in the exchange should include the period of time during
which such holder held its shares in Zoom Canada. However, the determination of
holding period is not free from doubt and you are urged to consult your own tax
advisors.
25
DISSENTING U.S. SHAREHOLDERS
A U.S. holder who dissents from the continuation will generally
recognize capital gain (or loss) equal to the amount by which the cash received
pursuant to the exercise of dissenters' rights exceeds (or is exceeded by) such
holder's adjusted basis in the shares surrendered.
CONTROLLED FOREIGN CORPORATION CONSIDERATIONS
If more than 50% of the stock of Zoom Canada is owned, directly,
indirectly, or constructively, by one or more U.S. holders that each owns,
directly or indirectly, 10% or more of the total combined voting power of all
classes of stock of Zoom Canada entitled to vote ("U.S. Shareholders"), Zoom
Canada will be treated as a controlled foreign corporation under Subpart F of
the Internal Revenue Code. This classification would have many complex results,
including the U.S. Shareholders' required inclusion in income of their pro rata
shares of the "Subpart F income," of Zoom Canada, as specifically defined by the
Internal Revenue Code. Further, if Zoom Canada is treated as a controlled
foreign corporation, U.S. Shareholders may be subject to U.S. income tax on
their pro rata shares of any increase in the average amounts of U.S. property
held by Zoom Canada.
In addition, under Section 1248 of the Internal Revenue Code, gain from
the sale or exchange of shares of Zoom Canada by a holder who is or was a U.S.
Shareholder at any time during the five-year period ending with such sale or
exchange would be treated as dividend income and taxed at ordinary income rates
to the extent of earnings and profits of Zoom Canada attributable to the stock
sold or exchanged.
If Zoom Canada is both a passive foreign investment company (as defined
below) and a controlled foreign corporation, Zoom Canada will not be treated as
a passive foreign investment company with respect to the U.S. Shareholders.
Management does not believe that Zoom Canada is a controlled foreign
corporation.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
Zoom Canada will be classified as a passive foreign investment company
for any taxable year during which either 75% or more of our gross income is
passive income or the average fair market value of Zoom Canada's assets that
produce or are held for the production of passive income for such taxable year
equals or exceeds 50% of the average value of our total assets for the year.
Classification of Zoom Canada as a passive foreign investment company at any
time during a particular U.S. holder's holding period may result in a number of
unfavorable U.S. income tax consequences including, among other things,
recognition of gain on the sale, exchange, disposition, pledge, or hypothecation
of Zoom Canada shares, recognition of gain on the continuation of Zoom Canada to
the United States, taxation of that gain at rates applicable to ordinary income,
and an imposition of an interest charge on taxes apportioned to prior years in
the U.S. holder's holding period for his Zoom Canada shares.
Management does not believe that Zoom Canada is a passive foreign
investment company, or that it was a passive foreign investment company in any
previous year.
FOREIGN PERSONAL HOLDING COMPANY CONSIDERATIONS
Zoom Canada will be classified as a foreign personal holding company
for U.S. federal income tax purposes if both of the following tests are
satisfied: (i) more than 50% of either the total combined voting power of all
classes of our voting stock or the total value of our outstanding stock is
owned, directly or indirectly (pursuant to the rules of attribution), by five or
fewer U.S. holders at any time during Zoom Canada's taxable year, and (ii) Zoom
Canada receives at least 60% (in certain cases 50%) of its gross income
(regardless of source), as specifically adjusted, from passive sources.
If Zoom Canada were to be classified as a foreign personal holding
company, a portion of our "undistributed foreign personal holding company
income" (as defined for U.S. federal income tax purposes) would
26
be allocated to each of our U.S. holders on the last day on which Zoom Canada is
classified as a foreign personal holding company or the last day of Zoom
Canada's taxable year if earlier. This income would be includible in a U.S.
holder's gross income as a dividend for U.S. federal income tax purposes.
Management does not believe that Zoom Canada is a foreign personal
holding company.
POST-CONTINUATION U.S. TAXATION OF INCOME, GAINS AND LOSSES
After the continuation/domestication, distributions made by Zoom
Delaware to U.S. holders of Zoom Delaware shares will be treated as dividends,
taxable to U.S. holders as ordinary income, to the extent such distributions are
paid from Zoom Delaware's current or accumulated earnings and profits. To the
extent a distribution were to exceed Zoom Delaware's current and accumulated
earnings and profits, the excess would be treated first as a tax-free return of
the U.S. holder's adjusted basis in their Zoom Delaware shares and would reduce
the adjusted basis by such amount. Any remaining excess would be treated as
capital gain.
A corporate U.S. holder who receives a dividend from Zoom Delaware will
generally be allowed a dividends received deduction from its taxable income in
an amount equal to 70% of the dividend received if the corporate U.S. holder
owns less than 20% of the voting power and the value of the shares of Zoom
Delaware. A corporate U.S. holder who has an ownership percentage of at least
20% but less than 80% of the voting power and value of shares of Zoom Delaware
will generally receive a dividends received deduction in the amount of 80% of
the dividends received. A corporate U.S. holder that owns 80% or more of the
voting power and value of the shares of Zoom Delaware will generally be allowed
a dividends received deduction equal to 100% of the dividend received from Zoom
Delaware.
U.S. holder will generally recognize capital gain or loss on a sale or
exchange of their Zoom Delaware shares. A U.S. holder's gain (or loss) will be
equal to the amount by which the holder's amount realized for the shares exceeds
(or is exceeded by) such holder's adjusted basis in the shares sold or
exchanged. The gain or loss recognized by a U.S. holder on a sale of exchange of
stock will be long-term capital gain or loss if they held the stock for more
than one year. In the case of individuals, long-term capital gains generally are
currently taxed at a maximum rate of 20 percent. The deductibility of capital
losses is subject to limitations. In the case of corporations, long-term capital
gains and ordinary income are taxed at the same maximum federal income tax rate.
POST-CONTINUATION SALE OF ZOOM DELAWARE SHARES
A Canadian holder will not be subject to United States federal income
tax on gain recognized on a subsequent sale or other disposition of Zoom
Delaware shares, unless the Zoom Delaware shares constitute a United States real
property interest at the time of disposition and the Canadian holder is a "5%
shareholder." A Canadian holder who beneficially owns or owned more than 5% of
the common stock of Zoom Delaware, either at the time of disposition or at any
time in the five-year period ending on the disposition date, will be a 5%
shareholder. Gain recognized by such a 5% shareholder would be subject to United
States tax unless the Canadian 5% shareholder were to establish in a prescribed
manner that his or her stock in Zoom Delaware is not a United States real
property interest. Specifically, the Canadian 5% shareholder must establish that
the fair market value of Zoom Delaware's United States real property interests
is and was less than 50% of the fair market value of the sum of all of its trade
or business assets, its real properties located outside the United States and
its United States real property interests, both at the time of disposition and
at any time in the five year period ending on the disposition date.
Management does not believe that the stock in Zoom Delaware is or will
be a U.S. real property interest.
POST-CONTINUATION DIVIDENDS ON ZOOM DELAWARE SHARES
Distributions made by Zoom Delaware to Canadian holders of Zoom
Delaware shares will be treated as U.S. source dividends to the extent of Zoom
Delaware's current or accumulated earnings and profits.
Canadian holders will generally be subject to 15% U.S. non-resident
withholding tax, with no allowance for deductions. This withholding tax rate is
reduced to 5% in the case of a Canadian corporation that owns at least 10% of
the Zoom Delaware voting shares.
27
Distributions in excess of Zoom Delaware's current and accumulated
earnings and profits will be tax-free to the extent of the Canadian holders'
adjusted basis in their Zoom Delaware shares, but will reduce their adjusted
basis in the shares by the same amount. Distributions in excess of Zoom
Delaware's earnings and profits and the Canadian holders' adjusted basis will
give rise to capital gain, treated in the manner described in "Post-Continuation
Sale of Zoom Delaware Shares," above.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The Internal Revenue Code and the Treasury regulations require those
who make certain specified payments to report the payments to the IRS. Among the
specified payments are dividends and proceeds paid by brokers to their
customers. The required information returns enable the IRS to determine whether
the recipient properly included the payments in income. This reporting regime is
reinforced by "backup withholding" rules. These rules require payors to withhold
tax at a 31 percent rate from payments subject to information reporting if the
recipient fails to cooperate with the reporting regime, fails to provide a
correct taxpayer identification number to the payor, or if the IRS or a broker
informs the payor that withholding is required. The information and backup
withholding rules do not apply to payments to corporations, whether domestic or
foreign.
Payments of dividends to a U.S. holder generally will be subject to
information reporting, and will be subject to backup withholding unless we are
provided with a correct taxpayer identification number of the holder and neither
the IRS nor a broker informs us that withholding is required.
The backup withholding rules do not apply to payments that are subject
to the 30 percent (or reduced 15 percent or 5 percent) withholding tax on
dividends paid to non-U.S. holders, or to payments that are exempt from tax by
application of a tax treaty or special exception. Accordingly, payments of
dividends to Canadian holders generally will not be subject to backup
withholding. To avoid backup withholding on dividends, Canadian holders will
have to certify their nonresident status. Even if certification is provided,
information reporting may still apply to payments of dividends.
Payments made to a U.S. holder upon a sale of stock generally will be
subject to information reporting and possible backup withholding. Payments made
to a Canadian holder upon a sale of stock will not be subject to information
reporting or backup withholding, provided the Canadian holder certifies its
foreign status.
Any amounts withheld from a payment to a holder under the backup
withholding rules can be credited against any U.S. federal income tax liability
of the holder.
CANADIAN INCOME TAX CONSIDERATIONS
Thomas Rondeau, Canadian counsel to Zoom Canada, has advised that the
following general summary fairly describes the principal Canadian federal income
tax consequences of the proposed continuation of Zoom Canada to Delaware to
Canadian holders who are, specifically, those shareholders of Zoom Canada who
are resident in Canada who own, either alone or together with related persons,
less than 10% of the shares of Zoom Canada, and to whom shares and warrants of
Zoom Canada constitute "capital property" for the purposes of the Income Tax Act
(Canada) (the "ITA"). This summary also describes the principal Canadian federal
income tax consequences of the proposed continuation of Zoom Canada to Delaware
to non-resident holders who, specifically, are non-residents of Canada, and do
not carry on business in Canada. Other holders of shares of Zoom Canada should
consult their own tax advisors as the tax consequences to them of the proposed
continuation are beyond the scope of this summary.
This summary is based upon the current provisions of the ITA, the
regulations thereunder in force on the date hereof (the "Regulations"), any
proposed amendments (the "Proposed Amendments") to the ITA or Regulations
previously announced by the Federal Minister of Finance and counsel's
understanding of the current administrative and assessing policies of the Canada
Customs and Revenue Agency. This description is not exhaustive of all possible
Canadian federal income tax consequences and does not take into account or
anticipate any changes in law, whether by legislative, governmental or judicial
action other than the Proposed Amendments, nor does it take into account
provincial or foreign tax considerations which may differ significantly from
those discussed herein.
28
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IT IS NOT INTENDED TO BE,
NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER.
ACCORDINGLY, HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS FOR ADVISE WITH
RESPECT TO THE CANADIAN INCOME TAX CONSEQUENCES TO THEM OF THE PROPOSED
CONTINUATION.
NATURE OF SHARES HELD BY CANADIAN SHAREHOLDERS
The shares of Zoom Canada will generally constitute" capital property"
to a Canadian holder, unless the Canadian holder is a trader or dealer in
securities or is engaged in an adventure in the nature of trade with respect to
the shares. Certain individual Canadian holders whose shares of Zoom Canada
might not otherwise qualify as "capital property" may be entitled to obtain such
qualification by disposing of their shares before the continuation of the
company and by making an irrevocable election under subsection 39(4) of the ITA.
AFTER THE CONTINUATION, THE SHARES OF ZOOM DELAWARE WILL NO LONGER QUALIFY FOR
THE SUBSECTION 39(4) ELECTION. ANY INDIVIDUALS CONTEMPLATING MAKING AN ELECTION
UNDER SUBSECTION 39(4) OF THE ITA SHOULD CONSULT THEIR TAX ADVISORS AS THE
ELECTION WILL AFFECT THE CANADIAN INCOME TAX TREATMENT OF THE DISPOSITION OF THE
SHAREHOLDER'S OTHER CANADIAN SECURITIES.
CONSEQUENCES OF CONTINUATION TO CANADIAN SHAREHOLDERS
The continuation of Zoom Canada into Delaware will not constitute a
taxable event for our Canadian holders. Canadian holders will continue to hold
their shares at the same adjusted cost basis as before the continuation.
Following the continuance, dividends paid by Zoom Delaware to Canadian
holders will be treated differently under the ITA than dividends those holders
might have previously received from Zoom Canada. By way of summary, a Canadian
holder will be required to include the gross amount of any dividend received
from Zoom Delaware in the holder's income for the year of receipt. The Canadian
holder who is an individual, will not be entitled to claim the federal dividend
tax credit in respect of such dividend. A foreign tax credit will be available
under the ITA to the Canadian holder to the extent of the lesser of:
(a) the withholding taxes paid and not deducted by the holder when
computing income (under the Canada-U.S. Income Tax Convention (the
"Canada/U.S. Treaty") U.S. withholding tax on dividends paid to a
Canadian holder will be limited to a maximum rate of 15%), and
(b) the Canadian taxes otherwise payable in respect of that foreign
income.
Alternatively, the individual Canadian holder can claim the foreign
withholding taxes paid as a deduction when computing his income for tax
purposes. If the withholding taxes paid exceed 15% of the foreign income from
property, such excess may be deducted in computing net income.
FOREIGN REPORTING
A Canadian resident is required under the ITA to report his or her
foreign property holdings if the aggregate cost amount of such holdings exceeds
$100,000. Following the continuation, the shares of Zoom Delaware will
constitute foreign property for the purposes of this rule and their "cost
amount" will be included in the $100,000 threshold.
FOREIGN INVESTMENT ENTITY
The Federal Minister of Finance has proposed amendments to the ITA
which, generally, may require a Canadian resident shareholder to include in
income the annual growth in value of an interest in a "foreign investment
entity" (an "FIE") on an accrual or mark-to-market basis. The most recent draft
of the proposed amendments was released on August 2, 2001 (the "Draft
Legislation"). Under the Draft Legislation the proposed amendments would apply
to taxation years beginning after 2001.
While a share of Zoom Delaware would be a FIE under the Draft
Legislation, it would also be an "exempt interest". As a consequence, a Canadian
resident shareholder of Zoom Delaware would not be required to include any
amount in income in respect of that share if the Draft Legislation is enacted as
proposed.
29
DISSENT PROCEEDINGS
Should a stockholder initiate formal dissent proceedings in respect of
the proposed continuation, and if Zoom Canada carries out the continuation, Zoom
Canada will be required to purchase the dissenting stockholder's shares for a
cash payment (the "redemption proceeds") equal to the fair value of the
purchased shares. The dissenting stockholder's receipt of the redemption
proceeds will be treated as a dividend to the extent that such proceeds exceed
the paid-up capital of the purchased shares. The balance of the redemption
proceeds (i.e., the amount equal to the paid-up capital of the purchased shares)
will be treated as proceeds of disposition of the shares for the purpose of
computing the stockholder's capital gain or loss. Consequently, the dissenting
stockholder will realize a capital gain or loss to the extent that the paid-up
capital of the purchased shares exceeds or is exceeded by the stockholder's
adjusted cost base of the shares. If the dissenting stockholder is a corporation
resident in Canada, the full amount of the redemption proceeds may be treated as
proceeds of disposition with the result that no dividend will be deemed to have
been paid to the stockholder and any gain or loss realized by the dissenting
stockholder will be determined by reference to the full amount of the redemption
proceeds.
Any capital loss arising on the exercise of dissent rights by a
corporate shareholder of Zoom Canada will be reduced by the amount of dividends
received or deemed to have been received, including any deemed dividend arising
from the exercise of dissent rights, on the purchased shares where the period of
ownership of such shares was less than 365 days or where the corporate holder
(together with persons with whom it did not deal at arm's length) held more than
5% of the issued shares of any class of Zoom Canada at the time the dividends
were received or deemed to have been received.
A dissenting stockholder that is a private corporation or a subject
corporation, as those expressions are defined in the ITA, will be liable to pay
a 33 1/3% refundable tax under Part IV of the ITA on the redemption proceeds to
the extent that they are treated as a dividend. Generally, a private corporation
is one that is not public and is not controlled by one or more public companies
and a subject corporation is one that is not private and is controlled by or for
the benefit of one individual or a related group of individuals.
IN THE EVENT THE CANADIAN HOLDER'S DISPOSITION OF SHARES ON DISSENT IS,
FOR CANADIAN TAX PURPOSES, DEEMED TO OCCUR AFTER ZOOM CANADA CONTINUES INTO ZOOM
DELAWARE AND CONSEQUENTLY CEASES TO BE A CORPORATION RESIDENT IN CANADA, THE
CANADIAN HOLDER WILL REALIZE A CAPITAL GAIN OR LOSS ON THAT DISPOSITION TO THE
EXTENT THAT THE REDEMPTION PROCEEDS EXCEED OR ARE EXCEEDED BY THE HOLDER'S
ADJUSTED COST BASE IN THE PURCHASED SHARES.
INTEREST EXPENSE
Zoom Canada's continuance to Delaware will not affect the deductibility
of interest incurred on money borrowed to purchase shares of Zoom Canada.
Generally, interest that is currently deductible will continue to be deductible
by the stockholder after the continuation to Delaware, as long as the
stockholder continues to own the shares of Zoom Delaware or uses the borrowed
funds to earn income from a business or property.
ZOOM CANADA CONSEQUENCES
Once we file our certificate of domestication with the Delaware
Secretary of State, Zoom Canada will be deemed to have been incorporated in
Delaware at that time for purposes of the ITA and will cease to be a resident of
Canada.
The "corporate emigration" rules under the ITA will apply upon the
continuation of Zoom Canada to Delaware. Accordingly, Zoom Canada will be deemed
to have its taxation year end immediately before being granted a certificate of
continuation in Delaware. Each property owned by Zoom Canada immediately before
the deemed year end will be deemed to have been disposed of for proceeds of
disposition equal to that property's fair market value. Any gains or losses
derived from this deemed disposition of property will be taken into account when
determining the amount of Zoom Canada's taxable income for the fiscal period
which ends immediately before its continuation into Delaware. Any available
non-capital loss carry-forwards of Zoom Canada from previous years can
30
be used to offset this taxable income. Any balance of taxable income so
determined will be subject to tax in accordance with the provisions of the ITA.
In view of the fair market value and tax cost of each property owned by
Zoom Canada, as of the date of this proxy statement/prospectus, management of
Zoom Canada does not believe that Canadian income tax will be payable as a
result of the deemed disposition of each of its properties.
Zoom Canada will also be required to pay a special branch tax equal to
5% of the amount by which the fair market value of its assets (calculated
immediately before continuance) exceeds the aggregate of its liabilities,
including any liabilities under the ITA, and the paid-up capital of its issued
and outstanding shares at the time of continuation into Delaware.
In view of the fair market value of our assets, liabilities and the
paid-up capital of its issued and outstanding shares, as of the date of this
proxy statement/prospectus, management of Zoom Canada does not believe that it
will be liable to pay the special branch tax.
After continuation into Delaware, Zoom Delaware will only be taxable in
Canada to the extent it carries on business through a permanent establishment
located in Canada, as that expression is defined in the Canada/U.S. Treaty or
realizes a gain from the sale of taxable Canadian property which is not
otherwise exempt from Canadian tax by virtue of certain relieving provisions in
the Canada/U.S. Treaty. We have no current plans to maintain a permanent
establishment located in Canada.
TAX-EXEMPT SHAREHOLDERS
Following the continuation, the shares of Zoom Delaware will remain
listed on the Nasdaq Stock Market which is a prescribed stock exchange for
purposes of the ITA. Consequently, the shares will continue to be qualified
investments for a trust governed by a registered retirement savings plan,
deferred profit sharing plan, registered retirement income fund or registered
pension plan, and certain other entities. However, a Zoom Delaware share will
continue to be "foreign property" to these trusts and entities for the purposes
of the ITA.
HOLDERS THAT ARE ONE OF THE TYPES OF ENTITIES DESCRIBED ABOVE SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING THE CONSEQUENCES OF HOLDING SHARES OF
ZOOM DELAWARE.
NON-RESIDENT CANADIAN SHAREHOLDERS
The continuation of Zoom Canada into Delaware will not constitute a
taxable event for federal Canadian income tax purposes for holders who are not
resident of Canada for Canadian income tax purposes.
Dividends paid by Zoom Delaware to these non-resident holders after the
continuation into Delaware will no longer be subject to Canadian withholding
tax.
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COMPARISON OF SHAREHOLDERS' RIGHTS
Upon the effective date of the continuance, all shareholders of Zoom
Canada will become shareholders of Zoom Delaware. Zoom Canada is a corporation
organized under and corporately governed by Canadian law, the articles of
continuance of Zoom Canada and the by-laws of Zoom Canada. Zoom Delaware will be
a corporation organized under and governed by Delaware law, the certificate of
incorporation and the by-laws of Zoom Delaware. The principle attributes of Zoom
Delaware common stock and Zoom Canada's common stock are comparable, but there
are material differences in shareholders rights.
The following is a summary of these material differences which arise
from differences between United States and Canadian securities laws, between the
Canada Business Corporations Act, the Delaware General Corporation Law, and
between Zoom Canada's present charter and by-laws and the proposed certificate
of incorporation and by-laws of Zoom Delaware. The proposed Delaware certificate
of incorporation and by-laws are attached to this document as Exhibits "E" and
"G", respectively.
This summary is qualified in its entirety by the terms of the present
charter and by-laws of Zoom Canada and the proposed certificate of incorporation
and by-laws of Zoom Delaware.
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VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
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CANADA DELAWARE
Under the Canada Business Corporations Act, extraordinary Delaware General Corporation Law requires the
corporate actions are required to be approved by special affirmative vote of a majority of the outstanding stock
resolution. These include: entitled to vote thereon to authorize any merger,
consolidation, dissolution or sale of substantially all
o certain amalgamations; of the assets of a corporation. However, unless
o continuances; required by its certificate of incorporation, no
o liquidations; authorizing shareholder vote is required of a
o dissolutions; and corporation surviving a merger if:
o sales, leases or exchanges of all or
substantially all the assets of a corporation o such corporation's certificate of
other than in the ordinary course of business. incorporation is not amended in any respect by
the merger;
A special resolution is a resolution passed by not less o each share of stock of such corporation
than 2/3 of the votes cast by the shareholders entitled to outstanding immediately prior to the effective
vote on the resolution. In certain cases, a special date of the merger will be an identical
resolution to approve an extraordinary corporate action is outstanding or treasury share of the surviving
also required to be approved separately by the holders of corporation after the effective date of the
a class or series of shares. merger; and
o either no shares of common stock, including
securities convertible into common stock will
be issued in the merger or the number of
shares of common stock to be issued in the
merger does not exceed 20% of such
corporation's outstanding common stock
immediately prior to the effective date of the
merger.
The proposed certificate of incorporation for Zoom
Delaware will not require such a vote.
No shareholder approval is required under Delaware
General Corporation Law for mergers or consolidations
in which a parent corporation merges or consolidates
with a subsidiary of which it owns at least 90% of the
outstanding shares of each class of stock.
Finally, unless required by its certificate of
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incorporation, shareholder approval is not required under
the Delaware General Corporation Law for a corporation
to merge with or into a direct or indirect wholly owned
subsidiary of a holding company (as defined in the
Delaware General Corporation Law) in certain
circumstances. The proposed certificate of incorporation
for Zoom Delaware will not require such a vote.
Zoom Canada currently does not have a shareholders'
rights plan. Shareholders' rights plans, in a variety of
forms, are common to many corporations incorporated
in the United States. They give a corporation's board of
directors the opportunity to withstand an unsolicited
takeover attempt while providing the board of directors
sufficient time to evaluate the offer and its adequacy
and to consider alternative measures or transactions that
may be appropriate in responding to the offer. Delaware
General Corporation Law permits shareholders' rights
plans in general and permits the adoption of shareholders'
rights plans by a board of directors without shareholder
approval.
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AMENDMENT TO GOVERNING DOCUMENTS
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CANADA DELAWARE
Under the Canada Business Corporations Act, amendments to Delaware General Corporation Law requires amendments to
the articles of incorporation generally require the the corporation's certificate of incorporation, to be
approval of not less than two-thirds of the votes cast by approved by the holders of a majority of the
shareholders entitled to vote on the resolution. The outstanding stock entitled to vote. The certificate of
directors may amend or repeal any by-law unless the incorporation can require a greater level of approval.
articles of incorporation or by-laws provide otherwise. The proposed certificate of incorporation for Zoom
When the directors amend or repeal a by-law, they are Delaware will not require a greater level of approval.
required under the Canada Business Corporations Act to
submit the change to the shareholders at the next meeting If an amendment adversely affects the rights or
of shareholders. Shareholders may confirm, reject, amend preferences of a particular class or series of stock,
or repeal the by-law amendment by a majority of the votes that class or series must approve the amendment as a
cast by shareholders present and entitled to vote on the class even if the certificate of incorporation does not
resolution. provide that right.
Delaware General Corporation Law also reserves the
power of the shareholders to adopt, amend or repeal the
by-laws of a corporation unless the certificate of
incorporation confers such power on the board of
directors in addition to the shareholders. The proposed
certificate of incorporation of Zoom Delaware expressly
authorizes the board of directors to adopt, amend or
repeal Zoom Delaware's by-laws.
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DISSENT RIGHTS
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CANADA DELAWARE
The Canada Business Corporations Act provides that Under Delaware General Corporation Law, shareholders
shareholders of a corporation entitled to vote on certain have the right to dissent from a merger or consolidation
matters are entitled to exercise dissent rights and by demanding payment in cash for their shares equal to
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demand payment for the fair value of their shares. For this the fair value of such shares. Fair value is determined
purpose, there is no distinction between listed and by a court in an action timely brought by the dissenters.
unlisted shares. In determining fair value, the court may consider all
relevant factors, including the rate of interest which the
Dissent rights exist when there is a vote upon matters resulting or surviving corporation would have had to pay
such as: to borrow money during the pendency of the court
proceeding.
o any amalgamation with another corporation (other
than with certain affiliated corporations);
o an amendment to the corporation's articles of Delaware General Corporation Law grants dissenters'
incorporation to add, change or remove any appraisal rights only in the case of mergers or
provisions restricting the issue, transfer or consolidations and not in the case of a sale or
ownership of shares; transfer of assets or a purchase of assets for stock
o an amendment to the corporation's articles of regardless of the number of shares being issued.
incorporation to add, change or remove any Further, no appraisal rights are available for shares
restriction upon the business or businesses that of any class or series listed on a national securities
the corporation may carry on; exchange or designated as a national market system
o a continuance under the laws of another security on the Nasdaq National Market or held of
jurisdiction; record by more than 2,000 shareholders. However,
o a sale, lease or exchange of all or substantially appraisal rights are available if the agreement of
all the property of the corporation other than in merger or consolidation does not convert such shares
the ordinary course of business; and into
o a court order permitting a shareholder to dissent
in connection with an application to the court o stock of the surviving corporation,
for an order approving an arrangement proposed by o stock of another corporation which is either
the corporation. listed on a national securities exchange or
designated as a national market system
However, a shareholder is not entitled to dissent if an security on the Nasdaq National Market or held
amendment to the articles of incorporation is effected by of record by more than 2,000 shareholders, or
a court order approving a reorganization or by a court o cash in lieu of fractional shares or some
order made in connection with an action for an oppression combination of the above
remedy. Under the Canada Business Corporations Act, a
shareholder may, in addition to exercising dissent rights, In addition, dissenters' rights are not available for
seek an oppression remedy for any act or omission of a any shares of the surviving corporation if the merger
corporation which is oppressive or unfairly prejudicial to did not require the vote of the shareholders of the
or that unfairly disregards a shareholder's interest. surviving corporation.
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OPPRESSION REMEDY
------------------------------------------------------------ ---------------------------------------------------------
CANADA DELAWARE
Section 241 of the Canada Business Corporations Act Delaware General Corporation Law does not provide for a
provides an oppression remedy. A court may make any similar remedy. However, Delaware General
order, both interim and final, to rectify the matters Corporation Law provides a variety of legal and
complained of, if satisfied that: equitable remedies to a corporation's shareholders for
improper acts or omissions of a corporation, its officers
and directors. Under Delaware General Corporation Law,
o any act or omission of the corporation or any of only shareholders can bring an action alleging a breach
its affiliates effects a result, of fiduciary duty by the directors of a corporation. In
o the business or affairs of the corporation or any order to be successful, the shareholder must overcome
of its affiliates are, have been carried on or the "business judgment rule," which simply stated means
conducted in a manner, or that absent a showing of intentional misconduct, gross
o the powers of the directors of the corporation or negligence or a conflict of interest, disinterested
any of its affiliates are or have been exercised directors' decisions are presumed by the courts to have
in a manner, been made in good faith and in the best interests of
the corporation.
that is oppressive or unfairly prejudicial to, or
that unfairly disregards the interests of, any security
holder, creditor, director or officer of the corporation.
A complainant includes a present or former shareholder,
officer or director of the corporation or any of its
affiliates, or the Director of the Canada Business
Corporations Act and any other person who in the discretion
of the court is a proper person to make such application.
Because of the breadth of the conduct covered by the
oppression remedy and the wide scope of the court's remedial
powers, the oppression remedy is very flexible. It is
frequently relied upon to safeguard the interest of
shareholders and other complainants with a substantial
interest in the corporation. Under the Canada Business
Corporations Act, it is not necessary to prove that the
directors of a corporation acted in bad faith in order to
seek an oppression remedy. It is sufficient to prove that
that their actions were oppressive, unfairly prejudiced to
or unfairly disregarded the interests of any security
holder, director, officer or creditor. Although the court
may order the corporation to pay the interim expenses
(including legal fees) of a complainant seeking an
oppression remedy, ultimately the complainant may be held
accountable for such interim costs.
------------------------------------------------------------ ---------------------------------------------------------
DERIVATIVE ACTION
------------------------------------------------------------ ---------------------------------------------------------
CANADA DELAWARE
Under the Canada Business Corporations Act, a complainant A derivative action may be brought in Delaware by a
may apply to the court for leave to bring an action in the shareholder on behalf of, and for the benefit of, the
name of and on behalf of a corporation or any of its corporation. Delaware General Corporation Law provides
subsidiaries, or to intervene in an existing action to that a shareholder must allege in the complaint that he
which they are a party. Under the Canada Business was a shareholder of the corporation when the
Corporations Act, no action may be brought and no transaction took place. A shareholder may not sue
intervention in an action may be made unless the derivatively without first demanding that the corporation
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complainant has given reasonable notice to the directors bring suit, which demand has been refused, unless it is
of the corporation or its subsidiary of the complainant's shown that such demand would have been futile.
intention to apply to the court. The court must be
satisfied that:
o the directors of the corporation or its
subsidiary will not bring, diligently prosecute
or defend or discontinue the action;
o the complainant is acting in good faith; and
o it appears to be in the interest of the
corporation or its subsidiary that the action be
brought, prosecuted, defended or discontinued.
Under the Canada Business Corporations Act, the court in
a derivative action may make any order it thinks fit
including, orders pertaining to conduct of the lawsuit
or the making of payments to former and present
shareholders and payment of reasonable legal fees
incurred by the complainant.
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SHAREHOLDER CONSENT IN LIEU OF MEETING
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CANADA DELAWARE
Under the Canada Business Corporations Act, Under Delaware General Corporation Law, unless
shareholders can take action by written resolution and otherwise provided in the certificate of incorporation,
without a meeting only if all shareholders sign the any action required to be taken or which may be taken at
written resolution. an annual or special meeting of shareholders may be
taken without a meeting if a consent in writing is signed
by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary
to authorize such action at a meeting at which all shares
entitled to vote were present and voted. The proposed
certificate of incorporation for Zoom Delaware will
prohibit the use of such a consent.
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SHAREHOLDER QUORUM
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CANADA DELAWARE
Under the Canada Business Corporations Act, unless a Under Delaware General Corporation Law, a corporation's
corporation's by-laws provide otherwise, a quorum is certificate of incorporation or by-laws may specify the
present at a meeting of the shareholders, irrespective of number of shares or the voting power which shall be
the number of shareholders actually present at the present, or represented by proxy, in order to
meeting, if the holders of a majority of the shares constitute a quorum for the transaction of any business
entitled to vote at the meeting are present in person or at any meeting of the shareholders. However, in no
represented by proxy. Zoom Canada's by-laws provide that event shall a quorum consist of less than 1/3 of the
a quorum shall be one person holding not less than shares entitled to vote at the meeting. The proposed
one-twentieth of the total number of issued shares bylaws of Zoom Delaware provides for a quorum to
entitling the holders thereof to vote at the meeting. The consist of 1/3 of the shares entitled to vote at a
Nasdaq Stock Market marketplace rules require a quorum to meeting being present in person or by proxy.
be at least 1/3 of the shares entitled to vote at the
meeting unless an exemption is granted by Nasdaq from this
requirement.
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DIRECTOR QUALIFICATIONS
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CANADA DELAWARE
Under the Canada Business Corporations Act, one-third of Delaware does not have comparable requirements.
the directors must be Canadian residents. If we earn more
than five percent of our gross revenues in Canada, then a
majority of our directors and any committees of the board
of directors must be Canadian residents. In addition,
because the securities of Zoom Canada are publicly traded,
Zoom Canada is required to have not fewer than three
directors. At least two of these directors must not be
officers or employees of Zoom Canada or its affiliates.
A director of Zoom Canada must not be:
o under eighteen years of age;
o adjudicated as mentally unsound;
o a person that is not an individual; or
o a person who has the status of a bankrupt.
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FIDUCIARY DUTIES OF DIRECTORS
CANADA AND DELAWARE. Directors of corporations incorporated or organized under the Canada Business
Corporations Act or Delaware General Corporation Law have fiduciary obligations to the corporation and its
shareholders. Under these fiduciary obligations, the directors must act in accordance with the so-called duty of care.
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CANADA DELAWARE
Section 122 of the Canada Business Corporations Act, Under Delaware common law, the duty of care requires
requires directors of a Canadian corporation to act that the directors act in an informed and deliberative
honestly and in good faith with a view to the best manner and to inform themselves, prior to making a
interests of the corporation. The duty of care requires business decision, of all material information
that the directors exercise the care, diligence and skill reasonably available to them. The duty of loyalty may be
that a reasonably prudent person would exercise in summarized as the duty to act in good faith, not out of
comparable circumstances. self-interest, and in a manner which the directors
reasonably believe to be in the best interest of the
shareholders pursuant to the "business judgment rule."
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INDEMNIFICATION OF OFFICERS AND DIRECTORS
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CANADA DELAWARE
Under the Canada Business Corporations Act and Delaware General Corporation Law permits a
pursuant to Zoom Canada's by-laws, Zoom Canada may corporation to indemnify its present or former directors
indemnify present or former directors or officers or officers made a party, or threatened to be made a
against all expenses and settlement amounts or party to any third party proceeding by reason of the fact
judgments arising out of actions against such individuals that such person is or was a director or officer of the
because of their service as directors or officers. corporation, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement
In order to qualify for indemnification such director or actually and reasonably incurred by such person in
officers must: connection with such action, suit or proceeding, if
such person:
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o acted honestly and in good faith with a view to o acted in good faith and in a manner such
the best interests of the company; and person reasonably believed to be in or not
o in the case of a criminal or administrative opposed to the best interests of the
action or proceeding enforced by a monetary corporation; and,
penalty, have had reasonable grounds for o with respect to any criminal action or
believing that his or her conduct was lawful. proceeding, had no reason to believe that such
conduct was unlawful.
Indemnification will be provided to an eligible director In a derivative action, or an action by or in the right
or officer who meets both these tests or was entitled to of the corporation, the corporation is permitted to
such indemnity or was substantially successful on the indemnify directors and officers against expenses
merits in the action. actually and reasonably incurred by them in connection
with the defense or settlement of an action or suit if
A corporation may, if the person meets the conditions they acted in good faith and in a manner that they
above and it is approved by a court, also indemnify an reasonably believed to be in or not opposed to the best
eligible director or officer in an action by or on behalf interests of the corporation. However, in such a case,
of the corporation. no indemnification shall be made if the person is
adjudged liable to the corporation, unless and only to
Some of the officers and director of Zoom Canada the extent that the court in which the action or suit
currently have indemnification agreements which was brought shall determine upon application that the
survive the termination of their service as officers defendant directors or officers are fairly and
or directors. These agreements will continue after the reasonably entitled to indemnity for such expenses
continuation. despite such adjudication of liability.
Delaware General Corporation Law allows the
corporation to advance expenses before the resolution of
an action, if the person agrees to repay any such amount
advanced if they are later determined not to be entitled
to indemnification. The Canada Business Corporations
Act does not expressly provide for such advance payment.
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DIRECTOR LIABILITY
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CANADA DELAWARE
The Canada Business Corporations Act limits or eliminates Delaware General Corporation Law provides that a
the liability of directors to the corporation or its corporation's certificate of incorporation may limit or
shareholders for malfeasance or nonfeasance. In some eliminate the liability of directors to the corporation
circumstances, a director proves that he did not know and or its shareholders for monetary damages for breach of
could not have known of the unlawful act, he will not be fiduciary duty as a director. However, such liability
liable. Also, most actions to enforce a liability imposed cannot arise from certain proscribed conduct, including:
by the Canada Business Corporations Act must be brought
within two years from the date of the act. Further, a o acts or omissions not in good faith;
director will not be liable under certain sections of the o acts which involve intentional misconduct;
Canada Business Corporations Act if he relied in good o acts which involve a knowing violation of law;
faith on o breach of the duty of loyalty;
o payment of unlawful dividends;
o expenditure of funds for unlawful stock
o financial statements fairly represented to him purchases; or
by an officer or in a written report of the o redemptions or transactions from which such
auditor to reflect the financial condition of the director derived an improper personal benefit.
corporation, or
o a report of a lawyer, accountant, engineer,
appraiser or other person whose profession lends The proposed certificate of incorporation of Zoom
credibility to a statement made by him. Delaware provides that no director of Zoom Delaware
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shall be liable to the corporation or its shareholders
for monetary damages for breach of fiduciary duty as a
director, except for liability:
o for any breach of the director's duty of
loyalty to the corporation or its shareholders;
o for acts or omissions not in good faith or
which involve intentional misconduct or a
knowing violation of law;
o or certain unlawful distributions by the
corporation; or
o for any transaction from which the director
derived an improper personal benefit.
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ANTI-TAKEOVER PROVISIONS AND INTERESTED STOCKHOLDER TRANSACTIONS
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CANADA DELAWARE
Policies of certain Canadian securities regulatory Delaware General Corporation Law prohibits, in certain
authorities, including Ontario Securities Commission Rule circumstances, a "business combination" between the
61-501 "Insider Bids, Issuer Bids Going Private corporation and an "interested shareholder" within
Transactions and Related Party Transactions" contain three years of the shareholder becoming an "interested
requirements for related party transactions. A related shareholder." An "interested shareholder" is a holder
party transaction includes any transaction in which a who, directly or indirectly,
corporation acquires or transfers an asset or securities
or liability from or to directors, senior officers or o controls 15% or more of the outstanding voting
holders of at least 10% of the voting securities of the stock, or
corporation. o is an affiliate of the corporation, and was
the owner of 15% or more of the outstanding
Rule 61-501 requires: voting stock at any time within the prior
o more detailed disclosures in proxy material three-year period.
pertaining to a related party transaction;
o preparation of a formal valuation of the A "business combination" includes a merger or
transaction; and consolidation, a sale or other disposition of assets having
o a summary of the valuation in the proxy material. an aggregate market value of 10% or more of the
consolidated assets of the corporation or the aggregate
Rule 61-501 also requires minority shareholders to market value of the outstanding stock of the corporation
approve the transaction, by either a simple majority or and certain transactions that would increase the
two-thirds of the votes cast, depending upon the interested shareholder's proportionate share ownership
circumstances. in the corporation.
This provision does not apply where:
o either the business combination or the
transaction making the shareholder an
interested shareholder is approved by the
corporation's board of directors prior to the
date the interested shareholder acquired such
15% interest;
o after the transaction making the person an
interested shareholder, the interested
shareholder owned at least 85% of the
outstanding voting stock of the corporation;
o the business combination is approved by a
majority of the board of directors and the
disinterested shareholders owning two-thirds of
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the outstanding votes entitled to be cast;
o the corporation is not a public company
because of stock exchange listing or
inter-dealer quotations and has less than
2,000 shareholders; or
o the corporation has opted out of this
provision.
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ACCESS TO CORPORATE RECORDS
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CANADA DELAWARE
Under the Canada Business Corporations Act, you, other Under the Delaware General Corporation Law, any
shareholders and the creditors of the corporation, their shareholder of a corporation, their agents or legal
agents or legal representatives as well as the Director representatives may make a written demand to examine
under the Canada Business Corporations Act may the records of that corporation. Such a demand to
examine: examine the corporation's records must have a proper
purpose, be sworn under oath, and directed to that
o the articles of incorporation, by-laws, unanimous corporation at its principal place of business or its
shareholder agreements of Zoom Canada; registered office in Delaware. A proper purpose is one
o the minutes and resolutions of shareholders; that is reasonably related to that shareholder's interest
o all notices pertaining to the term of office, in the corporation as a shareholder.
election of, or change of directors of Zoom
Canada; and
o the securities register of Zoom Canada free of
charge during normal business hours.
Since Zoom Canada is public, any person may examine
the aforementioned records for a reasonable fee. All
shareholders of Zoom Canada may request a copy of the
articles of incorporation, by-laws, unanimous
shareholder agreements of that corporation free of
charge.
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REQUISITION OF MEETINGS
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CANADA DELAWARE
The Canada Business Corporations Act provides that the Delaware General Corporation Law provides that special
holders of not less than five percent of the issued shares meetings of the stockholders may be called by the board
of a corporation may give notice to the Directors requiring of directors or by such person or persons as may be
them to call and hold a general meeting. authorized by the certificate of incorporation or by the
bylaws. Stockholders will not be able to call meetings
under our proposed certificate of incorporation or
bylaws.
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FORM OF PROXY AND INFORMATION CIRCULAR
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CANADA DELAWARE
The Canada Business Corporations Act requires management Delaware General Corporation Law permits stockholders
of a corporation with more than 15 shareholders to solicit to vote by proxy, but does not require that proxies be
proxies in connection with each shareholders' meeting. sent to stockholders or that any proxy statements or
Concurrently with giving notice of a meeting of the information statements be sent to the stockholders.
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shareholders, management must send to each shareholder a However, the SEC will continue to require us to meet
form of proxy for use by every shareholder entitled to its requirements with respect to the solicitation of
vote at such meeting, as well as an information circular proxies and preparation of proxy statements.
containing prescribed information regarding the matter to
be dealt with at and conduct of the meeting. In addition,
Canadian securities laws impose additional requirements
respecting the soliciting of proxies and shareholder
meetings.
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DISSENTING SHAREHOLDERS' RIGHTS
Section 190 of the Canada Business Corporations Act is reprinted in its
entirety as Exhibit "D" to this proxy statement/prospectus. Shareholders may
dissent from the proposal to change our jurisdiction of incorporation from
Canada to Delaware. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE
PROVISIONS OF SECTION 190 OF THE CANADA BUSINESS CORPORATIONS ACT.
If you wish to dissent and do so in compliance with Section 190, you
will be entitled to be paid the fair value of the shares you hold. Fair value is
determined as of the day before the continuation is approved by shareholders.
If you wish to dissent, you must send written objection to the
continuation to us before the special meeting. If you vote in favor of the
continuation, you lose your rights to dissent. If you abstain or vote against
the continuation, you preserve your dissent rights. However, it is not
sufficient to vote against the continuation or abstain. You must also provide a
separate dissent notice. If you grant a proxy and intend to dissent, the proxy
must instruct the proxy holder to vote against the continuation in order to
prevent the proxy holder from voting such shares in favor of the continuation
and thereby voiding your right to dissent. Under the Canada Business
Corporations Act, you have no right of partial dissent. Accordingly, you may
only dissent as to all your shares.
Under Section 190, you may dissent only for shares that are registered
in your name. In many cases, people beneficially own shares that are registered
either:
o in the name of an intermediary, such as a bank, trust company,
securities dealer, broker, trustee, administrator of self
administered registered retirement savings plans, registered
retirement income funds, registered educational savings plans and
similar plans and their nominees; or
o in the name of a clearing agency in which the intermediary
participates, such as The Canadian Depositary for Securities
Limited or The Depository Trust Company.
If you want to dissent and your shares are registered in someone else's
name, you must contact your intermediary and either:
o instruct your intermediary to exercise the dissenters' rights on
your behalf (which, if the shares are registered in the name of a
clearing agency, will require that the shares first be
re-registered in your intermediary's name); or
o instruct your intermediary to re-register the shares in your name,
in which case you will have to exercise your dissenters' rights
directly.
In other words, if your shares are registered in someone else's name,
you will not be able to exercise your dissenters' rights directly unless the
shares are re-registered in your name. We are required to notify each
shareholder who has filed a dissent notice when and if the continuation has been
approved. This must be sent within 10 days after shareholders approve the
continuation. We will not send a notice to any shareholder who voted to approve
the continuation or who has withdrawn their dissent notice.
41
Within 20 days after receiving the above notice from us, or if you do
not receive such notice within 20 days after learning that the continuation has
been approved, you must send us a payment demand containing:
o your name and address;
o the number of shares you own; and
o a demand for payment of the fair value of your shares.
Within 30 days after sending a payment demand, you must send to us via
our transfer agent, CIBC Mellon Trust Company, Corporate Trust Department, Suite
1600, 1066 West Hastings Street, Vancouver, B.C. V6E 3X1, the certificates
representing your shares. If you fail to send us a dissent notice, a payment
demand or your share certificates within the appropriate time frame, you forfeit
your right to dissent and your right to be paid the fair value of your shares.
Our transfer agent will endorse on your share certificates a notice that you are
a dissenting shareholder and will return the share certificates to you.
Once you send a payment demand to us, you cease to have any rights as a
shareholder. Your only remaining right is the right to be paid the fair value of
your shares. Your rights as a shareholder will be reinstated if:
o you withdraw your payment demand;
o we fail to make you an offer of payment; or
o if the continuation does not happen.
Within seven days of the effective date of the continuation or the date
we receive your payment demand, we must send you a written offer to pay for your
shares. This offer must include a written offer to pay you an amount considered
by the board of directors to be the fair value of your shares. The offer must
include a statement showing the manner used to calculate the fair value. Every
offer to pay any shareholder must be on the same terms. We must pay you for your
shares within 10 days after you accept our offer. Any such offer lapses if we do
not receive your acceptance within 30 days after the offer to pay has been made
to you.
If we fail to make an offer to pay for your shares, or if you fail to
accept the offer within 50 days after the date of the move, we may apply to a
court to fix a fair value for your shares. If we fail to apply to a court, you
may apply to a court for the same purpose within a further period of 20 days.
You are not required to give security for costs in such a case.
All dissenting shareholders whose shares have not been purchased will
be joined as parties and bound by the decision of the court. We are required to
notify each affected dissenting shareholder of the date, place and consequences
of the application and of their right to appear and be heard in person or by
counsel. The court may determine whether any person who is a dissenting
shareholder should be joined as a party. The court will then fix a fair value
for the shares of all dissenting shareholders who have not accepted a payment
offer from us. The final order of a court will be rendered against us for the
amount of the fair value of the shares of all dissenting shareholders. The court
may, in its discretion, allow a reasonable rate of interest on the amount
payable to each dissenting shareholder.
THIS IS ONLY A SUMMARY OF THE DISSENTING SHAREHOLDER PROVISIONS OF THE
CANADA BUSINESS CORPORATIONS ACT. THEY ARE TECHNICAL AND COMPLEX. IT IS
SUGGESTED THAT IF YOU WANT TO AVAIL YOURSELF OF YOUR RIGHTS THAT YOU SEEK YOUR
OWN LEGAL ADVICE. FAILURE TO COMPLY STRICTLY WITH THE PROVISIONS OF THE CANADA
BUSINESS CORPORATIONS ACT MAY PREJUDICE YOUR RIGHT OF DISSENT.
INTEREST OF MANAGEMENT IN THE CONTINUATION
No director or senior officer of Zoom Canada at any time since the
beginning of our most recently completed financial year and no associate or
affiliate of any such person has any material interest, direct or indirect, by
way of beneficial ownership of securities or otherwise, in the continuation,
except for any interest arising from the ownership of shares of Zoom Canada
where the shareholder will receive no extra or special benefit or advantage not
shared on a pro-rata basis by all holders of shares in the capital of Zoom
Canada.
42
DESCRIPTION OF CAPITAL STOCK
Zoom Canada's authorized capital consists of 25,000,000 shares of
common stock, without par value. The authorized capital of Zoom Delaware under
the proposed certificate of incorporation will be 25,000,000 shares of common
stock, $0.01 par value per share. As of November 27, 2001, there were 7,860,866
shares of common stock of Zoom Canada outstanding.
The principal attributes of Zoom Delaware common stock and Zoom
Canada common stock are comparable, but there are material differences in
shareholder rights. The summary of these material differences are described
under "Comparison of Shareholders' Rights." The holders of Zoom Delaware common
stock will be entitled to vote at all meetings of shareholders, except meetings
at which only holders of a specified class of shares are entitled to vote, to
receive any dividend declared thereon, and, subject to the rights, privileges,
restrictions and conditions attaching to any other class of shares of Zoom
Delaware, to receive the remaining property of Zoom Delaware upon dissolution.
Zoom Delaware common stock will have no preemptive or other subscription rights,
and there will be no conversion rights or redemption or sinking fund provisions
with respect to such shares.
ACCOUNTING TREATMENT OF CONTINUATION
The continuation of Zoom Canada and its domestication as a Delaware
corporation represents a transaction between entities under common control.
Assets and liabilities transferred between entities under common control are
accounted for at historical cost in a manner similar to a pooling-of-interests
("as if pooling-of-interests accounting"). Accordingly, the assets and
liabilities of Zoom Delaware, the continuing entity, will be reflected at their
historical cost to Zoom Canada.
Any shares of Zoom Canada that we acquire from dissenting shareholders
will be treated as an acquisition of treasury stock at the amount paid for such
shares.
43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of December 14, 2001, by (i) each person known
by us to own beneficially more than five (5%) percent of our common stock, (ii)
each of our directors and each named executive officer in the Summary
Compensation Table under "Executive Compensation", and (iii) all of our
directors and executive officers as a group. On December 14, 2001, there were
7,860,866 issued and outstanding shares of our common stock.
NUMBER OF SHARES
Name BENEFICIALLY OWNED % OF COMMON STOCK
--------------------------------------------- ------------------------------ ----------------------------
Frank B. Manning(1) (2) 731,246 9.3%
c/o Zoom Telephonics, Inc.
207 South Street
Boston, MA 02111
T. Pat Manning(2) 440,033 5.6%
1821 Sherman Drive
St. Charles, MO 63303
Peter R. Kramer(3) 580,449 7.4%
c/o Zoom Telephonics, Inc.
207 South Street
Boston, MA 02111
Bernard Furman(4) 52,000 *
L. Lamont Gordon(5) 25,000 *
J. Ronald Woods(6) 26,000 *
Robert A. Crist(7) 51,000 *
Dean Panagopoulos(8) 45,000 *
Deena Randall(9) 56,500 *
All Directors and Current 1,759,244 22.4%
Executive Officers
As a group (10 persons)
(1)(3)(4)(5)(6)(7)(8)(9)(10)
--------------------------------------------- ------------------------------ ----------------------------
*Less than one percent of shares outstanding.
(1) Includes 135,000 shares that Mr. Manning has the right to acquire under
outstanding stock options exercisable within sixty (60) days after
December 14, 2001. Includes 3,368 shares held by Mr. Manning's
daughter, as to which he disclaims beneficial ownership.
(2) T. Pat Manning and Frank B. Manning are brothers.
(3) Includes 100,000 shares that Mr. Kramer has the right to acquire under
outstanding stock options exercisable within sixty (60) days after
December 14, 2001.
(4) Includes 24,000 shares the Mr. Furman has the right to acquire under
outstanding stock options exercisable within sixty (60) days after
December 14, 2001.
(5) Includes 24,000 shares that Mr. Gordon has the right to acquire under
outstanding stock options exercisable within sixty (60) days after
December 14, 2001.
44
(6) Includes 24,000 shares that Mr. Woods has the right to acquire under
outstanding stock options exercisable within sixty (60) days after
December 14, 2001.
(7) Includes 51,000 shares that Mr. Crist has the right to acquire under
outstanding stock options exercisable within sixty (60) days after
December 14, 2001.
(8) Includes 45,000 shares that Mr. Panagopoulos has the right to acquire
under outstanding stock options exercisable within sixty (60) days
after December 14, 2001.
(9) Includes 56,500 shares that Ms. Randall has the right to acquire under
outstanding stock options exercisable within sixty (60) days after
December 14, 2001.
(10) Includes 75,000 shares that the executive officers of Zoom Canada, who
are not named above, have the right to acquire under outstanding stock
options exercisable within sixty (60) days after December 14, 2001.
OUR DIRECTORS AND EXECUTIVE OFFICERS
The names and biographical information of our current directors and executive
officers, are set forth below:
NAME AGE PRINCIPAL OCCUPATION AND POSITION WITH ZOOM CANADA DIRECTOR
SINCE
------------------------------ ------------ ----------------------------------------------------------- ------------
Frank B. Manning 53 Chief Executive Officer, President and Chairman of the 1977
Board.
Peter R. Kramer 50 Executive Vice President and Director 1977
Robert A. Crist 58 Vice President of Finance and Chief Financial Officer --
Bernard Furman 72 Consultant 1991
L. Lamont Gordon 69 Chairman of Sprott Securities Limited 1992
Richard Kumpf 52 Vice President of Engineering --
Terry J. Manning 53 Vice President of Sales and Marketing --
Dean N. Panagopolous 43 Vice President of Network Products --
Deena Randall 48 Vice President of Operations --
J. Ronald Woods 66 President of Rowood Capital Corp 1991
Frank B. Manning is a co-founder of our company. Mr. Manning has been
our president, chief executive officer, and a director since May 1977. He has
served as our 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. Mr. Manning was a
director of MicroTouch Systems, a Nasdaq-listed leader in touchscreen
technology, since 1993 until their acquisition by 3M in early 2001. 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. Frank B. Manning is
the brother of Terry Manning, vice president of sales and marketing of Zoom.
Peter R. Kramer is a co-founder of our company. Mr. Kramer has been our
executive vice president and a director 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 us in July 1997 as vice president of finance and
chief financial officer. From April 1992 until joining us, 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 and engineering controller. Mr. Crist
earned his BA degree from Pennsylvania State University and he earned his MBA
from the University of Rochester in 1971.
45
Bernard Furman has served as one of our directors since 1991. Mr.
Furman has served as a consultant to various companies, including Timeplex, Inc.
(formerly listed on the New York Stock Exchange), a world leader in large
capacity multiplexer and network management products. He was a co-founder of
Timeplex and served as its general counsel and as member of its board of
directors from its inception in 1969, and in 1984 also became vice chairman,
chief administrative officer and a member of the executive committee of the
board, holding all such positions until Timeplex was acquired by Unisys
Corporation in 1988.
L. Lamont Gordon has served as one of our directors since 1992. Since
1987, Mr. Gordon has served as the chairman of Sprott Securities Limited, a
Canadian institutional stock brokerage firm, and a member of the Toronto Stock
Exchange. He co-founded Gordon Securities Limited in 1969 and served as
president until 1978 and as chairman until 1979. He then founded Gordon
Lloyd-Price Investments Limited, a private investment holding company and has
served as its Chairman since 1979.
Richard Kumpf joined us in July, 2000 as vice president of engineering.
From March 1995 until joining us Mr. Kumpf served in various capacities at
Agilent Technologies (formerly Hewlett-Packard), most recently as general
manager of the cable rf business unit. Prior to 1995 Mr. Kumpf served in various
capacities at Motorola Inc., including the director of product development &
information technology. Mr. Kumpf earned a BS degree in Engineering from
Northeastern University in 1972 and an MS degree in Engineering from Washington
University in St. Louis in 1974.
Terry J. Manning joined us in 1984 and served as corporate
communications director from 1984 until 1989 when he became the director of our
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 us in February 1995 as director of
information systems. In July 2000 Mr. Panagopoulos was promoted to the position
of vice president of network products. 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 us in 1977 as our first employee. Ms. Randall has
served in various senior positions within our organization and has directed our
operations since 1989. Ms. Randall earned her BA degree from Eastern Nazarene
College in 1975.
J. Ronald Woods has served as one of our director since 1991. Since
November, 2000, Mr. Woods has served as President of Rowood Capital Corp. From
June 1996 to November 2000, Mr. Woods served as vice president-investments of
Jascan, Inc. Prior to that, Mr. Woods served as vice president-investments of
Conwest Exploration Corporation Ltd., a resource holding company based in
Toronto from 1987 to June 1996. He also served as a director, major shareholder
and head of research and corporate finance for Merit Investment Corporation, a
stock brokerage firm, from 1972 through 1987, and served as the president of
Merit Investment Corporation from 1984 through 1987. He is a former Governor of
the Toronto Stock Exchange and is currently a director of Upton Resources, Inc.,
and Key West Energy Corp.
DIRECTOR COMPENSATION
Each of our non-employee directors receives a fee of $500 per quarter
plus a fee of $500 for each meeting at which the director is personally present.
Travel and lodging expenses are also reimbursed.
Each non-employee director is also granted stock options our 1991
Directors Stock Option Plan. Currently, our non-employee directors are Bernard
Furman, J. Ronald Woods and L. Lamont Gordon. The Directors Plan, which expires
on April 30, 2011, provides in the aggregate that 198,000 shares of common stock
(subject to adjustment for capital changes) may be issued upon the exercise of
options granted under the Directors' Plan. Under the Directors Plan, each
non-employee director automatically receives an option to purchase 6,000 shares
of
46
common stock on January 10 and July 10 of each year. The exercise price for the
options granted under the Directors Plan is the fair market value of the common
stock on the date the option is granted.
During fiscal 2000, Messrs. Furman, Woods and Gordon each received
options to purchase 12,000 shares of Common Stock under the Directors Plan at an
average exercise price of $7.6875 per share.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summary compensation table shows, for the fiscal years
ended December 31, 2000, 1999, and 1998, the compensation of each person who
served as our chief executive officer and our four most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000 for all
services rendered in all capacities to Zoom Canada during the last completed
fiscal year.
NOTE: Bonus payments do not reflect the performance or value of an
executive. We focus on the total compensation of each executive, including base
salary, bonus, and stock options.
LONG TERM
---------
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
------------------- ------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS (#) COMPENSATION(3)
----------------------------------- ------------ ------------ ----------- ------------------ ----------------- --------------------
Frank B. Manning, 12/31/00 $126,040 $12,000 $11,771(1) 110,000 $210
Chief Executive Officer, 12/31/99 $120,371 $10,000 -0- -0- $300
President and Chairman of 12/31/98 $100,305 $10,000 -0- 103,500 $460
the Board
Peter R. Kramer, 12/31/00 $126,168 $12,000 $866(1) 80,000 $137
Executive Vice President 12/31/99 $120,196 $10,000 $10,988(1) -0- $200
and Director 12/31/98 $100,305 $10,000 -0- 69,000 $370
Robert A. Crist 12/31/00 $144,715 $12,000 $3,585(2) 32,000 $491
Vice President of Finance 12/31/99 $139,217 $10,000 $3,525(2) 15,000 $616
And Chief Financial Officer 12/31/98 $130,304 -0- -0- 34,500 -0-
Dean Panagopoulos 12/31/00 $117,311 $10,000 -0- 40,000 $90
Vice President of Network 12/31/99 $98,985 $10,000 -0- 10,000 $81
Products Group 12/31/98 $89,332 -0- -0- 17,250 $68
Deena Randall 12/31/00 $128,263 $14,000 -0- 30,000 $135
Vice President-Operations 12/31/99 $113,174 $10,000 $8,703(1) 10,000 $159
12/31/98 $95,537 $9,000 -0- 34,500 -0-
----------------------------------- ------------ ------------ ----------- ------------------ ----------------- --------------------
(1) Consists of amounts paid as a cash-out of accrued and unused vacation
time.
(2) Consists of amounts paid for parking expenses.
(3) Consists of insurance premiums we paid for the term life insurance
policy for the benefit of the named executive officer.
47
For the fiscal year ended December 31, 2000, all of our executive
officers as a group (7 persons) received, in the aggregate, cash compensation of
$913,005 (which excludes an aggregate of $90,000 paid to our executive officers
for bonuses earned in 2000).
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to
stock options granted to the named executive officers during the fiscal year
ended December 31, 2000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS EXERCISE ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO OR BASE PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION OPTION TERM (2)
NAME GRANTED (1) FISCAL YEAR SHARE DATE 5% 10%
----------------------------- --------------- -------------------- -------------- -------------- -----------------------------
Frank B. Manning 80,000 8.62% $8.000 01/20/03 $100,880 $211,840
30,000 3.23% $6.625 07/18/03 $31,328 $65,786
Peter R. Kramer 60,000 6.47% $8.000 01/20/03 $75,660 $158,880
20,000 2.16% $6.625 07/18/03 $20,885 $43,856
Robert A. Crist 10,000 1.08% $5.313 05/23/03 $8,375 $17,586
10,000 1.08% $6.625 07/18/03 $10,443 $21,929
12,000 1.29% $8.000 01/20/03 $15,132 $31,776
Dean Panagopoulos 10,000 1.08% $8.000 01/20/03 $12,610 $26,480
20,000 2.16% $6.625 07/18/03 $20,885 $43,858
10,000 1.08% $5.3125 05/23/03 $8,374 $17,584
Deena Randall 30,000 3.23% $8.000 01/20/03 $37,830 $79,440
----------------------------- --------------- -------------------- -------------- -------------- ------------- ---------------
(1) The options were granted under our 1990 Stock Option Plan, as amended,
and are subject to a vesting schedule pursuant to which, in general,
the options become exercisable at a rate of 50% per year commencing one
year after the date of grant provided the holder of the option remains
employed with us. Options generally may not be exercised later than 36
months after the date of grant.
(2) The assumed rates are compounded annually for the full term of the
options and do not represent our estimate or projection of future
common stock prices.
48
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth information with respect to the named
executive officers concerning the exercise of options during the fiscal year
ended December 31, 2000 and unexercised options held as of December 31, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
SHARES NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
ON EXERCISE VALUE FY-END (#) AT FY-END (6)
NAME REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------------- ------------- ------------ ---------------- ---------------- --------------- ----------------
Frank B. Manning(1) -0- -0- 193,500 110,000 -0- -0-
Peter R. Kramer(2) -0- -0- 129,000 80,000 -0- -0-
Robert A. Crist(3) 18,000 $169,267 35,000 48,500 -0- -0-
Dean Panagopoulos(4) 18,000 $135,518 17,000 45,000 -0- -0-
Deena M. Randall(5) 20,000 $118,069 29,500 35,000 -0- -0-
------------------------- ------------- ------------ ---------------- ---------------- --------------- ----------------
(1) Of the 303,500 options to purchase shares of common stock held by Mr.
Manning, 90,000 options have an exercise price of $8.125 per share,
90,000 options have an exercise price of $4.531 per share, 80,000
options have an exercise price of $8.00 per share, 30,000 options have
an exercise price of $6.625 per share and 13,500 options have an
exercise price of $4.125 per share.
(2) Of the 209,000 options to purchase shares of common stock held by Mr.
Kramer, 60,000 options have an exercise price of $8.125 per share,
60,000 options, have an exercise price of $4.531 per share, 60,000
options have an exercise price of $8.00 per share, 20,000 options have
an exercise price of $6.625 per share and 9,000 options have an
exercise price of $4.125 per share.
(3) Of the 83,500 options to purchase shares of common stock held by Mr.
Crist, 19,250 options have an exercise price of $7.3125 per share,
15,000 options have an exercise price of $4.531 per share, 2,250
options have an exercise price of $4.125 per share, 15,000 options have
an exercise price of $4.375 per share, 12,000 have an exercise price of
$8.00 per share, 10,000 options have an exercise price of $5.3125 and
10,000 options have an exercise price of $6.625 per share. In the event
that Mr. Crist is terminated for any reason other than for cause or a
change of control, options to purchase up to 20,000 shares of common
stock will become automatically vested.
(4) Of the 62,000 options to purchase shares of common stock held by Mr.
Panagopoulos, 2,250 options have an exercise price of $8.625 per share,
2,250 options have an exercise price of $4.125 per share, 10,000
options have an exercise price of $4.281 per share, 7,500 options have
an exercise price of $4.531 per share, 20,000 options have an exercise
price of $6.625 per share, 10,000 options have an exercise price of
$8.00 per share and 10,000 options have an exercise price of $5.3125.
(5) Of the 64,500 options to purchase shares of common stock held by Ms.
Randall, 20,000 options have an exercise price of $4.531 per share,
4,500 options have an exercise price of $4.125 per share, 10,000 have
an exercise price of $4.375 per share, and 30,000 options have an
exercise price of $8.00 per share.
(6) Based upon the closing price of our common stock on December 31, 2000
on the Nasdaq National Market ($3.313). As of December 31, 2000, no
named executive officer held options, exercisable or unexercisable,
with an exercise price of less than $3.313.
Options to purchase our common stock have been granted to our executive
officers and other employees under our 1990 Stock Option Plan. Options to
purchase our common stock may also be granted to our employees who are neither
officers nor directors under our 1998 Employee Equity Incentive Plan (the "1998
Equity Incentive Plan"). The 1990 Stock Option Plan and the 1998 Equity
Incentive Plan are each administered by the stock option committee of the board
of directors. In addition, the board of directors has authorized Mr. Manning to
award a limited number of options under the 1998 Equity Incentive Plan
throughout the fiscal year.
49
During the fiscal year ending December 31, 2000, our executive officers
as a group (7 persons) were granted in the aggregate options to purchase a total
of 362,000 shares of our common stock, net of cancellations, at an average
exercise price per share of $7.5781. During the year, executive officers
exercised an aggregate of 56,000 options.
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
Decisions regarding executive compensation, exclusive of the
administration of the 1990 Stock Option Plan, are made by the entire board of
directors. The board of directors has no compensation committee. The stock
option committee, consisting of Messrs. Furman and Woods, is responsible for
administering the 1990 Stock Option Plan, including determining the individuals
to whom stock options are awarded, certain of the terms upon which option grants
are made, and the number of shares subject to each option granted under the 1990
Stock Option Plan. No member of the stock option committee is a former or
current officer or employee of Zoom Canada. Mr. Manning and Mr. Kramer, who are
executive officers and directors of Zoom Canada, made recommendations to the
stock option committee regarding the granting of stock options and participated
in deliberations of the board of directors concerning executive officer
compensation. Neither Mr. Manning nor Mr. Kramer participated in any vote
establishing their compensation.
SHAREHOLDER PROPOSALS
Shareholder proposals which comply with Rule 14a-8 promulgated under
the Securities Exchange Act of 1934, as amended, and which are intended to be
presented by such shareholder at our 2002 Annual General Meeting, must be
received by us no later than January 11, 2002, in order to be considered for
inclusion in the Proxy Statement relating to that meeting.
Notice of shareholder proposals intended to be presented at our 2002
Annual General Meeting which are submitted outside the processes of Rule 14a-8
will be considered untimely if we received them after March 27, 2002. The proxy
solicited by our board of directors with respect to that meeting may confer
discretionary authority to vote on matters submitted in an untimely proposal.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar is CIBC Mellon Trust Company, whose
address is Corporate Trust Department, Suite 1600, 1066 West Hastings Street,
Vancouver, B.C. V6E 3X1
LEGAL MATTERS
Legal matters relating to this proxy statement/prospectus will be
passed upon by Thomas Rondeau, Vancouver, British Columbia with respect to the
laws of Canada and by Brown, Rudnick, Freed & Gesmer, P.C. of Boston,
Massachusetts with respect to the laws of the United States.
EXPERTS
The consolidated financial statements of Zoom Telephonics, Inc. as of
December 31, 2000 and 1999, and for each of the years in the three-year period
ended December 31, 2000, have been included in the proxy statement/prospectus
and incorporated by reference in this registration statement in reliance upon
the report of KPMG LLP, independent certified public accountants, appearing
elsewhere in the proxy statement/prospectus and incorporated by reference in
this registration statement, and upon the authority of said firm as experts in
accounting and auditing.
50
WHERE YOU CAN FIND MORE INFORMATION
This proxy statement/prospectus constitutes part of a registration
statement on Form S-4 that we filed with the SEC. As allowed by SEC rules, this
proxy statement/prospectus does not contain all the information you can find in
the registration statement or the exhibits to the registration statement. For
further information about our company and the shares of common stock offered by
this proxy statement/prospectus, please refer to the copy of the documents filed
as exhibits to the registration statement with the SEC.
In addition, we file annual, quarterly, and current reports, proxy
statements and other information with the SEC under the Securities Exchange Act
of 1934. You may read and copy this information at the following locations of
the SEC:
Public Reference Room Chicago Regional Office New York Regional Office
450 Fifth Street, NW. Citicorp Center 233 Broadway
Room 1024 500 West Madison Street New York 10279
Washington, D.C. 20549 Suite 1400
Chicago, Illinois 60661-2511
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. The SEC also maintains an
Internet World Wide Web site that contains reports, proxy statements and other
information about issuers, including Zoom Canada, who file electronically with
the SEC. The address of that site is http://www.sec.gov. You can also inspect
reports, proxy statements and other information about Zoom Canada at the offices
of the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 2006.
The SEC allows us to incorporate by reference information into this
proxy statement/ prospectus. This means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is considered to be a part of
this proxy statement/prospectus, except for any information that is superseded
by information that is included directly in this proxy statement/prospectus.
This proxy statement/prospectus incorporates by reference the documents
listed below that we previously filed with the SEC. They contain important
information about our company and our financial condition.
ZOOM TELEPHONICS, INC. SEC FILINGS (FILE NO. 000-18672)
o Annual Report on Form 10-K for the fiscal year ended
December 31, 2000; and
o Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 2001.
You can obtain any of the documents incorporated by reference in this
proxy statement/ prospectus from the SEC through the SEC's Internet site at the
address provided above. Documents incorporated by reference are also available
from our investor relations personnel, without charge, excluding any exhibits to
those documents unless the exhibit is specifically incorporated by reference as
an exhibit in this proxy statement/prospectus. You can obtain these documents by
requesting them in writing or by telephone from the appropriate company at the
following address:
Zoom Telephonics, Inc.
Investor Relations
207 South Street
Boston, Massachusetts 02111
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM US, PLEASE DO SO
BY FEBRUARY 8, 2002 IN ORDER TO RECEIVE THEM BEFORE THE SHAREHOLDERS MEETING.
51
If you request any incorporated documents from us, we will mail them
to you by first class mail, or another equally prompt means, within one business
day after we receive your request.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ABOUT THE CONTINUATION THAT DIFFERS FROM, OR ADDS TO, THE
INFORMATION IN THIS PROXY STATEMENT/ PROSPECTUS OR IN OUR DOCUMENTS THAT ARE
PUBLICLY FILED WITH THE SEC. THEREFORE, IF ANYONE DOES GIVE YOU DIFFERENT OR
ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT.
IF YOU ARE IN A JURISDICTION WHERE IT IS UNLAWFUL TO OFFER TO EXCHANGE
OR SELL, OR TO ASK FOR OFFERS OF EXCHANGE OR TO BUY, THE SECURITIES OFFERED BY
THIS PROXY STATEMENT/PROSPECTUS OR TO ASK FOR PROXIES, OR IF YOU ARE A PERSON TO
WHOM IT IS UNLAWFUL TO DIRECT THESE ACTIVITIES, THEN THE OFFER PRESENTED BY THIS
PROXY STATEMENT/PROSPECTUS DOES NOT EXTEND TO YOU.
THE INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS SPEAKS
ONLY AS OF ITS DATE UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER
DATE APPLIES.
52
EXHIBIT A
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
A-1
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, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-18672
ZOOM TELEPHONICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Canada 04-2621506
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
207 South Street, Boston, Massachusetts 02111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 423-1072
Securities Registered Pursuant to Section 12 (b) of the Act: None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
YES [ ] NO [X]
The aggregate market value of the common stock, no par value, of the
registrant held by non-affiliates of the registrant as of March 23, 2001
(computed by reference to the closing price of such stock on The NASDAQ
National Market on such date) was approximately $19,160,861.
The number of shares outstanding of the registrant's common stock, no par
value, as of March 23, 2001 was 7,860,866 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the registrant's 2001
annual meeting of shareholders to be filed with the SEC in April 2001 are
incorporated by reference into Part III, Items 10-12 of this Form 10-K.
1
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. These statements, which include
statements relating to the timing and availability of products under
development, our ability to market such products once developed, the
anticipated growth or expansion of the markets for our products, and other
matters that are subject to risks and uncertainties, could cause our actual
results to differ materially from those anticipated. You should note that many
factors could affect our future financial results and could cause these results
to differ materially from those expressed in our forward-looking statements.
These forward-looking statements speak only as of the date of this report. We
expressly disclaim any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statement contained in this report
to reflect any change in our expectations or any change in events, conditions
or circumstances on which any of our forward-looking statements are based.
Factors that could cause or contribute to differences in our future financial
results include those discussed in the risk factors set forth in Item 7 below
as well as those discussed elsewhere in this report.
PART I
ITEM 1 - BUSINESS
Overview
We design, produce and market dial-up and broadband modems, wireless local
area network products, and other communications products.
Our primary objective is to build upon our position as a leading supplier
of Internet access devices and to take advantage of a number of current and
emerging trends in computer connectivity including Internet access, higher data
rates, broadband applications, and alternatives to traditional wired local area
networks. We intend to achieve our objective by:
o building upon and exploiting our Zoom, Hayes and Global Village brands;
o continuing to produce dial-up, cable and ADSL modems, wireless
networking and gateway products;
o expanding our current distribution channels of high-volume retailers,
value-added resellers, Internet service providers, distributors, and
original equipment manufacturers ("OEM");
to also include cable service providers and telephone companies;
o expanding our international product line and distribution network;
o maintaining low costs through cost-effective product designs, careful
sourcing of components, and outsourced manufacturing; and
o exploring strategic acquisitions.
Our current products and products under development are as follows:
Dial-up Modems.
To date our revenues have come primarily from sales of our dial-up modems.
Our dial-up modems connect personal computers and other devices to the local
telephone line for transmission of data, fax, voice, and video. Our dial-up
modems enable personal computers and other devices to connect to other
computers and networks, including the Internet and local area networks, at top
data speeds of 56,000 bits per second. Our broad line of dial-up modems is
available in internal, external and PCMCIA models. PCMCIA models plug into a
PCMCIA slot, which is a standard slot typically found in a notebook or laptop
computer. Most of our modems connect to a single telephone line, but we also
make the Zoom/MultiLine modem which can connect to eight telephone lines.
2
In March and April of 1999, we acquired substantially all of the modem
assets of Hayes Microcomputer Products, Inc., a former leader in the modem
industry. In July, 2000, we acquired the trademark and product rights to Global
Village products. Global Village is a leading modem brand for MacIntosh
computers. We now sell and market dial-up modems under the Zoom, Hayes and
Global Village names, as well as under various other private-label brands
developed for some of our large accounts.
We also have a line of integrated services digital network products, which
can transmit and receive data simultaneously at up to 128,000 bits per second.
In late 2000, we introduced the following three integrated services digital
network products, commonly referred to as ISDN products:
o a PCI model that plugs into the PCI slot of a Windows PC;
o a USB model that plugs into the USB port of a PC; and
o a serial port model that plugs into the serial port of a PC.
While we continue to believe there are opportunities to expand our dial-up
modem business in the United States and worldwide, we are also developing new
broadband, home gateway, and networking products, all of which provide faster
connection speeds than dial-up modems.
Wireless Local Area Network Products.
Wireless local area network products enable the connection of a notebook
or desktop computer to another computer or an existing local area network using
a wireless data communication standard. We currently ship a variety of
"ZoomAir" models of wireless products. We continue to develop and introduce a
broad line of ZoomAir products, with the near-term focus on products with an 11
megabits per second ("Mbps") data rate using IEEE 802.11b, a wireless data
communications standard.
Our ZoomAir line currently includes network interface cards that plug into
either a PCMCIA or PCI 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. We also recently began shipping building-to-building
wireless bridges and an access point for connecting wireless network devices to
a wired local area network. In 2001 we expect to introduce USB wireless network
interface devices and a wireless gateway that enables wireless devices to share
a broadband link to the Internet such as a cable modem or ADSL modem.
Cable Modems.
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. In 2000 we received CableLabs certification for the following
three cable modems:
o a PCI model that plugs into the PCI slot of a PC, set-top box, or other
electronic device;
o an Ethernet model that plugs into the Ethernet port of a PC, router, or
other electronic device; and
o a Universal Serial Bus, or USB, model that plugs into the USB port of a
Windows PC.
We began shipping a limited number of cable modems during 2000. We have
also provided samples of our cable modem models to a number of cable service
providers, PC manufacturers, original equipment manufacturers and retailers. We
believe we are positioned to ship high volumes of cable modems if and when
substantial orders are received.
ADSL Modems.
Asymmetric Digital Subscriber Line modems, known as ADSL modems, provide a
high-bandwidth connection to the Internet through a standard telephone line
that connects to compatible ADSL equipment in or near the central telephone
office. In 2000 we completed the design of two ADSL modems, including a PCI
model and a USB model. We began shipping a limited number of ADSL modem models
during 2000. We have also provided samples of our ADSL modem models to
telephone companies, Internet service providers, and retailers. We believe we
are positioned to ship high volumes of ADSL modems if and when substantial
orders are received.
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Other Products.
In the early eighties we designed and produced dialers including the Demon
Dialer(tm) and Hotshot(tm). We have a new generation of dialers incorporating
proprietary technology, including patented technology that enables a single
dialer to plug into a standard telephone jack and provide its capabilities to
all the telephones on the same line. This type of dialer has a wide range of
uses, including the ability to speed up and simplify access to low-cost
long-distance networks.
Legal Status
We are a Canadian holding company. Our operations are carried out by our
wholly-owned subsidiary, Zoom Telephonics, Inc., a Delaware corporation. Our
principal executive offices are located at 207 South Street, Boston, MA 02111.
We also have a sales and support office in the United Kingdom, and a support
office in Boca Raton, Florida.
Industry Background
Demand for modems has grown significantly. We believe that this growth has
been driven by a variety of factors including:
o the increasing popularity of the Internet and on-line services such as
America Online, Microsoft Network, and Earthlink;
o the growing installed base of PCs and other portable information
devices;
o a significant increase in the percentage of PCs and portable information
devices used for remote access to the Internet and corporate networks;
o the growing use of PCs outside the traditional office setting; and
o 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 dial-up 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 dial-up modems sold for
PCs are now faxmodems that have the ability to send and receive
faxes, and many dial-up 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. Dial-up 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 dial-up modems are often
bundled with a new PC, particularly in North America. However, some of the
installed PCs have no dial-up modem, have a dial-up modem with a speed less
than 56K, or have a 56K V.90 dial-up modem with inadequate performance or
features. We believe there should continue to be substantial demand for
after-market dial-up modems because:
o 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 higher quality dial-up modem in the after-market; and
o the new V.92 and companion V.44 standards should increase the percentage
of people upgrading their dial-up 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
phone call while on-line, suspend their Internet session without closing it,
participate in their phone call, and then re-activate their Internet session
when the phone call is complete. V.44 compression can significantly speed up
web browsing and other Internet applications. We believe that these
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advantages should cause a significant number of V.90 56K dial-up modem owners to
upgrade to a V.92 dial-up modem in the after-market.
Advances in dial-up modem technology and lower dial-up modem prices have
created rapid growth in the installed base of dial-up modems. As a result, the
high-volume segment of the market has shifted from dial-up modems with a
maximum speed of 2400 bps in 1987, to 33,600 bps in 1996 and 1997, to 56,000
bps today. Dial-up modems with high data speeds require less time to transmit
text files and graphics, thereby reducing phone call costs and easing 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 dial-up 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 dial-up
modems with faster speeds and greater functionality and many popular versions
of Windows include remote access, faxing and Internet access capabilities that
can only be used with some type of dial-up modem.
We expect the demand for faster speeds and increased modem functionality will
drive sales of new generations of "broadband" modems in the future, including
cable modems and ADSL modems, particularly as after-market upgrades or as
options for a new PC. In 2000 there were significant sales of dial-up, cable,
and ADSL modems in the industry; and all three types of modems are expected by
industry analysts to ship in high volume throughout this decade.
Zoom Strategy
We believe that the Zoom trade name is associated with high performance
per dollar, breadth of product line, broad distribution, and product
innovation. Our primary objective is to build upon our position as a leading
supplier of modems and to take advantage of 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. Our
strategy includes the following key elements:
Build Upon and Exploit Brand Equity.
Our Zoom, Hayes, and Global Village brands are widely recognized and
respected. In addition, our marketing channels are extensive.
We believe that our success has been due in part to:
o offering our customers a broad range of products that provide high
performance per dollar,
o supporting the installed base of our dial-up modems with multiple
technical support options,
o promoting our products through cooperative advertising with our retailer
customers, and
o designing attractive and informative packaging for our products.
In December 2000 our dial-up modems had the second highest share of
dial-up modem revenues in stores surveyed by PC Data. We intend to continue to
enhance our brand equity by continuing to expand our marketing channels,
advertising and promoting our products, and broadening our product offerings
through our established sales channels.
Introduce Innovative PC Communications Products.
We attempt 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 our brand equity by
delivering these products quickly and effectively through our sales channels.
We were one of the first high-volume producers of dial-up faxmodems, voice
dial-up faxmodems, video-capture-enabled dial-up faxmodems, and V.92 dial-up
modems. One of our major initiatives is to provide broadband Internet access,
and advanced local area networking products to allow people to share that
bandwidth. This is an over all theme for our development plans for cable
and ADSL modems, wireless networking, and Internet gateway products.
5
Expand Distribution Channels.
Our existing marketing and distribution channels are strong. We expect our
marketing and distribution channels to continue to be an asset as we expand our
product line. We recognize, however, that we will need to expand our channels
to fit our new products. We are placing an increased emphasis on establishing
relationships with cable companies, telephone companies, Internet Service
Providers, and OEMs.
Expand International Sales.
We introduced our first dial-up modems in selected Western European
countries in 1993. We now sell our products in approximately 50 countries. Our
international sales (excluding sales to OEMs) have increased from 8% of net
sales in 1994 to 25% of net sales in 2000. We hope to continue to expand our
international product lines and distribution network.
Outsource Chipset Technology.
We outsource rather than internally develop our chipsets. Chipsets are
application-specific integrated circuits that form the technology base for our
modems and certain other products. By outsourcing the chipset technology, we
are able to concentrate our research and development resources on system
design, leverage the extensive research and development capabilities of our
chipset suppliers, and reduce our development time and associated costs and
risks. We currently buy dial-up modem chipsets exclusively from the two
highest-volume dial-up modem chipset manufacturers, Agere Systems (formerly
Lucent) and Conexant Systems (formerly Rockwell). Agere Systems and Conexant
Systems 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
dial-up modems, ADSL modems, cable modems, wireless networking, home phone line
networking, routers, and gateways. We also buy chipsets from Globespan for some
of our ADSL modems, and from Intersil for our ZoomAir wireless network interface
cards.
Maintain Low Costs.
We continually seek ways to improve our product designs and manufacturing
approach to reduce our costs. We outsource to contract manufacturers, primarily
in Mainland China and Mexico, aspects of our manufacturing processes including
board stuffing, wave soldering, in-circuit test, and for some products
component purchasing. By outsourcing, we are able to reduce our labor costs and
capital expenditures, and we have greater flexibility in our capacity planning.
Explore Acquisitions.
We believe that appropriate acquisitions can reduce the development risk
associated with new product offerings, and that we can leverage our brand
equity and existing sales channels to enhance the value of these acquisitions.
Over the last five years we have been successful in acquiring products and
assets from other entities. For example, in mid-1996, we acquired the products
and certain other assets of Tribe Computer Works. In 1999 we acquired
trademarks and substantially all of the dial-up modem product lines from Hayes
Microcomputers Products, Inc. In 2000 we acquired trademarks and product rights
for Global Village from Boca Research and Boca Global. We plan to continue to
consider acquisitions of businesses, products or technologies complementary to
our business.
Products
General
The vast majority of our products facilitate communication of data through
the Internet. Our dial-up modems and integrated services digital network, or
ISDN, modems link PCs and portable information devices through the telephone
network and connected networks, including the Internet and local area networks.
Similarly, our cable modems use the cable-TV cable and our ADSL modems use the
local telephone line, to provide a high-speed link to the Internet. Our video
cameras are used primarily to communicate videos through the Internet. Our
advanced networking products, including wireless local area network, or LAN,
products, help to link PCs and other computing devices to each other and to the
Internet. Starting with our acquisition of Tribe Computer Works in 1996, we
began shipping business products that provide remote users shared access to the
resources of a LAN, and connect users of the LAN to the Internet and to remote
LANs and computers.
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Dial-Up Modems
We have a broad line of dial-up 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. Many
of our external modems are designed to work with any terminal or computer,
including IBM PC-compatibles, the Macintosh and other computers. Our external
models include desktop and multi-line modems that have up to eight modems in a
compact enclosure. Our 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, our modems
are shipped complete with third-party software that supports the hardware
capabilities of the modem.
56K modems allow users connected to standard phone lines 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. We began shipping pre-standard K56flex(tm) 56K modems in the second
quarter of 1997. 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, and most
of our dial-up modem sales include V.90. We are now also shipping V.92 modems.
We expect V.92 modems to take an increasing and ultimately large share of the
dial-up modem market.
In March and April of 1999, we acquired substantially all of the modem
assets of Hayes Microcomputer Products, Inc., a former leader in the modem
industry. In July, 2000, we acquired the trademark and product rights to Global
Village products. Global Village is a leading modem brand for MacIntosh
computers. We now sell and market dial-up modems under the Zoom, Hayes and
Global Village names, as well as under various other private-label brands
developed for some of our large accounts.
The following sets forth some of the key features incorporated in one or
more of our dial-up modems:
o ZoomGuard(tm). ZoomGuard represents the protective circuitry added to
our modems to improve their ability to withstand the effects of
lightning striking a phone line 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 our PCMCIA modems to protect against destruction caused by
plugging the modem into a digital PBX phone jack. We were 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 our 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 phone
line, 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 phone line, a second number to be answered
as a fax line, and a third number to be answered as a data line. We
have been issued a United States patent related to our distinctive ring
technology.
o Plug & Play. Microsoft's Windows software supports 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.
International Modems.
Most foreign countries have their own telecommunications standards and
regulatory approval requirements for sales of communications products such as
those we offer. As a result, the introduction of new products into
international markets can be costly and time-consuming. In 1993, we introduced
our first dial-up modem approved for selected Western European countries. Since
then we have continued to expand our product offerings internationally. We
7
have received regulatory approvals for, and are currently selling dial-up modems
in a number of countries, including Australia, Austria, Belgium, Denmark,
Finland, Germany, Hungary, India, Ireland, Italy, Japan, the Netherlands,
Poland, Portugal, Russia, Slovenia, South Africa, Spain, Sweden, Switzerland,
and the United Kingdom. We intend to continue to expand and enhance our product
line for our existing markets and to seek approvals for the sale of our products
in new countries throughout the world.
Multi-line Modems.
In 1996 we began shipping a family of multi-line dial-up 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 dial-up faxmodems in one small external case
that includes status indicators for each dial-up modem. The Hayes Century
product line provides up to 16 dial-up modems in a single enclosure.
ISDN Products.
We have a family of modems for Integrated Service Digital Network, or
ISDN, communications. ISDN is a 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 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 we
shipped our first ISDN product. We continue to expand our ISDN product line,
particularly for Europe. In addition, we have integrated ISDN capability into
some of our LAN-oriented business products, including the ZoomAir AP128
wireless access point.
We have a line of ISDN products, which can transmit and receive data
simultaneously at up to 128,000 bits per second. In addition, in late 2000 we
introduced the following ISDN products:
o a PCI model that plugs into the PCI slot of a Windows PC,
o a USB model that plugs into the USB port of a PC, and
o a serial port model that plugs into the serial port of a PC.
ADSL Modems.
Our ADSL modems incorporate the standards that are most popular with U.S.
telephone companies and Internet Service providers, including G.DMT and G.Lite.
In 2000, we designed and shipped our first ADSL modems, an external USB model
and an internal PCI model. In 2001, we will seek to sell ADSL modems in high
volume and to continue to extend our product line. In 2001, we also plan to
introduce an Ethernet model.
Cable Modems.
In 2000, we were successful in obtaining CableLabs certification for three
of our DOCSIS-standard cable modems - PCI, USB, and Ethernet models. This
certification is important, particularly in the United States. The
certification is time consuming, costly and very difficult to obtain. We now
have one of the broadest lines of CableLabs-certified cable modems. In 2001 we
will seek to sell cable modems in high volume and to continue to extend our
product line.
Wireless LAN Products.
In December 1998 we began shipping the first models in our ZoomAir(tm) line of
wireless local area network products. These products connect a notebook or
desktop computer to another computer or an existing local area network using a
wireless communication standard. Our most recent wireless LAN products provides
an 11 Mbps data rate using the IEEE 802.11b standard. We currently ship network
interface cards that plug into either a PCMCIA or PCI 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. We recently began shipping
building-to-building wireless bridges and an access point for connecting
wireless network devices to a wired local area network. In 2001 we expect to
introduce USB wireless network interface devices and a wireless gateway that
enables wireless devices to share a broadband link to the Internet such as a
cable modem or ADSL modem.
Full-Color Live-Motion Cameras and Other Video Products.
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In late 1997, we 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. We have limited product
development in the video area, and our primary sales come from cameras that
connect to a USB port. We expect 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. We
expect to introduce new camera products, but not to make a significant product
development effort in this area.
Dialers.
Our dialers simplify the placing of a phone call by dialing digits
automatically. We shipped our first telephone dialer, the Demon Dialer-(tm), in
1981; and, in 1983, began shipping the Hotshot-(tm) dialer. As the dialer market
decreased due to equal access, we focused on modems and other peripherals for
the personal computer market. We have commenced shipping a new generation of
dialers incorporating proprietary technology, and have one patent and another
patent pending. Dialer products currently represent under 1% of Zoom's sales,
but may become more important in the future.
Sales Channels
General
We sell our products primarily through high-volume retailers and
distributors, and to PC manufacturers and other OEMs. We support our 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 we expand our product offerings, particularly in cable, ADSL and
other broadband modems, we plan to expand and strengthen our market channels to
include cable service providers, phone companies, and Internet Service
Providers.
During 2000, Best Buy Co., Inc. accounted for 15% of our net sales and
Staples, Inc. accounted for 11% of our net sales. A significant reduction in
sales to these customers could have a material adverse effect on our business.
High-volume Retailers.
In the United States, we reach the PC retail market primarily through
high-volume retailers. Our extensive United States retail distribution network
includes Best Buy, Office Depot, PC Connection, Staples and many others.
Personal Technology Research reported that in February 2001 Zoom brands had the
second greatest amount of retail shelf space for dial-up modems in North
America, and had gained share overall and relative to the leading brand in the
prior year.
Distributors.
We sell significant quantities of dial-up modems through distributors, who
often sell to corporate accounts, value-added resellers and other channels that
are generally not served by our high-volume retailers. Our North American
distributors include D&H Distributing, Gates-Arrow, Ingram Micro, Merisel, and
Tech Data.
Original Equipment Manufacturers; OEMs.
Our OEM customers sell our products under their own name or incorporate
our products as a component of their pre-packaged systems. In addition, our
packaging design capability enables us to respond to an OEM's need for
customized or generic products and packaging. We are 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, we sell our products primarily through
independent distributors and retailers. Our international distributors include
Actebis, Computer 2000, Criterium, Infotide International, Northamber, and
others. Our major European high-volume retailers include Business Logic,
Centromail, Dixons/PC World, and others. Our international net sales (including
sales to OEMs located outside the United States) have grown from 8% in 1994 to
28% in 2000. Our revenues from international sales were $16.8 million in 2000,
$18.5 million in 1999, and $13.5 million in 1998. We believe that our continued
sales growth outside of the United States will require substantial
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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.
Sales, Marketing and Support
Our sales, support, and marketing are primarily managed from our
headquarters in Boston, Massachusetts. In North America we sell our Zoom,
Hayes, Global Village, and private-label products primarily through
commissioned independent sales representatives managed and supported by our own
staff. North American technical support is primarily handled from our Boston
headquarters location and from our technical support offices in Boca Raton,
Florida. We also maintain a sales, support, and logistics office in the United
Kingdom. Warehousing, customs clearance, shipping, and invoicing for the United
Kingdom and some other European countries are primarily handled by contract
with an unaffiliated specialist in these services located in England. For
countries outside North America and Europe, our in-house staff typically works
directly with country-specific distributors. Our worldwide OEM sales are
primarily handled by our staff in the United States and United Kingdom, who are
at times assisted by our sales staff or commissioned sales representatives.
We believe that Zoom, Hayes, and Global Village are widely recognized
brand names. We build upon our brand equity in a variety of ways, including
cooperative advertising, product packaging, trade shows and public relations.
We generally provide our high-volume retailers with funds to advertise our
products in conjunction with the customers' general advertising. We believe
that this type of advertising efficiently and effectively targets the end-user
market for our products.
We attempt to develop quality products that are user-friendly and require
minimal support. We support our claims of quality with product warranties of
one to seven years, depending upon the product. To address the needs of those
end-users of our products who require assistance, we have our own staff of
technical specialists who provide telephone support six days per week. We also
employ an independent technical support team in the United Kingdom to support
our European products five day per week. Our technical support specialists also
maintain a significant World Wide Web support facility that includes email,
firmware and software downloads, and the SmartFacts(tm) Q&A search engine. In
2001, we expect to expand our European technical support to enable users in
other countries to access support in their own language. This support will be
provided by our support staff in Boston, Florida, and the United Kingdom.
Research and Development
Our 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. We have developed close
collaborative relationships with certain of our OEM customers and component
suppliers, who work with us to identify and respond to emerging technologies
and market trends by developing products that address these trends. In
addition, we purchase modem and other chipsets that incorporate sophisticated
technology, thereby eliminating the need for us to develop this technology
in-house. As of March 23, 2001, we had 46 employees engaged primarily in
research and development. Our 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 1998, 1999, and 2000, we expended $4.4 million, $6.4 million and
$6.2 million, respectively, on research and development activities. The
increase in costs expended on research and development in 1999 and 2000 is
primarily due to our initiatives in the broadband, advanced networking, and
gateway product areas, including the costs associated with obtaining industry
and governmental approvals for our new products.
10
Manufacturing and Suppliers
Our products are currently designed for high-volume automated assembly in
China, Mexico, and the United States to help assure reduced costs, rapid market
entry, short lead times, and reliability. In North America, we supply large
kits of parts to one of several automated contract manufacturers. In China, our
contract manufacturers will also obtain certain material required to assemble
the products based upon a Zoom Telephonics Approved Vendor List and Parts List.
The contract manufacturers insert parts onto the printed circuit board, with
most parts automatically inserted by machine, solder the circuit board, and
in-circuit test the completed assemblies. Functional test and packaging are
sometimes performed by the contract manufacturer. For the United States and
many other markets, functional test and packaging are more commonly performed
at our facilities in Boston, allowing us to tailor the packaging and its
contents for our customers immediately before shipping. We also perform circuit
design, circuit board layout, and strategic component sourcing in our Boston
office.
We usually use one primary contract manufacturer for a given design. We
sometimes maintain back-up production tooling at a second assembler for our
highest-volume products. Our contract manufacturers 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 our shipments and revenues.
Our products include a large number of parts, most of which are available
from multiple sources with varying lead times. However, most of our products
include a sole-sourced chipset as the most critical component of the product.
Currently Agere and Conexant are our only dial-up modem chipset suppliers, and
Intersil is our only wireless chipset supplier. Due to capacity constraints, we
have experienced delays in receiving shipments of modem chipsets in the past,
and we may experience such delays in the future. Moreover, there can be no
assurance that a chipset supplier will, in the future, sell chipsets to us in
quantities sufficient to meet our needs. An interruption in a chipset
supplier's ability to deliver chipsets, a failure of our 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 our relationship with modem chipset suppliers could have a material
adverse effect on our results of operations.
A substantial percentage of our manufacturing is done by Vtech
Communication LTD.("Vtech"). The loss of Vtech's services or a material adverse
change in Vtech's business or in our relationship with Vtech could materially
and adversely harm our business.
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. Our failure to keep pace with technological
advances would adversely affect our competitive position and results of
operations.
Our primary competitors by product group include the following:
o Dial-up modem competitors: US Robotics (a spin-off of 3Com), Actiontec,
Askey, Best Data, Creative Labs, Elsa, GVC, and SONICblue.
o Cable modem competitors: 3Com, Com21, Motorola and Toshiba.
o DSL modem competitors: 3Com, Efficient Networks and Westell.
o Wireless Local Area Network competitors: 3Com, Agere, Cisco Systems,
Intel, Lucent,Linksys, and Proxim.
Many of our competitors and potential competitors have more extensive
financial, engineering, product development, manufacturing, and marketing
resources than we do.
The principal competitive factors in our industry include the following:
o product performance, features and reliability;
o price;
o product availability and lead times;
o size and stability of operations;
11
o breadth of product line and shelf space;
o sales and distribution capability;
o technical support and service;
o product documentation and product warranties;
o relationships with providers of broadband access services; and
o compliance with industry standards.
We believe we are competitive in each of these areas.
Cable and ADSL modems transmit data at significantly faster speeds than
dial-up modems, which still account for the vast majority of our revenues.
Cable and ADSL modems, however, are generally more expensive than dial-up
modems and cannot be used with conventional telephone service. In addition, the
use of cable and ADSL modems is currently impeded by a number of technical and
infrastructure limitations. We began shipping both cable and ADSL modems in the
year 2000. In the year 2000, our competitors' cable and ADSL modem products
were sold in the greatest number through cable service operators, phone
companies, and Internet Service Providers. Large quantities of cable modems and
ADSL modems are still not sold through retailers and distributors, our
strongest market channels. We are attempting to sell our broadband products
through these new sales channels, as well as our traditional sales channels.
There can be no assurance that we will compete effectively, particularly in new
market channels.
Intellectual Property Rights
We rely primarily on a combination of copyrights, trademarks, trade
secrets and patents to protect our proprietary rights. We have trademarks and
copyrights for our firmware (software on a chip), printed circuit board
artwork, instructions, packaging, and literature. We also have 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 us, or that the validity of a
patent will not be challenged. Moreover, there can be no assurance that our
means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop comparable or superior technologies.
We license certain technologies used in our products, typically bundled
software, on a non-exclusive basis. In addition we purchase chipsets that
incorporate sophisticated technology. We have received, and may receive in the
future, infringement claims from third parties relating to our products and
technologies. We investigate the validity of these claims and, if we believe
the claims have merit, we respond through licensing or other appropriate
actions. Certain of these past claims have related to technology included in
modem chipsets. We forwarded these claims to the appropriate vendor. If we or
our component manufacturers were unable to license necessary technology on a
cost-effective basis, we 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.
Government Regulation
All of our North American products are required to meet United States and
Canadian government regulations, including regulations of the United States
Federal Communication Commission, known as the 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 our products sold in most foreign countries, specific regulatory approvals
must be obtained for matters such as electrical safety, manufacturing
standards, country-specific telecommunications equipment requirements and
electromagnetic radiation and susceptibility requirements. We have 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. We expect 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 our
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. We cannot predict what impact, if any, such changes may have
upon its business.
Seasonality
12
We believe our sales are somewhat seasonal, with increased sales generally
occurring in mid-August through November. We expect that our quarterly results
will continue to fluctuate in the future as a result of seasonality and other
factors.
Backlog
Our backlog as of March 21, 2001 was $3.1 million, and on March 25, 2000 was
$3.1 million. Our backlog for delivery of products within 120 days or less
was $3.0 million as of March 21, 2001 and was $2.3 million on March 25, 2000.
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 our net sales for any future period.
Employees
As of December 31, 2000 we had 313 full-time employees (including
employees hired on a temporary basis). Of this total, 51 were engaged in
research and development, 152 were involved in purchasing, assembly, packaging,
shipping and quality control, 72 were engaged in sales, marketing and technical
support, and the remaining 38 performed accounting, administrative, management
information systems, and executive functions. Our temporary employees were
comprised of 15 individuals at December 31, 2000. Most of these temporary
employees were employed in manufacturing. None of our employees are represented
by a labor union.
Our Executive Officers
The names and biographical information of our current executive officers,
are set forth below:
Name Age Position with Zoom
------------------------- ------------ --------------------------------------
Frank B. Manning 52 Chief Executive Officer, President and
Chairman of the Board
Peter R. Kramer 49 Executive Vice President and Director
Robert A. Crist 57 Vice President of Finance and Chief
Financial Officer
Terry J. Manning 49 Vice President of Sales and Marketing
Dean N. Panagopoulos 43 Vice President of Network Products
Deena Randall 47 Vice President of Operations
Richard Kumpf 51 Vice President of Engineering
Frank B. Manning is a co-founder of our company. Mr. Manning has been our
president, chief executive officer, and a director since May 1977. He has
served as our 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. Mr. Manning was
a director of MicroTouch Systems, a NASDAQ-listed leader in touchscreen
technology, since 1993 until their acquisition by 3M in early 2001. 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 our Company. Mr. Kramer has been our
executive vice president and a director 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 us in July 1997 as vice president of finance and
chief financial officer. From April 1992 until joining us, 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 and 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 us in 1984 and served as corporate communications
director from 1984 until 1989 when he became the director of our 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.
13
Dean N. Panagopoulos joined us in February 1995 as director of information
systems. In July 2000 Mr. Panagopoulos was promoted to the position of vice
president of network products. 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 us in 1977 as our first employee. Ms. Randall has
served in various senior positions within our organization and has directed our
operations since 1989. Ms. Randall earned her BA degree from Eastern Nazarene
College in 1975.
Richard Kumpf joined us in July, 2000 as vice president of engineering. From
March 1995 until joining us Mr. Kumpf served in various capacities at Agilent
Technologies(formerly Hewlett-Packard), most recently as general manger of the
cable rf business unit. Prior to 1995 Mr. Kumpf served in various capacities at
Motorola Inc., including the director of product development & information
technology. Mr. Kumpf earned a BS degree in Engineering from Northeastern
University in 1972 and an MS degree in Engineering from Washington University
in St. Louis in 1974.
ITEM 2 - PROPERTIES
Our corporate headquarters occupies approximately 59,000 square feet out
of approximately 72,000 square feet in adjacent, connected buildings at 201 and
207 South Street, Boston, Massachusetts. Approximately 13,000 square feet of
this property is leased to third parties. We purchased these buildings in April
1993. In January 2001, we received $6.0 million in financing by securing a
mortgage on this property. This is a 20 year direct reduction mortgage. The
interest rate is fixed for one year, based on the one year Federal Home Loan
Bank rate plus 2.5 % per annum. The rate is adjusted on January 10th of each
calendar year commencing on January 10, 2002. As of January 10, 2001, the rate
of interest is 7.76%.
In August 1996, we entered into a five year lease for a 77,428 square foot
manufacturing and warehousing facility at 645 Summer Street, Boston, MA. On
February 28, 2001, we exercised our option to extend this lease for an
additional five years at the current market price. We are currently negotiating
the price for this space for the new term. We believe that this space provides
us with adequate and suitable manufacturing space for our current operations.
We also believe that if we did not use all of this space, we would be able to
sublet any unused space at this facility at or near our cost.
In March 1999, we assumed an office lease from Hayes Microcomputer
Products, Inc. at 430 Frimley Business Park, Camberly Surrey, UK. This ten-year
lease expires in February 2008. Our monthly rent is $11,717.
In July, 2000, we entered into a sublease as a tenant at will for
approximately 4,500 square feet at 1601 Clint Moore Road, Boca Raton, Florida.
We primarily use this facility as a technical support facility. Our monthly
rent is $2,344. We entered into this sublease when we acquired the modem assets
of Global Village and Boca Global.
ITEM 3 - LEGAL PROCEEDINGS
No material litigation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered in this report.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
14
Our common stock is traded on the NASDAQ National Market under
the symbol "ZOOM." The following table sets forth, for the periods indicated,
the high and low sale prices per share of common stock, as reported by the
NASDAQ National Market.
Fiscal Year Ending December 31, 1999 High Low
First Quarter...............................$ 5.500 $ 3.344
Second Quarter............................ 7.375 3.500
Third Quarter............................ 6.250 4.000
Fourth Quarter.............................. 13.250 4.031
Fiscal Year Ending December 31, 2000
First Quarter........................... $ 18.875 $ 7.188
Second Quarter.............................. 14.125 4.250
Third Quarter............................ 10.500 5.813
Fourth Quarter.............................. 8.125 3.125
As of March 23, 2001, there were 7,860,866 shares of our common stock
outstanding and approximately 264 holders of record of the Company's Common
Stock.
Recent Sales of Unregistered Securities
We did not sell any unregistered securities during the fourth quarter of 2000.
Dividend Policy
We have never declared or paid cash dividends on our capital stock and do
not plan to pay any cash dividends in the foreseeable future. Our current
policy is to retain all of our earnings to finance future growth. In addition,
our bank line of credit restricts the payment of cash dividends.
Limitations Affecting Holders of Common Stock
An investment in our common stock which results in a change in control of
Zoom may be subject to review and approval under the Investment Canada Act
(Canada), 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 the
investment will not be subject to review under the Investment Canada Act so
long as our gross assets 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 our business.
Under the Canada Business Corporations Act, at least one-third of the
members of the board of directors and any committees of the board of directors
must be resident Canadians. If our gross revenues generated in Canada were
greater than 5% of our total gross revenues, then one-half of our board and
committee members would have to be resident Canadians.
Certain Income Tax Considerations
The following summary is based on the tax laws of the United States and
Canada 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 some 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. These shareholders are referred to
in this section as US shareholders. The tax consequences of holding the common
stock by individuals or corporations who are not 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.
15
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, shareholders
should consult their own tax advisors with respect to the tax consequences of
holding our common stock.
Canadian Federal Income Tax Considerations
Any dividends on our common stock paid or credited, or deemed to be paid
or credited to US shareholders generally will be subject to Canadian
withholding tax. Under the Convention, the rate of withholding tax generally
applicable to US shareholders is 15%. In the case of a United States corporate
shareholder owning 10% or more of our voting shares, the applicable withholding
tax is 5% for dividends paid or credited.
Capital gains realized on the disposition of common stock by US
shareholders will not be subject to tax under the Income Tax Act (Canada) (the
"Tax Act") unless the 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 Zoom.
If the common stock is considered taxable Canadian property to a holder, the
Convention will generally exempt US shareholders from tax under the Tax Act in
respect of a disposition of common stock provided the value of our shares 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
US shareholders generally will treat the gross amount of any cash
dividends we pay, without reduction for the Canadian withholding tax, as
dividend income for United States federal income tax purposes to the extent of
our 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 our common stock generally may be credited against
the United States federal income tax liability of a 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, a US shareholder that is a domestic corporation that
owns 10% or more of our 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 we paid. Because the foreign tax credit
provisions of the Code are complex, shareholders should consult their own tax
advisors when claiming foreign tax credits. Dividends paid on our 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 a 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.
16
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,
1998, 1999, and 2000 and the balance sheet data as of December 31, 1999 and
2000 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, 1996 and 1997
and the balance sheet data as of December 31, 1996, 1997, and 1998 have been
derived from consolidated financial statements of the Company, which have been
audited by KPMG LLP and are not included in this report. The statement of
operations data and the balance sheet data of the Company for the years ending
December 31, 1996, 1997, 1998, and 1999 have been reclassified to reflect a
change in the Company's accounting for sales returns in accordance with the
guidance in the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). 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.
Years Ending December 31,
-----------------------------------------------------
1996 1997 1998 1999 2000
(In thousands) except per share amounts
Statement of Operations Data:
Net sales.......................... $ 97,762 $ 63,816 $ 61,894 $ 64,088 $ 59,750
Cost of goods sold................. 77,370 55,636 45,181 40,550 39,404
------ ------ ------ ------ ------
Gross profit................ 20,392 8,180 16,713 23,538 20,346
Operating expenses:
Selling..................... 10,216 11,103 11,801 13,571 12,714
General and administrative.. 3,674 4,957 4,976 6,276 6,228
Research and development.... 2,940 4,182 4,449 6,425 6,249
------ ------ ------ ------ ------
Total operating expenses.... 16,830 20,242 21,226 26,272 25,191
------ ------ ------ ------ ------
Operating income (loss) ..... 3,562 (12,062) (4,513) (2,734) (4,845)
Other income net .................. 293 741 1,074 737 469
------ ------ ------ ------ ------
Income (loss) before income taxes 3,855 (11,321) (3,439) (1,997) (4,376)
Income tax expense (benefit)....... 1,375 (4,189) (1,287) (588) (1,299)
------ ------ ------ ------ ------
Net income (loss).............. 2,480 (7,132) (2,152) (1,409) (3,077)
====== ====== ====== ====== ======
Earnings (loss) per common and
Common equivalent share:
Basic.......................... $ 0.35 $ (0.95) $ (0.29) $ (0.19) $ (0.40)
====== ====== ====== ====== ======
Diluted........................ $ 0.35 $ (0.95) $ (0.29) $ (0.19) $ (0.40)
====== ====== ====== ====== ======
Weighted average common and
common equivalent shares:
Basic.......................... 7,068 7,469 7,474 7,483 7,757
Diluted........................ 7,162 7,469 7,474 7,483 7,757
At December 31,
-----------------------------------------------------
1996 1997 1998 1999 2000
(In thousands)
Balance Sheet Data:
Working capital $ 41,557 $ 35,064 $ 33,376 $ 29,573 $ 29,374
Total assets 56,782 48,515 43,560 43,072 46,960
Long-term obligations - - - 481 369
Total stockholders' equity 47,355 40,503 38,425 37,514 36,747
17
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the consolidated financial statements included
elsewhere in this report and the information described under the caption "Risk
Factors" below.
Overview
We were established in 1977, and initially produced and marketed speed
dialers and other specialty telephone accessories. We shipped our first dial-up
modem in 1983 and our first dial-up faxmodem in 1990. Sales of dial-up
faxmodems and related products now comprise substantially all of our revenues.
We sell our dial-up modems and related products both domestically and
internationally through high-volume retailers and distributors, and to PC
manufacturers and other OEMs. In 2000, we began shipping samples of our cable
and ADSL modems, predominately to cable operators and telecommunications
companies worldwide.
Our 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 our or our OEM customers' products, the timing of the
announcement and introduction of new products by us and our competitors,
variations in our product mix and component costs, variations in the proportion
of sales made to retailers, distributors and OEMs, the financial health and
inventory levels of our customers, seasonal promotions by us, our 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 our products and general economic conditions. We also
believe that our sales are seasonal, with increased sales generally occurring
in the fourth quarter reflecting holiday sales. We expect that our quarterly
operating results will continue to fluctuate in the future as a result of these
and other factors.
We continually seek to improve our product designs and manufacturing
approach in order to reduce our costs. We pursue a strategy of outsourcing
rather than internally developing our faxmodem chipsets, which are
application-specific integrated circuits that form the technology base for our
modems. By outsourcing the chipset technology, we are able to concentrate out
research and development resources on modem system design, leverage the
extensive research and development capabilities of our chipset suppliers, and
reduce our development time and associated costs and risks. As a result of this
approach, we are able to quickly develop new and innovative products while
maintaining a relatively low level of research and development expense as a
percentage of sales. We also outsource aspects of our manufacturing to contract
manufacturers as a means of reducing our fixed labor costs and capital
expenditures, and to provide us with greater flexibility in its capacity
planning.
Our gross margins are typically significantly higher for our 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 dial-up 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, our products are
susceptible to price decreases. We have a policy of offering price protection
to certain of our retailer and distributor customers for some or all of their
on-hand inventory, whereby when we reduces our prices for a product, the
customer receives a credit for the difference between the original purchase
price and our reduced price. In 1997, 1998 and to a lesser extent in 1999 and
2000, our 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 our introduction of new products, the adoption
of lower-cost technologies and product designs, and the implementation of other
measures to reduce our manufacturing and other costs.
Our statement of operations data for the years ending December 31, 1998 and
1999 have been reclassified to reflect a change in our accounting for sales
returns in accordance with the guidance in the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements". There was no net impact on our previously reported gross
margins or net income (loss).
18
Results of Operations
The following table sets forth certain financial data for the periods
indicated as a percentage of net sales:
Years Ending December 31,
-----------------------------------
1998 1999 2000
---- ---- ----
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of goods sold................................. 73.0 63.3 65.9
----- ----- -----
Gross profit................................... 27.0 36.7 34.1
Operating expenses:
Selling........................................ 19.1 21.2 21.3
General and administration..................... 8.0 9.8 10.4
Research and development....................... 7.2 10.0 10.5
----- ----- -----
Total operating expenses....................... 34.3 41.0 42.2
----- ----- -----
Operating loss..................................... (7.3) (4.3) (8.1)
Other income, net............................. 1.7 1.2 .8
----- ----- -----
Loss before income taxes........................... (5.6) (3.1) (7.3)
Income tax benefit (2.1) (0.9) (2.2)
----- ----- -----
Net loss........................................... (3.5)% (2.2)% (5.1)%
===== ===== =====
Year Ending December 31, 2000 Compared to Year Ending December 31, 1999
Net Sales. Our net sales decreased 6.8% to $59.8 million in 2000 from
$64.1 million in 1999. Our sales decline resulted from overall lower average
selling prices for our products, which offset an approximate 7% increase in
unit sales in 2000 compared to 1999. In both 2000 and 1999, more than 90% of
our sales were dial-up modem products.
Our net sales to retailers and distributors in the United States decreased
by 5.9% to $40.2 million in 2000. Our sales decline was considerably less than
the total retail market sales decline of dial-up modems in the USA. According
to PC Data, a point-of-sale market tracking organization for the computer
industry, our market share of dial-up modems at surveyed USA retailers
increased in 2000 versus 1999 both in dollars and in unit sales.
Our worldwide net sales to OEM customers increased by 84.7% to $4.5
million in 2000, reflecting our first significant sale in the OEM embedded
modem market.
Our international sales to retailers and distributors decreased by 21.0%
to $15.0 million in 2000.
Gross Profit. Gross profit as a percentage of net sales decreased to 34.1%
in 2000 from 36.7% in 1999. Our average selling prices declined year over year
by more than 10%. Materials cost and manufacturing cost were also reduced but
they could not be reduced to the same extent, yielding a gross profit
reduction.
Selling Expenses. Selling expenses decreased 6.3% to $12.7 million in 2000
from $13.6 million in 1999. Selling expenses as a percent of net sales
increased slightly to 21.3% in 2000 from 21.2% in 1999. The dollar decrease was
primarily the result of reduced selling expenses in our United Kingdom office
and reduced commissions.
General and Administrative Expenses. General and administrative expenses
decreased .8% to $6.2 million in 2000 from $6.3 million in 1999. General and
administrative expenses as a percent of net sales increased to 10.4% in 2000
from 9.8% in 1999. The dollar decrease was primarily due to the result of
reduced legal expenses, administrative support costs in our office in the
United Kingdom, and bad debt expense, which were partially offset by increases
in depreciation and amortization expenses and employee health insurance.
Research and Development Expenses. Research and development expenses
decreased 2.8% to $6.2 million in 2000 from $6.4 million in 1999. Research and
development expenses as a percent of net sales increased to 10.5% in 2000 from
10.0% in 1999. The dollar decrease in research and development expenses was
primarily due to reduced expenses in our United Kingdom office and lower
spending for preproduction materials, consultants, and recruiting which was
partially offset by increases in spending for industry and government
approvals.
Interest Income. Net interest income decreased to $447,148 in 2000 from
$546,329 in 1999. The decrease was the result of our lower average cash
balances during 2000 compared to 1999. The interest income impact of lower
19
average cash balances was partially offset by higher interest rates. The
interest rate earned in 2000 was approximately 90 basis points higher than
earned in 1999.
Equity losses of Affiliate. Our affiliate equity losses were $215,834 in 2000
compared to $24,000 in 1999. Our original investment in the affiliate was
$300,000. Our investment balance has been reduced to $60,166 at December 31,
2000, which, should the affiliate continue to record losses, represents our
maximum potential future loss, based on our investment as of December 31, 2000.
Other Income Net. Other income and non-interest income increased to $237,820 in
2000 from $214,999 in 1999. The increase was primarily the result of higher
rental income in 2000 compared to 1999.
Income Tax Benefit. Our tax benefit of $1,298,916 in 2000 represents an
effective tax rate of 29.7% compared to a 29.5% rate in 1999. In both 1999 and
2000, we determined that it was more likely than not that certain state tax
benefits would not be realized. In assessing the realizability of deferred tax
assets, we consider 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. We consider the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and other matters in making this assessment. As a result of our
evaluation of these factors, we recorded an additional valuation allowance of
$396,884 against our deferred tax asset. The additional valuation allowance was
the result of our assessment that some portion of the benefits from the net
operating losses for state tax purposes incurred by us might not be realized in
future periods. If we do not meet projections in the near term, it may be
necessary to record additional valuation allowance.
Year Ending December 31, 1999 Compared to Year Ending December 31, 1998
Net Sales. Our net sales increased 3.5% to $64.1 million in 1999 from $61.9
million in 1998. Our net sales to retailers and distributors in the United
States were unchanged at $42.7 million in both 1998 and 1999. Our worldwide net
sales to OEM customers decreased by 53.9% to $2.4 million. Our 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 36.7% in
1999 from 27.0% in 1998. Although average selling prices for dial-up 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. The impact of the favorable purchases is realized as units are
sold.
Selling Expenses. Selling expenses increased 15.0% to $13.6 million or 21.2% of
net sales in 1999 from $11.8 million or 19.1% of net sales in 1998. The dollar
increase was primarily the result of the selling expenses in our new office in
the United Kingdom, acquired from Hayes Corporation, and increased advertising
and promotion expense, primarily in the form of cooperative advertising
programs with the resellers of our modems.
General and Administrative Expenses. General and administrative expenses
increased 26.1% to $6.3 million or 9.8% of net sales in 1999 from $5.0 million
or 8.0% of net sales in 1998. The added expense was primarily due to the
general and administrative expenses in our new office in the United Kingdom,
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 10.0% of net sales in 1999 from $4.5 million or 7.2%
of net sales in 1998. The increase in expenses was primarily due to additional
personnel and related expenses consistent with development of our 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 our 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.
20
Income Tax Benefit. Our tax benefit of $587,935 in 1999 represents an effective
tax rate of 29.4% compared to the 37.4% rate in 1998. The tax benefit rate
decreased because we 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, we consider 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. We consider 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 we recorded a valuation
allowance against our deferred tax asset of $770,116. The valuation allowance
was the result of our assessment that some portion of the benefits from the net
operating losses for state tax purposes incurred by us might not be realized in
future periods. If we do not meet projections in the near term, it may be
necessary to record additional valuation allowance.
Liquidity and Capital Resources
On December 31, 2000 we had working capital of $29.4 million, including $2.9
million in cash and investment securities. We have a $5 million (maximum) 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 is secured and contains certain
financial and other covenants. We are in full compliance with all covenants. On
December 31, 2000 the dollar amount that could be borrowed under our $5 million
line, which is based on United States accounts receivables, was $3.5 million.
No amounts were outstanding under any lines of credit at December 31, 2000.
In 2000 our net cash used in operating activities was approximately $ 8.2
million. Sources of cash were an increase of $4.8 million of accounts payable
and accrued expenses, depreciation and amortization of $1.7 million, and the
tax benefit from the exercise of stock options of $.5 million. The increase in
accounts payable was primarily the result of a build-up of inventory in the
latter part of 2000. These sources of cash were offset by the increase of
inventories of $ 9.5 million, the net loss of $3.1 million, the increase of net
deferred income taxes of $1.8 million, and other current assets of $.7 million.
The significant increase in inventories resulted from our decision to initiate
an aggressive production plan for new broadband cable and ADSL modem products.
This was done in part because of a severe electronics parts shortage during the
third and fourth quarters of 2000 and also because a quick delivery ramp to
high volume production was our perceived requirement to be able to compete for
large orders from the major cable service operators and telecommunications
companies.
Our capital expenditures in 2000 of approximately $1.3 million consisted
primarily of purchases of computer hardware and software, purchases of other
equipment and tooling, and continued renovations to our headquarters.
In January 2001, we obtained a mortgage from a bank, secured by our owned real
estate in Boston, Massachusetts, for $6 million. This is a 20-year direct
reduction mortgage. The interest rate is fixed for one year, based on the
one-year Federal Home Loan Bank rate plus 2.5% per annum. The current rate of
interest as of December 31,2000 was 7.76%. We are also currently negotiating to
substantially increase our current $5 million line of credit. We can provide no
assurance that we will be able to increase our current line of credit or other
financing at favorable terms, or at all. We believe that the existing cash, the
cash from the $6 million mortgage, the potential borrowing availability from
our $5 million line of credit, and the expected cash from the reduction of our
inventory to normal levels will be sufficient to fund our normal working
capital requirements for next 12 months. (See RISK FACTORS).
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. We have 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. We are in
the process of analyzing the impact of the euro with a view to minimizing the
effects on the Company's operations. We do not expect the costs of upgrading
its systems to be material.
A portion of our revenues are subject to the risks associated with
international sales. Although most of our product prices are denominated in the
United States currency, customers in foreign countries generally evaluate
purchases of products such as those sold by us 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,
21
particularly with respect to the U.S. dollar) may have a material adverse affect
on the demand for our products as well as on our business, financial condition
and results of operations.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133 ").
This statement was amended by the issuance of SFAS 137, "Deferral of the
Effective Date of FASB Statement No. 133", which changed the effective date of
SFAS 133 to all fiscal years beginning after June 15, 2000 (fiscal 2001 for us)
and requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if so, the type
of hedge transaction. We anticipate that the adoption of SFAS 133 will not have
a material impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 expresses the view of the SEC staff in applying generally
accepted accounting principles to certain revenue recognition issues. We
adopted SAB 101 in the fourth quarter of 2000, and have adjusted previously
reported revenue, cost of revenue, accounts receivable and inventory balances
related to the manner in which we had historically recorded and reported sales
returns reserves. There was no net impact on our previously reported gross
margins or net income (loss). We have reclassified the balance sheet at
December 31, 1999 and the statements of operations for each of the years in the
two-year period ended December 31, 1999 to reflect this change (See Note 3 of
the Consolidated Financial Statements).
In September 2000 the FASB Emerging Issues Task Force discussed Issue No. 00-22
"Accounting for Points and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to Be Delivered in
the Future", and Issue No. 00-25 "Accounting for Consideration from a Vendor to
a Retailer in Connection with the Purchase or Promotion of the Vendor's
Products". A consensus has not yet been reached on either matter. Issue No.
00-22 addresses the accounting for future offers to customers of free product,
discounts or rebates which will be awarded only if the customer completes a
specified cumulative level of revenue transactions or remains a customer for a
specified time period. Issue No. 00-25 addresses whether certain consideration
offered by a vendor to a distributor, including slotting fees, cooperative
advertising arrangements and "buy-down" programs, should be characterized as
operating expenses or reductions of revenue. These pronouncements may result in
a reclassification of certain costs within our income statement, but are not
expected to have a material impact on our financial condition or results of
operations.
FASB Emerging Issues Task Force Issue No. 00-14 "Accounting for Certain Sales
Incentives" addresses the recognition, measurement, and income statement
classification for certain types of sales incentives. The application of the
guidance in Issue No. 00-14 will result in a change in the manner in which we
record certain types of discounts and sales and marketing incentives that are
provided to its customers. We have historically recorded certain types of these
incentives as marketing expenses. Under Issue No. 00-14, the Company will
record these incentives as reductions of revenue. We are required to and will
adopt the guidance outlined in Issue No. 00-14 for the second fiscal quarter of
2001, at which time prior period reported amounts will be reclassified to
conform to the new presentation.
RISK FACTORS
This report contains forward-looking statements that involve risks and
uncertainties, such as statements of our objectives, expectations and
intentions. The cautionary statements made in this report should be read as
applicable to all forward-looking statements wherever they appear in this
report. Our actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this report.
22
We are incurring and expect to continue to incur significant losses.
We incurred net losses of approximately $3.1 million in fiscal 2000, $1.4
million in fiscal 1999, and $2.2 million in fiscal 1998. Although we have
developed a strategic business plan under which we expect to become profitable,
we cannot be sure that we will become profitable.
We anticipate that we will continue to incur significant expenses in the
foreseeable future as we:
o continue to develop our broadband access products, such as cable and
ADSL modems, and our wireless local area network and Internet gateway
products; and
o continue to make efforts to expand our sales channels to include cable
service providers and telephone companies.
Because we expect to continue to invest in our business ahead of future
revenues, we expect that we will continue to incur operating losses, at least
in the near future. We cannot guarantee that our expenditures will
significantly increase our revenues, if at all. If we fail to significantly
increase our revenues as we implement our strategies, we may not be able to
achieve profitability.
Our Obligations Under Our Existing and Anticipated Debt Facilities Could
Prevent Us From Obtaining Additional Financing and Harm Our Liquidity.
We have a $5 million line of credit that expires on April 1, 2003. Our
line of credit bears interest at the bank's prime rate. The line of credit is
secured, and contains certain financial and other covenants. We are in
full compliance with all covenants. On December 31, 2000 the dollar amount that
could be borrowed under our $5 million line, which is based on U. S. accounts
receivables, was $3.5 million. No amounts were outstanding under any lines of
credit at December 31, 2000. The Company is also currently negotiating to
substantially increase its current $5 million line of credit. In January 2001,
the Company obtained a $6 million mortgage from a bank, secured by the
Company's owed real estate in Boston, Massachusetts.
Our outstanding and anticipated indebtedness could adversely affect our ability
to obtain additional financing for working capital, acquisitions or other
purposes. They could also make us more vulnerable to economic downturns and
competitive pressures, and adversely affect our liquidity. In the event of a
cash shortfall, we could be forced to reduce other expenditures to meet our
requirements with respect to our outstanding debt. Our ability to meet these
obligations will be dependent upon our future performance, which will be
subject to financial, business and other factors affecting our operations. Many
of these factors are beyond our control. If we are unable to generate
sufficient cash flow from operations in the future to service our debt, we may
be required to refinance all or a portion of these obligations or obtain
additional financing in order to stay in business.
To stay in business we may require future additional funding which we may be
unable to obtain on favorable terms, if at all.
Over time, we may require additional financing for our operations or potential
acquisitions. This additional financing may not be available to us on a timely
basis if at all, or, on terms acceptable to us. If we fail to obtain acceptable
additional financing when needed, we may be required to reduce our planned
expenditures or forego acquisition opportunities, which could reduce our
revenues, increase our losses, and harm our business. Moreover, additional
equity financing could dilute the per share value of our common stock held by
current stockholders, while additional debt financing could restrict our
ability to make capital expenditures or incur additional indebtedness, all of
which would impede our ability to succeed.
Our failure to effectively manage our increased inventory levels could
materially and adversely affect or liquidity and harm our business.
During 2000, in anticipation of future sales of our recently introduced
broadband access products, particularly cable modems, we significantly
increased our inventory for these products. We also built up this inventory in
response to shortages of components for these products earlier in the year, and
since then most of these shortages have been alleviated. We have also had
difficulty in generating significant orders for some of our products,
particularly broadband products; and as a result we experienced a significant
increase in our inventory, to $21.9 million on December 31, 2000 from $14.3
million on December 31, 1999. Our increased levels of inventory may adversely
23
affect our liquidity and increases the risk of inventory obsolescence, a
decline in market value of the inventory, or losses from theft, fire or other
casualty.
Our failure to manage our changing business effectively would harm our business.
We are managing a changing business as we attempt to grow our customer base and
develop and seize market opportunities in the broadband access industry. Our
changing business could place a significant strain on our senior management
team and on operational and financial resources. To manage our changing
business, we may need to:
o adapt, improve or replace our existing operational and financial
systems, procedures and controls;
o hire, train, retain, motivate and manage the required personnel;
o maintain close coordination among our sales and marketing, research and
development, finance, administrative and operations personnel; and
o identify, manage, and benefit from existing and potential strategic
relationships and market opportunities.
We cannot guarantee that we will be successful in any of these endeavors. If we
do not effectively manage the planning and other process control issues
presented by our changing business, our business will suffer. Furthermore, if
we are unable to undertake new business due to a shortage of staff or
technology resources, our growth will be impeded. Therefore, there may be times
when our opportunities for revenue growth may be limited by the capacity of our
internal resources rather than by the absence of market demand.
Continued fluctuations in our operating results could cause the market price of
our common stock to fall.
Our operating results have fluctuated in the past and are likely to fluctuate
in the future. It is possible that our revenues and operating results will be
below the expectations of securities analysts and investors in future quarters.
If we fail to meet or surpass the expectations of securities analysts or
investors, the market price of our common stock will most likely fall. Factors
that have affected and may in the future affect our operating results include:
o the overall demand for dial-up, cable and ADSL modems, wireless local
area network products, Internet gateway products, and other products;
o the timing of new product announcements and releases, such as our cable
and ADSL modems, by us and our competitors; of successful testing and
qualification of our products, such as Cablelabs and @Home
qualification of cable modems and telephone company qualification of
ADSL modems;
o variations in the number and mix of products we sell;
o the timing of customer orders and adjustments of delivery schedules to
accommodate our customers' programs;
o the availability of components, materials and labor necessary to produce
our products;
o the timing and level of expenditures in anticipation of future sales;
o pricing and other competitive conditions; and
o seasonality.
Our customer base is concentrated and the loss of one or more of our customers
could harm our business.
Relatively few customers have accounted for a significant portion of our net
sales. In fiscal 2000, 26% of our net sales were attributable to two customers
and in fiscal 1999, two customers represented 27% of our net sales. Because our
customer base is concentrated, a loss of one or more of these significant
customers or a reduction or delay in orders or a default in payment from any of
our top customers could significantly reduce our sales which would materially
harm our business, results of operations and financial condition.
Our failure to meet changing customer requirements and emerging industry
standards would adversely impact our ability to sell our products.
The market for PC communications products and high-speed broadband access
products is characterized by rapidly changing customer demands and short
product life cycles. Some of our product developments and enhancements have
taken longer than planned and have delayed the availability of our products,
which adversely affected our sales and profitability in the past. Any
significant delays in the future may adversely impact our ability to sell our
products, and our results of operations and financial condition may be
adversely affected. Our future success will depend in large part upon our
ability to:
24
o identify and respond to emerging technological trends in the market;
o develop and maintain competitive products that meet changing customer
demands;
o enhance our products by adding innovative features that differentiate
our products from those of our competitors;
o bring products to market on a timely basis;
o introduce products that have competitive prices; and
o respond effectively to new technological changes or new product
announcements by others.
Our future success depends in part on our ability to enhance our existing
products and to develop new products.
We have developed and marketed a limited number of different product types. To
date our product introductions have focused on the development and enhancement
of our dial-up, cable and ADSL modems, wireless products, and other
communications products. We believe that our future success will depend in
large part on our ability to enhance our existing products and to continue to
develop new products, such as cable and ADSL modems, which meet regulatory and
customer requirements. The successful development of new products and product
enhancements are subject to numerous risks, both known and unknown, including:
o unanticipated delays;
o budget overruns;
o technical problems;
o component shortages;
o regulatory approval from the Federal Communications Commission and other
regulatory authorities;
o successful testing and qualification of our products, such as Cablelabs
and @Home qualification of cable modems and telephone company
qualification of ADSL modems; and
o other difficulties that could result in the abandonment or substantial
change in the commercialization of these enhancements or new products.
Our failure to introduce new products or to enhance our existing products on a
timely basis has in the past and may in the future cause our stock price to
fluctuate.
The Sales Cycle for Some of Our Products is Lengthy.
The sales cycle associated with our cable and ADSL modems and other broadband
access products may be lengthy, potentially lasting six months to a year. Our
customers generally conduct technical evaluations of competing technologies
prior to the commitment of capital and other resources. In addition, purchasing
decisions may be delayed because of our customers' internal budget approval
procedures. Sales may also be subject to customer trials, which could last
several months. Because of the lengthy sales cycle and the large size of
customers' order, if orders forecasted for a specific customer for a particular
quarter do not occur in that quarter, our operating results for that quarter
could suffer and our business would be harmed.
Our Product Cycles Tend to be Short, and We May Incur Significant
Non-Recoverable Expenses or Devote Significant Resources to Sales that Do Not
Occur When Anticipated.
In the rapidly changing technology environment in which we operate, product
cycles tend to be short. Therefore, the resources we devote to product
development, sales and marketing may not generate material revenues for us. In
addition, short product cycles can result in excess and obsolete inventory. We
have incurred and expect in the future to incur substantial development, sales,
marketing, and inventory costs. If we are unable to recover these costs, our
financial condition and operating results could be adversely affected. In
addition, if we sell our products at reduced prices in anticipation of cost
reductions and we still have higher cost products in inventory, our business
would be harmed and our results of operations and financial condition would be
adversely affected.
Our average selling prices for our dial-up modems have declined, which has had
an adverse affect on our operating results.
The dial-up modem industry has been characterized by declining average selling
prices. The decline in average selling prices is due to a number of factors,
including technological change and competition. As industry standards for cable
and ADSL modems continue to evolve, it is likely that there will be an
increased retail distribution of cable and ADSL modems, which could put further
price pressure on our dial-up modems and any cable or ADSL modems that we
introduce in the future. Decreasing average selling prices could result in
decreased revenue even if the
25
number of units sold increase. As a result of decreased average selling prices,
we have experienced and we may in the future experience substantial period to
period fluctuations in operating results.
Our operating results have been adversely affected because of price protection
programs.
In 1998 and, to a lesser extent, in 1999 and 2000, our operating results were
adversely affected by reductions in average selling prices because we gave
credits to some of our customers as a result of price protection. Specifically,
when we reduce the price for a product, the customer receives a credit for the
difference between the customer's original purchase price and our reduced price
for the product, for all unsold product at the time of the price reduction.
We may be subject to product returns resulting from defects in or overstocking
of our products. Product returns could result in the failure to attain market
acceptance of our products, which would harm our business.
If our products contain undetected defects, errors or failures, we could face:
o delays in the development of our products;
o numerous product returns; and
o other losses to us or to our customers or end users.
Any of these occurrences could also result in the loss of or delay in market
acceptance of our products, either of which would reduce our sales and harm our
business. We are also exposed to the risk of product returns from our customers
as a result of contractual stock rotation privileges and our practice of
assisting some of our customers in balancing their inventories. Overstocking
has in the past led and may in the future lead too higher than normal returns.
We may be unable to produce sufficient quantities of our products because we
depend on third party manufacturers. If these third party manufacturers fail to
produce quality products in a timely manner, our ability to fulfill our
customer orders would be adversely impacted.
We use contract manufacturers, primarily a single manufacturer in China to
partially manufacture our products. We use these third party manufacturers to
help ensure low costs, rapid market entry and reliability. Any manufacturing
disruption could impair our ability to fulfill orders. Our failure to fulfill
orders would adversely affect our sales. Although we work with more than one
third party manufacturer, a significant number of our products are manufactured
by only one manufacturer. Since third parties manufacture our products and we
expect this to continue in the future, our success will depend, in part, on the
ability of third parties to manufacture our products cost effectively and in
sufficient quantities to meet our customer demand.
We are subject to the following risks because of our reliance on third party
manufacturers:
o reduced management and control of component purchases;
o reduced control over delivery schedules;
o reduced control over quality assurance;
o reduced control over manufacturing yields;
o lack of adequate capacity during periods of excess demand;
o limited warranties on products supplied to us;
o potential increases in prices;
o interruption of supplies from assemblers as a result of a fire, natural
calamity, strike or other significant event; and
o misappropriation of our intellectual property.
We may be unable to obtain certain components for our dial-up, cable and ADSL
modems because of the high demand and relatively low availability of these
components. If we fail to obtain these components our business would be harmed
because we would be unable to manufacture certain products.
Periodically, there have been shortages of critical components for our
products. In the first half of 2000, there were shortages of components for our
cable modems, which has since been alleviated. If, in the future, we are unable
to obtain required components in a timely manner or at all, we would be unable
to manufacture some of our modem products and our business would be harmed.
26
We may be unable to produce sufficient quantities of our products because we
obtain certain key components from, and depend on, certain sole or limited
source suppliers.
We obtain certain key parts, components and equipment from sole or limited
sources of supply. For example, we obtain modem chipsets from Agere Systems
(formerly Lucent Technologies) and Conexant Systems (formerly Rockwell). In
addition, Intersil is our only wireless chipset supplier. In the past, we have
experienced delays in receiving shipments of modem chipsets from our sole
source suppliers. We may experience similar delays in the future. Any
interruption in the operations of our suppliers of sole or limited source parts
could affect our ability to meet our scheduled product deliveries to our
customers.
Our business would be harmed if any of our sole or limited source suppliers:
o fail to produce chipset enhancements or new chipsets on a timely basis;
o stop selling their products or components to us at commercially
reasonable prices; or
o refuse to sell their products or components to us at any price.
If we are unable to obtain components from our sole or limited source
suppliers, we would be unable to ship our products in a timely manner and our
relationships with our customers would be harmed.
If we are unable to obtain a sufficient supply of components from our current
sources, we could experience difficulties in obtaining alternative sources or
in altering product designs to use alternative components. Resulting delays or
reductions in product shipments could damage relationships with our customers
and our customers could decide to purchase products from our competitors.
Inability to meet our customers' demand or a decision by one or more of our
customers to purchase products from our competitors could harm our operating
results.
Sales of our products depend on the widespread adoption of broadband access
products. If the demand for broadband access services does not develop, then
our results of operations and financial condition could be adversely affected.
Although we are continuing to enhance our existing dial-up modems, wireless
products and other communications products, our growth will be strongly
affected by our sale of cable and ADSL modems and other broadband access
products. We have invested, and are continuing to invest, substantial resources
to produce and develop our inventory of cable and ADSL modems and other
broadband access products. We may be unable to generate significant revenues
from sales of our broadband access products and we will have expended
significant resources on products for which we are generating limited or no
revenues, if:
o the market for broadband access products, such as cable and ADSL modems,
does not develop further or develops slower than we expect;
o we do not market our broadband access products effectively;
o we are unable to expand our distribution channels for our broadband
access products; or
o our broadband access products do not obtain market acceptance.
Certain critical factors will likely affect our ability to develop a market and
obtain market acceptance for our broadband access products. These factors
include:
o quality and reliability of service;
o availability of cost-effective, high-speed service;
o ability to integrate business applications on the Internet;
o interoperability among multiple vendors' network equipment;
o lack of congestion in service providers' networks;
o adequate security; and
o ability to meet growing demands for increasing bandwidth.
We may be unable to recoup our investments in research and development of new
products.
The technical innovations required for us to remain competitive in the
broadband access industry are complex, require long development cycles, and
entail a significant amount of research and development expenditures. We have
invested and will continue in the future to invest in research and development
to develop new products and to enhance our existing technologies and products.
In fiscal 1998, 1999, and 2000 we incurred $4.4 million, $6.4 million, and $6.2
27
million in research and development costs. Growth in our research and
development activities is primarily related to our initiatives in the
broadband, advanced networking and Internet gateway product areas. We will have
incurred and expect to continue to incur most of our research and development
expenses before the technical feasibility or commercial viability of our
enhanced or new products can be ascertained. Revenues from our future or
enhanced products may be insufficient to recover our associated research and
development costs.
We may be unable to maintain or increase our sales through our existing or new
sales channels.
We have primarily sold our dial-up modem products through high-volume
retailers, independent distributors, and original equipment manufacturers, also
known as OEMs. Sales to each of these distribution channels subject us to the
following risks which, if they materialize, would significantly reduce sales of
our products.
Retailers:
Our sales to retailers have historically constituted the largest percentage of
our net sales. Due to competition for limited shelf space, retailers have the
ability to negotiate favorable terms of sale, including price discounts and
product return policies. We may be unable to maintain or increase our sales to
retailers on favorable terms, if at all.
Independent Distributors:
Our independent distributors generally are not contractually committed to
future purchases of our products and may carry our competitors' products. One
or more of our distributors could discontinue carrying our products at any
time.
OEMs:
OEMs may require special distribution arrangements and product pricing. We may
be unsuccessful in developing products for sales to OEMs or maintaining or
increasing sales to OEMs on favorable terms.
The market for high-speed communications products and services has many
competing technologies and, as a result, the demand for our products and
services is uncertain.
The market for high-speed communications products and services has a number of
competing technologies. For instance, Internet access can be achieved by:
o using a standard telephone line and appropriate service for dial-up
modems, ISDN modems, or ADSL modems, possibly in combination;
o using a cable modem with a cable TV line and cable modem service; using
a router to service the computers connected to a local area network; or
o other approaches, including wireless links to the Internet.
Although we currently sell or plan to sell products which include the
technologies described in the first three bullet points above, the market for
high-speed communication products and services is fragmented and still in its
development stage. The introduction of new products by competitors, market
acceptance of products based on new or alternative technologies, or the
emergence of new industry standards could render our products less competitive
or obsolete. If any of these events occur, we may be unable to sustain or grow
our business. In addition, if any of one or more of the alternative
technologies gain market share at the expense of another technology, demand for
our products may be reduced, and we may be unable to sustain or grow our
business.
We face significant competition, which could result in decreased demand for our
products or services.
We may be unable to compete successfully. A number of companies have developed,
or are expected to develop, products that compete or will compete with our
products. Furthermore, many of our current and potential competitors have
significantly greater resources than we do. Intense competition, rapid
technological change and evolving industry standards could decrease demand for
our products or make our products obsolete.
Our competitors by product group include the following:
o Dial-up modem competitors: U.S. Robotics, Actiontec, Askey, Best Data,
Creative Labs, Elsa, GVC, Intel, and SONICblue.
28
o Cable modem competitors: 3Com, Com21, Motorola, and Toshiba.
o ADSL modem competitors: 3Com, Efficient Networks and Westell.
o Wireless Local Area Network competitors: 3Com, Agere, Cisco, Intel,
Linksys, and Proxim.
The principal competitive factors in our industry include the following:
o product performance, features and reliability;
o price;
o product availability and lead times;
o size and stability of operations;
o breadth of product line;
o sales and distribution capability;
o technical support and service;
o relationships with providers of broadband access services; and
o compliance with industry standards.
Our business is dependent on the Internet and the development of the Internet
infrastructure.
Our success will depend in large part on increased use of the Internet to
increase the demand for high-speed communications products. Critical issues
concerning the commercial use of the Internet remain largely unresolved and are
likely to affect the development of the market for our products. These issues
include security, reliability, cost, ease of access and quality of service.
Our success also will depend on the growth of the use of the Internet by
businesses, particularly for applications that utilize multimedia content and
that require high bandwidth. The recent growth in the use of the Internet has
caused frequent periods of performance degradation. This has required the
upgrade of routers, telecommunications links and other components forming the
infrastructure of the Internet by Internet service providers and other
organizations with links to the Internet.
Any perceived degradation in the performance of the Internet as a whole could
undermine the benefits of our products. Potentially increased performance
provided by our products and the products of others ultimately is limited by
and reliant upon the speed and reliability of the Internet backbone itself.
Consequently, the emergence and growth of the market for our products will
depend on improvements being made to the entire Internet infrastructure to
alleviate overloading.
Changes in current or future laws or governmental regulations that negatively
impact our products and technologies could harm our business.
The jurisdiction of the Federal Communications Commission, or the FCC, extends
to the entire United States communications industry including our customers and
their products and services that incorporate our products. Our products are
also required to meet the regulatory requirements of Industry Canada and other
countries throughout the world where our products are sold. Obtaining
government regulatory approvals is time-consuming and very costly. In the past,
we have encountered delays in the introduction of our cable modems as a result
of government certifications. We may face further delays if we are unable to
comply with governmental regulations. Delays caused by the time it takes to
comply with regulatory requirements may result in cancellations or
postponements of product orders or purchases by our customers, which would harm
our business.
Our international operations are subject to a number of risks inherent in
international activities.
Our international sales accounted for approximately 29% of our revenues in
fiscal 1999 and 28% in fiscal 2000. The revenues we received from international
sales were significantly impacted by our Hayes European operation, which we
began operating in March 1999. Currently our operations are significantly
dependent on our international operations and may be materially and adversely
affected by many factors including:
o international regulatory and communications requirements and policy
changes;
o favoritism towards local suppliers;
o difficulties in inventory management, accounts receivable collection and
the management of distributors or representatives;
o difficulties in staffing and managing foreign operations;
29
o political and economic changes and disruptions;
o governmental currency controls;
o shipping costs;
o currency exchange rate fluctuations; and
o tariff regulations.
We anticipate that our international sales will continue to account for a
significant percentage of our revenues. If foreign markets for our current and
future products develop more slowly than currently anticipated or if foreign
countries decide not to construct the infrastructure necessary to operate
broadband access products, our future results of operations may be harmed.
Fluctuations in the foreign currency exchange rates in relation to the U.S.
dollar could have a material adverse effect on our operating results.
Changes in currency exchange rates that increase the relative value of the U.S.
dollar may make it more difficult for us to compete with foreign manufacturers
on price or otherwise have a material adverse effect on our sales and operating
results. A significant increase in our foreign denominated sales would increase
our risk associated with foreign currency fluctuations.
Our future success will depend on the continued services of our executive
officers and key research and development personnel with expertise in hardware
and software development.
The loss of any of our executive officers or key research and development
personnel, the inability to attract or retain qualified personnel in the future
or delays in hiring skilled personnel could harm our business. Competition for
personnel, particularly hardware and software engineers and other technical
personnel, is extremely intense. We may be unable to attract and retain all the
personnel necessary for the development of our business. In addition, the loss
of Frank B. Manning, our president and chief executive officer, or Peter
Kramer, our executive vice president, some other member of the management team,
a key engineer or other key individual contributors, could harm our relations
with our customers, our ability to respond to technological change, and our
business.
Our business may be harmed by acquisitions we may complete in the future.
We may pursue acquisitions of related businesses, technologies, product lines
or products. Our identification of suitable acquisition candidates involves
risk inherent in assessing the values, strengths, weaknesses, risks and
profitability of acquisition candidates, including the effects of the possible
acquisition on our business, diversion of our management's attention, risk of
increased leverage, stockholder dilution, and risk associated with
unanticipated problems or latent liabilities.
We have had and may in the future have difficulty protecting our intellectual
property.
Our ability to compete is heavily affected by our ability to protect our
intellectual property. We rely primarily on trade secret laws, confidentiality
procedures, patents, copyrights, trademarks, and licensing arrangements to
protect our intellectual property. The steps we take to protect our technology
may be inadequate. Existing trade secret, trademark and copyright laws offer
only limited protection. Our patents could be invalidated or circumvented. The
laws of some foreign countries in which our products are or may be developed,
manufactured or sold may not protect our products or intellectual property
rights to the same extent as do the laws of the United States. This may make
the possibility of piracy of our technology and products more likely. We cannot
assure that the steps that we have taken to protect our intellectual property
will be adequate to prevent misappropriation of our technology.
We could infringe the intellectual property rights of others.
Particular aspects of our technology could be found to infringe on the
intellectual property rights or patents of others. Other companies may hold or
obtain patents on inventions or may otherwise claim proprietary rights to
technology necessary to our business. We cannot predict the extent to which we
may be required to seek licenses. We cannot assure that the terms of any
licenses we may be required to seek will be reasonable.
Our executive officers and directors may control certain matters to be voted on
by the stockholders. These officers and directors may vote in a manner that is
not in your best interests.
30
Our executive officers and directors beneficially own, in the aggregate,
approximately 21.6% of our outstanding common stock. As a result, in
practicality, these stockholders control certain matters to be voted on by the
stockholders. These matters include the election of directors, amendments to
our articles of continuance and approval of significant corporate transactions.
These executive officers and directors may vote as stockholders in a manner
that is not in the best interests of the other stockholders of the company.
The volatility of our stock price could adversely affect your investment in our
common stock.
The market price of our common stock has been and may continue to be highly
volatile. We believe that a variety of factors have caused and could in the
future cause the stock price of our common stock to fluctuate, including:
o announcements of developments related to our business, including
announcements of certification by the FCC or other regulatory
authorities of our products or our competitors products;
o quarterly fluctuations in our actual or anticipated operating results
and order levels;
o general conditions in the worldwide economy;
o announcements of technological innovations;
o new products or product enhancements introduced by us or our
competitors;
o developments in patents or other intellectual property rights and
litigation; and
o developments in our relationships with our customers and suppliers.
In addition, in recent years the stock market in general and the markets for
shares of small capitalization and "high-tech" companies in particular, have
experienced extreme price fluctuations which have often been unrelated to the
operating performance of affected companies. Any fluctuations in the future
could adversely affect the market price of our common stock and the market
price of our common stock may decline.
Because we are a Canadian corporation, we are subject to laws that may have the
effect of delaying or preventing a change in control of our company.
An investment in our common stock that results in a change of control may be
subject to the review and approval of the Canadian governmental authorities. If
the Canadian governmental authorities have to approve and review an investment
that may result in a change of control, the investment will be delayed and
possibly prevented.
Generally, under the Canada Business Corporations Act, at least one-third of
our directors and any committees of the board of directors must be Canadian
residents. If our sales in Canada exceed five percent of our net sales, then
one-half of our directors and any committees of the board of directors must be
Canadian residents.
ITEM 7A.
We own financial instruments that are sensitive to market risks as part of our
investment portfolio. The investment portfolio is used to preserve our capital
until we are required to fund operations, including our research and development
activities. None of these market-risk sensitive instruments are held for
trading purposes. We do not own derivative financial instruments in our
investment portfolio. The investment portfolio contains instruments that are
subject to the risk of a decline in interest rates.
Investment Rate Risk - Our 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. Our 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, we do not believe that we have a material exposure to interest rate
risk.
31
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ZOOM TELEPHONICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Index to Consolidated Financial Statements 38
Independent Auditors' Report 39
Consolidated Balance Sheets as of December 31, 1999 and 2000 40
Consolidated Statements of Operations for the years ending December 31,
1998, 1999 and 2000 41
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the years ending December 31, 1998, 1999 and 2000 42
Consolidated Statements of Cash Flows for the years ending December 31,
1998, 1999 and 2000 43
Notes to Consolidated Financial Statements 44-57
Schedule II: Valuation and Qualifying Accounts for Fiscal Years
Ending December 31, 1998, 1999 and 2000 61
32
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.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item appears under the caption "Our Executive
Officers" 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 our definitive proxy statement for our 2001 annual meeting of
shareholders which will be filed with the SEC in April 2001, 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 our definitive proxy
statement for our 2001 annual meeting of shareholders which will be filed with
the SEC in April 2001, 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 our definitive proxy statement for our 2001 annual meeting of
shareholders which will be filed with the SEC in April 2001, pursuant to
Regulation 14A, and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
33
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits:
(1), (2) The consolidated financial statements and required schedules
are indexed on page F-1.
(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 Zoom's
Registration Statement on Form S-3 (File No. 333-38950) filed
with the Commission on June 9, 2000 (the "Registration
Statement on Form S-3"). *
3.2 By-Law No. 1 of Zoom Telephonics, Inc., filed as Exhibit 3.2
to the Registration Statement on Form S-3.*
3.3 By-Law No. 2 of Zoom Telephonics, Inc., filed as Exhibit 3.3
to the Registration Statement on Form S-3. *
**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 Loan and Security Agreement by and between Zoom Telephonics,
Inc. and Fleet Capital Corporation, filed as Exhibit 10.1 to
the Quarterly Report on Form 10-Q for the fiscal quarter
ending June 30, 2000 (the "June 2000 form 10-Q").*
10.4 Revolving Promissory Note issued in favor of Fleet Capital
Corporation, filed as Exhibit 10.2 to the June 2000 10-Q.*
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 Letter Agreement between Zoom and an executive officer, filed
as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
fiscal quarter ending September 30, 2000.*
**10.8 Employment Agreement, filed as Exhibit 10.9 to the 1997
Form 10-K. *
11. Statement re computation of per share earnings.
21. Subsidiaries.
23. Consent of KPMG LLP.
(b) Reports on Form 8-K.
34
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.
35
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 30, 2001
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.
Signature Title(s) Date
/s/ Frank B. Manning Principal Executive Officer and March 30, 2001
-------------------- Chairman of the Board
Frank B. Manning
/s/ Robert A. Crist Principal Financial and March 30, 2001
------------------- Accounting Officer
Robert A. Crist
/s/ Peter R. Kramer Director March 30, 2001
-------------------
Peter R. Kramer
/s/ Bernard Furman Director March 30, 2001
------------------
Bernard Furman
/s/ L. Lamont Gordon Director March 30, 2001
--------------------
L. Lamont Gordon
/s/ J. Ronald Woods Director March 30, 2001
-------------------
J. Ronald Woods
36
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000 F-3
Consolidated Statements of Operations for the years ending
December 31, 1998, 1999 and 2000 F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
Loss for the years ending December 31, 1998, 1999 and 2000 F-5
Consolidated Statements of Cash Flows for the years ending
December 31, 1998, 1999 and 2000 F-6
Notes to Consolidated Financial Statements F-7
Schedule II: Valuation and Qualifying Accounts for Fiscal Years
Ending December 31, 1998, 1999 and 2000 F-24
37
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 subsidiary as of December 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss and cash flows for each of the years in the three-year
period ended December 31, 2000. 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 auditing standards generally
accepted in the United States of America. 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 subsidiary as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Boston, Massachusetts
February 7, 2001
38
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------
Assets 1999 2000
------ ---- ----
Current assets:
Cash and cash equivalents $ 7,218,500 $ 2,906,270
Investment securities 3,189,074 -
Accounts receivable, net of reserves for
doubtful accounts, returns, and allowances of
$6,770,591 in 1999 and $3,127,455 in 2000 (note 12) 5,409,565 7,923,967
Inventories (note 4) 14,303,607 21,896,883
Net deferred tax assets (note 11) 3,968,970 5,812,844
Prepaid expenses and other current assets 560,869 678,271
---------- ----------
Total current assets 34,650,586 39,218,235
---------- ----------
Property, plant and equipment, net (note 5) 4,211,921 4,580,634
Goodwill, net of accumulated amortization of
$1,005,273 in 1999 and $1,827,459 in 2000 (note 7) 3,898,410 3,076,224
Other assets 311,487 84,902
---------- ----------
Total assets $ 43,072,404 $ 46,959,995
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 2,703,729 $ 7,428,832
Accrued expenses 2,373,817 2,414,917
---------- ----------
Total current liabilities 5,077,546 9,843,749
---------- ----------
Other non-current liabilities (note 7) 480,775 368,800
---------- ----------
Total liabilities 5,558,321 10,212,549
---------- ----------
Stockholders' equity (note 10):
Common stock, no par value. Authorized 25,000,000
shares; issued and outstanding 7,560,296 shares
at December 31, 1999 and 7,860,866 shares at
December 31, 2000 25,780,231 28,145,375
Retained earnings 11,771,478 8,694,230
Accumulated other comprehensive loss (37,626) (92,159)
---------- ----------
Total stockholders' equity 37,514,083 36,747,446
---------- ----------
Total liabilities and stockholders'
equity $ 43,072,404 $ 46,959,995
========== ==========
See accompanying notes to consolidated financial statements.
39
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ending December 31, 1998, 1999 and 2000
1998 1999 2000
---- ---- ----
Net sales (notes 3, 12 and 16) $ 61,894,602 $ 64,088,384 $ 59,750,187
Cost of goods sold (note 3) 45,181,665 40,549,909 39,404,320
---------- ---------- ----------
Gross profit 16,712,937 23,538,475 20,345,867
---------- ---------- ----------
Operating expenses:
Selling 11,800,948 13,571,083 12,713,756
General and administrative 4,976,433 6,275,827 6,228,317
Research and development 4,449,093 6,425,584 6,249,092
---------- ---------- ----------
Total operating expenses 21,226,474 26,272,494 25,191,165
---------- ---------- ----------
Operating loss (4,513,537) (2,734,019) (4,845,298)
Interest income 840,044 546,329 447,148
Equity losses of affiliate - (24,000) (215,834)
Other, net 233,979 214,999 237,820
---------- ---------- ----------
Total other income, net 1,074,023 737,328 469,134
---------- ---------- ----------
Loss before income taxes (3,439,514) (1,996,691) (4,376,164)
Income tax benefit (note 11) (1,287,420) (587,935) (1,298,916)
---------- ---------- ----------
Net loss $ (2,152,094) $ (1,408,756) $ (3,077,248)
========== ========== ==========
Net loss per share (note 2):
Basic $ (.29) $ (.19) $ (.40)
========== ========== ==========
Diluted $ (.29) $ (.19) $ (.40)
========== ========== ==========
Weighted average common and common
equivalent shares:
Basic 7,474,371 7,482,586 7,756,815
========== ========== ==========
Diluted 7,474,371 7,482,586 7,756,815
========== ========== ==========
See accompanying notes to consolidated financial statements.
40
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
Shares Amount Earnings Income (loss) Equity
------ -------- -------- ------------- ------------
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 on
investments - - - 54,554 54,554
Comprehensive loss - - - - (2,097,540)
Exercise of stock options (note 10) 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) on
investments - - - (80,862) (80,862)
Comprehensive loss - - - - (1,500,936)
Exercise of stock options (note 10) 85,425 487,330 - - 487,330
Tax effect of exercises of nonqualified
stock options (notes 10 and 11) - 102,322 - - 102,322
--------- ---------- ---------- --------- ----------
Balance at December 31, 1999 7,560,296 25,780,231 11,771,478 (37,626) 37,514,083
--------- ---------- ---------- --------- ----------
Net loss - - (3,077,248) - (3,077,248)
Foreign currency translation
adjustment - - - (80,788) (80,788)
Unrealized holding gain on
investments - - - 26,255 26,255
Comprehensive loss - - - - (3,131,781)
Exercise of stock options and
issuance of restricted stock(note 10) 300,570 1,875,299 - - 1,875,299
Tax effect of exercises of nonqualified
stock options (notes 10 and 11) - 489,845 - - 489,845
--------- ---------- ---------- --------- ----------
Balance at December 31, 2000 7,860,866 $28,145,375 $8,694,230 $ (92,159) $36,747,446
========== =========== ========== ========= ===========
See accompanying notes to consolidated financial statements.
41
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ending December 31, 1998, 1999 and 2000
1998 1999 2000
---- ---- ----
Cash flows from operating activities:
Net loss $(2,152,094) $(1,408,756) $(3,077,248)
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Depreciation and amortization 1,081,987 1,318,450 1,665,853
Equity in losses of Affiliate - 24,000 215,834
Net deferred income taxes (838,044) (742,737) (1,843,874)
Tax benefit from exercise of
nonqualified stock options - 102,322 489,845
Changes in assets and liabilities:
Accounts receivable 5,590,822 811,283 (2,514,401)
Inventories 3,671,297 (1,978,308) (7,593,276)
Prepaid expenses and other
current assets (15,866) 56,315 (106,651)
Refundable income taxes 3,730,585 63,378 -
Accounts payable and accrued
expenses (2,877,649) (911,873) 4,766,116
---------- ---------- ----------
Net cash provided by (used in)
operating activities 8,191,038 (2,665,926) (7,997,802)
---------- ---------- ----------
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 3,215,329
Investment in affiliates - (300,000) -
Additions to licenses (133,000) (40,000) -
Additions to property, plant and equipment (560,610) (912,400) (1,324,268)
---------- ---------- ----------
Net cash provided by (used in)
investing activities (14,168,108) 4,094,458 1,891,061
---------- ---------- ----------
Cash flows from financing activities:
Exercise of nonqualified stock options 20,312 487,330 1,875,299
---------- ---------- ----------
Net cash provided by financing activities 20,312 487,330 1,875,299
---------- ---------- ----------
Effect of exchange rate changes on cash - ( 21,941) (80,788)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (5,956,758) 1,893,921 (4,312,230)
---------- ---------- ----------
Cash and cash equivalents at beginning of year 11,281,337 5,324,579 7,218,500
---------- ---------- ----------
Cash and cash equivalents at end of year $ 5,324,579 $ 7,218,500 $ 2,906,270
========== ========== ==========
See accompanying notes to consolidated financial statements.
42
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ending December 31, 1998, 1999 and 2000
(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 accounting principles generally accepted in the United States
of America and are stated in US dollars. Any differences between US and
Canadian generally accepted accounting principles 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
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
(g) Goodwill and Impairment of Long-lived Assets
Goodwill resulted from the excess of cost over fair value of net assets
acquired in purchase business combinations and is being amortized on a
straight-line basis over periods of 5 to 10 years. 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. Management performs ongoing business reviews and evaluates
impairment indicators based on qualitative and quantitative factors. If it is
determined that the carrying amount of an asset cannot be fully recovered, an
impairment loss is recognized. The Company periodically 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
43
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(g) Goodwill (continued)
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. An appropriate discount rate, determined through
an analysis of the risks associated with the goodwill, would be applied to the
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.
1998 1999 2000
---- ---- ----
Basic weighted
average shares outstanding 7,474,371 7,482,586 7,756,815
Net effect of dilutive
potential common
shares outstanding, based
on the treasury stock method - - -
--------- --------- ---------
Diluted weighted
average shares outstanding 7,474,371 7,482,586 7,756,815
========= ========= =========
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 744,111, 661,355 and 419,039 shares of common
stock at December 31, 1998, 1999, and 2000, 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 or receipt by customers,
depending on the selling terms with the customer, after persuasive evidence of
the arrangement exits, the selling price is fixed or determinable, and
collectibility is reasonably assured. The Company records provisions for
returns, warranty, and price protection, when the corresponding revenue is
recognized.
(k) Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents,
investment securities, accounts receivable, accounts payable and accrued
expenses. Due to the short term nature of these instruments, the carrying
amount of these financial instruments approximates fair value.
(l) Stock-Based Compensation
The Company accounts for stock based compensation under 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 FASB interpretation No. 44 (FIN 44). 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, if
any, are credited to equity.
(m) Advertising Costs
Advertising costs are expensed as incurred and reported in selling, general,
44
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) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingents assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(o) 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.
(p) Foreign Currencies
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. 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, 1998, 1999 and 2000 foreign currency gains and losses were not material. At
December 31, 2000, the Company's foreign currency-denominated net assets were
not material. The Company has no involvement with derivative financial
instruments.
(3) New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 expresses the view of the SEC staff in applying generally
accepted accounting principles to certain revenue recognition issues. The
Company adopted SAB 101 in the fourth quarter of 2000, and has adjusted
previously reported revenue, cost of revenue, accounts receivable and inventory
balances related to the manner in which the Company had previously accounted
for reserves for sales returns. There was no net impact on the Company's
previously reported gross margins or net income (loss). The Company has
reclassified the balance sheet at December 31, 1999 and the statements of
operations for each of the years in the two-year period ended December 31,
1999. The impact on the Company's balance sheets and statements of operations
is as follows:
Years Ending December 31,
1998 1999
---- ----
Revenues
As previously reported: $ 61,364,385 $ 63,438,427
As restated: 61,894,602 64,088,384
Cost of Revenues
As previously reported: 44,651,448 39,899,952
As restated: 45,181,665 40,549,909
45
December 31, 1999
-----------------
Accounts receivable
As previously reported: 7,324,307
As restated: 5,409,565
Inventory
As previously reported: 12,388,866
As restated: 14,303,607
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133 ").
This statement was amended by the issuance of SFAS 137, "Deferral of the
Effective Date of FASB Statement No. 133", which changed the effective date of
SFAS 133 to all fiscal years beginning after June 15, 2000 (fiscal 2001 for the
Company) and requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if so, the type of hedge transaction. We anticipate that the adoption of
SFAS 133 will not have a material impact on our financial position or results
of operations.
FASB Emerging Issues Task Force Issue No. 00-14 "Accounting for Certain Sales
Incentives" addresses the recognition, measurement, and income statement
classification for certain types of sales incentives. The application of the
guidance in Issue No. 00-14 will result in a change in the manner in which the
Company records certain types of discounts and sales and marketing incentives
that are provided to its customers. The Company has historically recorded
certain types of these incentives as marketing expenses. Under Issue No. 00-14,
the Company will record these incentives as reductions of revenue. The Company
is required to and will adopt the guidance outlined in Issue No. 00-14 for the
second fiscal quarter of 2001, at which time prior period reported amounts will
be reclassified to conform to the new presentation. The pro forma disclosures
below reflect the reclassification of both previously reported as well as
current year reported revenues and sales and marketing expenses based on the
application of the guidance in Issue No. 00-14. There is no current year or
historical impact on the Company's balance sheets.
Years ending December 31,
1998 1999 2000
---- ---- ----
Revenues:
As previously reported $ 61,894,602 $ 64,088,384 $ 59,750,187
As reclassified 59,807,534 62,228,216 57,708,456
Sales and Marketing
expenses:
As previously reported 11,800,948 13,571,083 12,713,756
As reclassified 9,713,880 11,710,915 10,672,025
46
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) Inventories
Inventories consist of the following at December 31:
1999 2000
---- ----
Raw materials $ 6,590,232 $ 10,335,673
Work in process 1,175,463 5,101,037
Finished goods 6,537,912 6,460,173
---------- ----------
$ 14,303,607 $ 21,896,883
========== ==========
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31:
Estimated
1999 2000 useful lives
---- ----
Land $ 309,637 $ 309,637 -
Buildings and improvements 2,255,688 2,491,667 31.5
years
Leasehold improvements 470,777 470,777 5 years
Computer hardware and software 2,673,724 3,251,335 3 years
Machinery and equipment 1,217,211 1,597,355 5 years
Molds, tools and dies 1,300,991 1,422,073 5 years
Office furniture and fixtures 250,360 259,811 5 years
--------- ---------
8,478,388 9,802,655
--------- ---------
Less accumulated depreciation 4,266,467 5,222,021
--------- ---------
$ 4,211,921 $ 4,580,634
========= =========
(6) Lease Commitments
In August 1996 the Company entered into a five-year lease for a manufacturing
and warehousing facility in Boston, Massachusetts. The Company recently
extended the lease for an additional five years at a market value to be
negotiated or if that is unsuccessful, determined by appraisal. In March of
1999, the Company assumed a ten-year lease for an office facility in Camberley,
United Kingdom. This is a non-cancelable ten-year lease that commenced in
February 1998. The Company also subleases 4,500 square feet as a
tenant-at-will, which it uses primarily as a technical support facility, in a
building located in Boca Raton, Florida. Total rent expense, under
non-cancelable operating leases, was $334,469, $420,086, and $463,693 for the
years ending December 31, 1998, 1999, and 2000, respectively. Future minimum
rental payments, excluding executory costs, required or estimated under these
operating leases are as follows:
Year Total
2001 $ 630,072
2002 776,438
2003 760,030
2004 772,918
2005 774,090
2006-2008 $ 691,376
(7) 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,
47
(Continued)
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
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
=========
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.
(8) Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, are as follows:
1998 1999 2000
---- ---- ----
Net loss $ (2,152,094) $ (1,408,756) $ (3,077,248)
Foreign currency translation
adjustment - (11,318) (80,788)
Net unrealized holding gain (loss)
on investment securities 54,554 (80,862) 26,255
--------- --------- ---------
Comprehensive loss $ (2,097,540) $ (1,500,936) $ (3,131,781)
========= ========= =========
48
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(9) Credit Lines
The Company has a $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 is
secured by all of the assets of the Corporation except the real estate, and
contains certain financial and other covenants. The Company is in full
compliance with all covenants. No amounts were outstanding under the lines of
credit at December 31, 2000.
(10) Stock Option Plans
At December 31, 2000 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 are 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:
Weighted average
Number of shares exercise price
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
Granted 377,000 7.43
Exercised (196,181) 7.09
Expired (254,285) 10.67
--------- -----
Balance at December 31, 2000 958,001 $ 6.40
========= =====
The following table summarizes information about fixed stock options under the
Employee Stock Option Plan outstanding on December 31, 2000:
49
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- ---------------- ------------ ----------------
$4.13 to $5.25 385,806 0.70 $ 4.47 363,306 $ 4.48
5.25 to 7.00 107,900 2.40 6.40 4,075 6.88
7.00 to 8.63 464,295 1.30 8.00 191,075 8.16
------------- ------- ---- ---- ------- ----
$4.13 to $8.63 958,001 1.20 years $ 6.40 558,456 $ 5.76
============= ======= ==== ==== ======= ====
The Company recognized a tax benefit of $102,322 and $489,845 in 1999 and 2000,
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 is 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 is 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 expires two years from the grant date. Options
outstanding under this plan are as follows:
Weighted average
Number of shares exercise price
---------------- ----------------
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
Granted 36,000 7.69
Exercised (42,000) 5.99
Expired (6,000) 7.75
------ -----
Balance at December 31, 2000 60,000 $ 6.76
====== =====
The following table summarizes information about fixed stock options under the
Directors Plan on December 31, 2000:
(Continued)
50
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- ---------------- ------------ ----------------
$4.38 to $5.25 6,000 0.03 $ 4.38 6,000 $ 4.38
5.25 to 7.00 36,000 0.90 6.23 18,000 5.71
7.00 to 8.63 18,000 1.00 8.63 18,000 8.63
------------- ------- ---- ---- ------- ----
$4.38 to $8.63 60,000 .9 years $ 6.76 42,000 6.77
============= ======= ==== ==== ======= ====
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 2000 the Board of Directors increased the
authorized number of shares available for grant under the 1998 Plan from
600,000 to 950,000 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 100,000 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:
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
Granted 514,650 6.36
Exercised (42,050) 4.27
Expired (149,975) 5.01
------- ----
Balance at December 31, 2000 650,675 $ 5.74
======= ====
(Continued)
51
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table summarizes information about fixed stock options under the
1998 Plan outstanding on December 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 3.31 to $ 3.50 68,000 3.00 $ 3.31 - $ -
3.50 to 5.25 180,675 1.40 4.25 93,150 4.25
5.25 to 7.00 257,500 2.50 5.83 - -
7.00 to 8.75 98,500 2.10 7.94 1,050 7.94
8.75 to 10.00 46,000 2.10 10.00 - -
--------------- ------- ---- ----- ------ -----
$ 3.31 to $ 10.00 650,675 2.1 years $ 5.74 94,200 $ 4.28
=============== ======= ========= ==== ====== ==== -
On December 31, 2000 there were 1,027,270 additional shares available for grant
under all three stock option plans. The per share weighted-average fair value
of stock options granted during 1998, 1999, and 2000 was $3.70, $4.33 and
$6.84, respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 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; 2000 - expected dividend yield 0.0%, risk-free interest rate of 5.90%,
volatility 110% and an expected life of 3.0 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 loss and basic and diluted net loss per share would have been
reduced to the pro forma amounts indicated below:
1998 1999 2000
---- ---- ----
Net loss As reported $ (2,152,094) $ (1,408,756) $ (3,077,248)
Pro forma (2,883,787) (1,869,478) (3,914,789)
Net loss per share As reported-basic $ (.29) $ (.19) $ (.40)
Pro forma-basic (.39) (.25) (.50)
As reported-diluted $ (.29) $ (.19) $ (.40)
Pro forma-diluted (.39) (.25) (.50)
(11) Income Taxes
Income tax benefit attributable to loss from operations consists of:
Current Deferred Total
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)
========= ========= ===========
52
ZOOM TELEPHONICS, INC. AND
SUBSIDIARY (Continued)
Notes to Consolidated Financial Statements
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)
======= ========= =========
Year ending December 31, 2000:
US federal $ 48,160 $ (1,539,591) $(1,491,431)
State and local - 192,515 192,515
------- ----------- -----------
$ 48,160 $ (1,347,076) $(1,298,916)
======= =========== ===========
Income tax benefit was $1,287,420, $587,935 and $1,298,916 for the years ending
December 31, 1998, 1999 and 2000, respectively, and differed from the amounts
as computed by applying the US federal income tax rate of 34% to pretax loss as
a result of the following:
1998 1999 2000
---- ---- ----
Computed "expected" US tax benefit $ (1,169,435) $ (678,980) $ (1,487,896)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit (114,824) (78,862) 127,061
Other, net (3,161) 169,907 61,919
--------- ------- ---------
$ (1,287,420) $ (587,935) $ (1,298,916)
========= ======= =========
Total income tax benefit was allocated as follows:
1998 1999 2000
---- ---- ----
Loss from operations $ (1,287,420) $ (587,935) $ (1,298,916)
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial statement purposes - (102,322) (489,845)
--------- ------- ---------
$ (1,287,420) $ (690,257) $ (1,788,761)
========= ======= =========
The tax effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 1998, 1999,
and 2000 are presented below:
1998 1999 2000
---- ---- ----
Deferred tax assets:
Inventories, primarily
non-deductible reserves $ 1,186,445 $ 1,832,101 $ 1,830,940
Accounts receivable, primarily
returns and allowances 1,276,054 645,517 534,204
Accrued expenses, principally
provisions not currently
deductible 234,473 367,761 392,011
Net operating loss carryforwards
and credits 316,558 1,542,861 3,697,196
Other 212,703 350,846 525,493
--------- --------- ---------
Total current gross deferred tax assets 3,226,233 4,739,086 6,979,844
--------- --------- ---------
Less valuation allowance - (770,116) (1,167,000)
--------- --------- ---------
Total gross deferred tax assets $ 3,226,233 $ 3,968,970 $ 5,812,844
========= ========= =========
Deferred tax liability:
Property, plant and equipment,
principally due to differences in
depreciation - - -
--------- --------- ---------
Net deferred tax assets $ 3,226,233 $ 3,968,970 $ 5,812,844
========= ========= =========
(Continued)
53
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
On December 31, 2000 the Company has federal and state net operating loss
carryforwards of approximately $5,597,447 and $17,564,732, 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.
(12) Significant Customers
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. Two customers accounted for
approximately 15% and 11% of net sales for the year ending December 31, 2000.
On December 31, 1999, two customers comprised approximately 29% of net accounts
receivable. On December 31, 2000, two customers comprised approximately 48% of
net accounts receivable.
(13) Investment in Affiliates
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. In May 2000 the
LLC converted to a "C" corporation. As a result of the recognition of the
Company's share of equity in losses of the affiliate, the investment balance as
of December 31, 2000 has been reduced to $60,166.
(14) Supplemental Disclosure of Cash Flow Information
1998 1999 2000
---- ---- ----
Cash paid during year for interest $ - $ - $ -
========= ========= =========
Cash paid during year for income taxes $ - $ - $ -
========= ========= =========
The tax benefit of the exercise of stock options resulted in increases to common stock
of $102,322 in 1999 and $ 489,845 in 2000.
(15) Dependence on Key Suppliers and Contract Manufacturers
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. In
1999, the Company purchased substantially all of its modem chipsets from
Lucent. In 2000, the Company purchased dial-up modem chipsets exclusively from
both Agere Systems (formerly Lucent) and Conexant Systems (formerly Rockwell).
(Continued)
54
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
A substantial percentage of the Company's manufacturing in 2000 was done by a
contract manufacturer, Vtech Communications LTD ("Vtech"); the loss of Vtech's
services or a material adverse change in Vtech's business or in our
relationship with Vtech could materially and adversely harm the Company's
business.
(16) Segment and Geographic Information
The Company's operations are classified into one reportable segment.
Substantially all of the Company's operations and long-lived assets reside
primarily in the United States. The Company's domestic net sales and export
sales to Europe and other international locations for 1998, 1999, and 2000 were
comprised as follows:
1998 % of Total 1999 % of Total 2000 % of Total
---- ---------- ---- ---------- ---- ----------
North America $ 48,385,279 78% $ 45,624,737 71% $ 42,957,055 72%
International 13,509,323 22% 18,463,647 29% 16,793,132 28%
---------- --- ---------- --- ---------- ---
Total $ 61,894,602 100% $ 64,088,384 100% $ 59,750,187 100%
========== === ========== === ========== ===
(17) Retirement Plan
The Company established a 401(k) retirement savings plan for employees in
January 1996. Under the provisions of the plan, the Company matches 25% of an
employee's contribution, up to a maximum of $350 per employee per year. Total
Company contributions in 1998, 1999 and 2000 were approximately $46,151,
$56,605, and $55,314, respectively.
(18) Subsequent Events
On January 10, 2001, the Company obtained a mortgage for $6 million on the real
estate property located at 201 and 207 South Street, Boston, Massachusetts. This
is a 20 year direct reduction mortgage. The interest rate is fixed for one
year, based on the one year Federal Home Loan Bank rate plus 2.5 % per annum.
The rate is adjusted on January 10th of each calendar year commencing on
January 10, 2002. The current rate of interest as of December 31, 2000 was
7.76%.
55
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(19) Selected Quarterly Financial Information (in thousands, unaudited)
The following table sets forth selected quarterly financial for the years ended
December 31, 1999 and 2000. The operating results for any given quarter are not
necessarily indicative of results for any future period.
Fiscal 1999 Quarter Ending Fiscal 2000 Quarter Ending
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept.30 Dec. 31
------- ------- -------- ------- ------- ------- ------- -------
Net sales $12,548 $15,634 $18,491 $17,415 $14,033 $13,267 $16,178 $16,272
Costs of goods sold 8,487 9,766 11,410 10,887 9,652 8,682 9,992 11,078
------ ------ ------ ------ ------ ------ ------ ------
Gross profit 4,061 5,868 7,081 6,528 4,381 4,585 6,186 5,194
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling 2,499 3,719 3,641 3,712 2,943 2,852 3,540 3,379
General and administrative 1,375 1,636 1,620 1,645 1,346 1,454 1,601 1,827
Research and development 1,504 1,806 1,546 1,569 1,591 1,814 1,256 1,588
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses 5,378 7,161 6,807 6,926 5,880 6,120 6,397 6,794
------ ------ ------ ------ ------ ------ ------ ------
Operating income(loss) (1,317) (1,293) 274 (398) (1,499) (1,535) (211) (1,600)
Other income, net 278 116 97 246 115 168 136 50
Income (loss) before
income taxes (benefit) (1,039) (1,177) 371 (152) (1,384) (1,367) (75) (1,550)
Income tax (benefit) expense (349) (458) 276 (57) (443) (430) (25) (401)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) $ (690) $ (719) $ 95 $ (95) $ (941) $ (937) $ (50) $(1,149)
====== ====== ====== ====== ====== ====== ====== ======
Net loss per common share:
Basic $ (0.09) $ (0.10) $ 0.01 $ (0.01) $ (0.12) $ (0.12) $ (0.01) $ (0.15)
Diluted $ (0.09) $ (0.10) $ 0.01 $ (0.01) $ (0.12) $ (0.12) $ (0.01) $ (0.15)
Weighted average common
And common equivalent
Shares:
Basic 7,475 7,475 7,475 7,505 7,640 7,745 7,799 7,860
Diluted 7,475 7,475 7,541 7,505 7,640 7,745 7,799 7,860
56
EXHIBIT INDEX
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 Zoom's Registration
Statement on Form S-3 (File No. 333-38950) filed with the Commission on
June 9, 2000 (the "Registration Statement on Form S-3"). *
3.2 By-Law No. 1 of Zoom Telephonics, Inc., filed as Exhibit 3.2 to the
Registration Statement on Form S-3.*
3.3 By-Law No. 2 of Zoom Telephonics, Inc., filed as Exhibit 3.3 to the
Registration Statement on Form S-3. *
**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 Loan and Security Agreement between Zoom Telephonics, Inc. and Fleet
Capital Corporation, filed as Exhibit 10.1 to the Quarterly Report on Form
10-Q for the fiscal quarter ending June 30, 2000 (the "June 2000 form
10-Q").*
10.4 Revolving Promissory Note issued in favor of Fleet Capital Corporation,
filed as Exhibit 10.2 to the June 2000 10-Q.*
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 Letter Agreement between Zoom and an executive officer, filed as Exhibit
10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ending
September 30, 2000.*
**10.8 Employment Agreement, filed as Exhibit 10.9 to the 1997 Form 10-K. *
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.
* In accordance with Rule 12b-32 under the Securities Exchange Act of 1934,
as amended, reference is made to the documents previously filed with the
Securities and Exchange Commission, which documents are hereby
incorporated by reference.
** Compensation Plan or Arrangement.
Exhibit 21
Subsidiaries
Zoom Telephonics, Inc., a Delaware corporation
Exhibit 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 7, 2001, included the
related financial statement schedule for each of the years in the three-year
period ended December 31, 2000, 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. 333-75575, and No. 333-47188) on
Form S-8 and No. 333-38590 on Form S-3 of Zoom Telephonics, Inc., of our report
dated February 7, 2001, relating to the consolidated balance sheets of Zoom
Telephonics, Inc. and subsidiary as of December 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss and cash flows and related schedule for each of the years in
the three-year period ended December 31, 2000, which report appears in the
December 31, 2000 annual report on Form 10-K of Zoom Telephonics, Inc.
KPMG LLP
Boston, Massachusetts
March 30, 2001
Schedule II
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
Years ending December 31, 1998, 1999 and 2000
Balance at Charged Balance
Beginning (Credited) to Amount at end
Description of year Expense Other written off of year
-------- ------- ----- ----------- -------
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 4,126,554 9,929,379 - 10,542,648 3,513,285
COOP advertising and other
allowances 1,713,059 3,268,744 - 2,614,754 2,367,049
--------- --------- -------- ---------- ---------
Year ending December 31, 1998 $ 7,613,121 $17,172,105 $ - $16,532,777 $ 8,252,449
========= ========== ======== ========== =========
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 3,513,285 5,893,014 - 6,472,280 2,934,019
COOP advertising and other
allowances 2,367,049 4,714,611 - 4,853,437 2,228,223
--------- ---------- ------- ---------- ---------
Year ending December 31, 1999 $ 8,252,449 $12,549,876 $ 761,901 $14,793,635 $ 6,770,591
========= ========== ======= ========== =========
Reserve for doubtful accounts $ 958,663 $ (43,608) - $ 560,849 $ 354,206
Reserve for price protection 649,686 235,651 - 686,588 198,749
Reserve for sales returns 2,934,019 7,532,526 - 9,401,130 1,065,415
COOP advertising and other
allowances 2,228,223 6,566,840 - 7,285,978 1,509,085
--------- --------- ------- ---------- ---------
Year ending December 31, 2000 $ 6,770,591 $14,291,409 $ - $17,934,545 $ 3,127,455
========= ========== ======= ========== =========
(a) Represents allowance for doubtful accounts of Hayes Microcomputer Products,
Inc. as of March 9, 1999.
EXHIBIT B
FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2001
B-1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- --------------
Commission File Number 0-18672
ZOOM TELEPHONICS, INC.
----------------------
(Exact Name of Registrant as Specified in its Charter)
Canada 04-2621506
------ ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
207 South Street, Boston, Massachusetts 02111
--------------------------------------- -----
(Address of Principal Executive Offices in the U.S.) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 423-1072
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
The number of shares outstanding of the registrant's Common Stock, No Par Value,
as of November 13, 2001 was 7,860,866 shares.
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 3
Consolidated Statements of Operations for the Three
Months and Nine Months Ending September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the Nine
Months Ending September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 14
Item 3. Qualitative and Quantitative Disclosures About
Market Risk 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
PART I - FINANCIAL INFORMATION
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 2001 December 31, 2000
(Unaudited) (Audited)
----------- ---------
Assets
Current assets:
Cash and cash equivalents $ 5,823,527 $ 2,906,270
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of $2,481,740 at
September 30, 2001 and $3,127,455 at December 31, 2000 7,316,349 7,923,967
Inventories, net 12,857,141 21,896,883
Net deferred tax assets 2,012,844 5,812,844
Prepaid expenses and other current assets 986,347 678,271
------------ ------------
Total current assets 28,996,208 39,218,235
------------ ------------
Property, plant and equipment, net 4,346,212 4,580,634
Goodwill, net of accumulated amortization of $2,444,122 at
September 30, 2001 and $1,827,459 at December 31, 2000 2,159,561 3,076,224
Other assets 24,736 84,902
------------ ------------
Total assets $ 35,526,717 $ 46,959,995
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 136,535 $ --
Accounts payable 3,860,508 7,428,832
Accrued expenses 2,048,671 2,414,917
------------ ------------
Total current liabilities 6,045,714 9,843,749
------------ ------------
Long-term debt 5,780,070 --
Other non-current liabilities 283,665 368,800
------------ ------------
Total liabilities 12,109,449 10,212,549
------------ ------------
Stockholders' equity:
Common stock, no par value. Authorized 25,000,000 shares;
issued and outstanding 7,860,866 shares at September 30, 2001
and at December 31, 2000 28,220,255 28,145,375
Retained earnings (accumulated deficit) (4,667,458) 8,694,230
Accumulated other comprehensive loss (135,529) (92,159)
------------ ------------
Total stockholders' equity 23,417,268 36,747,446
------------ ------------
Total liabilities and stockholders' equity $ 35,526,717 $ 46,959,995
============ ============
See accompanying notes to consolidated financial statements.
3
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ending Nine Months Ending
------------------- ------------------
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $ 12,317,900 $ 16,177,255 $ 33,408,216 $ 43,477,888
Costs of goods sold 8,889,253 9,992,056 26,855,076 28,326,408
------------ ------------ ------------ ------------
Gross profit 3,428,647 6,185,199 6,553,140 15,151,480
Operating expenses:
Selling 2,400,686 3,540,337 7,254,360 9,334,961
General and administrative 1,433,023 1,600,510 4,571,519 4,400,908
Research and development 1,334,617 1,255,801 4,155,051 4,661,511
------------ ------------ ------------ ------------
Total operating expenses 5,168,326 6,396,648 15,980,930 18,397,380
------------ ------------ ------------ ------------
Operating loss (1,739,679) (211,449) (9,427,790) (3,245,900)
Other income (expense), net 22,520 136,181 (133,898) 419,250
------------ ------------ ------------ ------------
Loss before income tax expense (benefit) (1,717,159) (75,268) (9,561,688) (2,826,650)
Income tax expense (benefit) 3,800,000 (25,442) 3,800,000 (898,412)
------------ ------------ ------------ ------------
Net loss $ (5,517,159) $ (49,826) $(13,361,688) $ (1,928,238)
============ ============ ============ ============
Net loss per common share:
Basic $ (.70) $ (.01) $ (1.70) $ (.25)
============ ============ ============ ============
Diluted $ (.70) $ (.01) $ (1.70) $ (.25)
============ ============ ============ ============
Weighted average common and common equivalent shares:
Basic 7,860,866 7,798,674 7,860,866 7,642,795
============ ============ ============ ============
Diluted 7,860,866 7,798,674 7,860,866 7,642,795
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ending September 30,
--------------------------------
2001 2000
--------------- ---------------
Cash flows from operating activities:
Net loss $(13,361,688) $(1,928,238)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,613,269 1,162,025
Amortization of restricted stock 74,880 --
Deferred income taxes 3,800,000 (914,187)
Equity in losses of affiliate 135,165 120,000
Changes in operating assets and liabilities:
Accounts receivable, net 607,618 (2,907,634)
Inventories, net 9,039,742 (4,167,664)
Prepaid expenses and other assets (308,076) 62,860
Accounts payable and accrued expenses (3,934,570) 2,702,806
------------ -----------
Net cash used in operating activities (2,333,660) (5,870,032)
------------ -----------
Cash flows from investing activities:
Sale of investment securities 53 1,162,757
Investment in affiliate (74,999) --
Additions to property, plant and equipment (547,319) (993,518)
------------ -----------
Net cash provided (used in) by investing activities (622,265) 169,239
------------ -----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 6,000,000 --
Principal payments on long-term debt (83,395) --
Proceeds from exercise of nonqualified stock options -- 1,807,242
------------ -----------
Net cash provided by financing activities 5,916,605 1,807,242
------------ -----------
Effect of exchange rate changes on cash (43,423) (225,490)
------------ -----------
Net increase (decrease) in cash and cash equivalents 2,917,257 (4,119,041)
Cash and cash equivalents, beginning of period 2,906,270 7,218,500
------------ -----------
Cash and cash equivalents, end of period $ 5,823,527 $ 3,099,459
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 310,956 $ --
============ ===========
Income taxes $ -- $ --
============ ===========
See accompanying notes to consolidated financial statements.
5
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
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 footnote 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, 2000 included in the Company's 2000 Annual Report on Form 10-K.
The consolidated balance sheet as of September 30, 2001, the
consolidated statements of operations for the three months and nine months
ending September 30, 2001 and 2000, and the consolidated statements of cash
flows for the nine months ending September 30, 2001 and 2000 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, 2001.
(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 Nine Months Ending
September 30, September 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Basic:
Net loss $(5,517,159) $ (49,826) $(13,361,688) $ (1,928,238)
Weighted average shares outstanding
7,860,866 7,798,674 7,860,866 7,642,795
----------- ----------- ------------ -------------
Net loss per share $ (.70) $ (.01) $ (1.70) $ (.25)
=========== =========== ============ =============
Diluted:
Net loss $(5,517,159) $ (49,826) $(13,361,688) $ (1,928,238)
Weighted average shares outstanding
7,860,866 7,798,674 7,860,866 7,642,795
Net effect of dilutive stock options
based on the treasury stock method
using average market price -- -- -- --
Weighted average shares outstanding
7,860,866 7,798,674 7,860,866 7,642,795
----------- ----------- ------------ -------------
Net loss per share $ (.70) $ (.01) $ (1.70) $ (.25)
=========== =========== ============ =============
6
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 24,486 and 505,381 shares of common stock at
September 30, 2001 and 2000, respectively, were outstanding, but not included in
the computation of diluted earnings per share as their effect would be
antidilutive.
(3) Inventories
Inventories consist of the following:
September 30, 2001 December 31, 2000
------------------ -----------------
Raw materials $ 6,356,085 $10,335,673
Work in process 2,270,140 5,101,037
Finished goods 4,230,916 6,460,173
----------- -----------
$12,857,141 $21,896,883
=========== ===========
(4) Comprehensive Income
Statement of Financial Accounting Standards ("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 (loss) 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 Nine Months Ending
September 30, September 30,
2001 2000 2001 2000
-------------- -------------- ----------- ------------
Net loss $(5,517,159) $ (49,826) $(13,361,688) $(1,928,238)
Foreign currency translation
adjustment 132,536 (266,313) (43,423) (225,490)
Net unrealized holding gain on
investment securities -- 20,765 53 30,825
----------- --------- ------------ -----------
Comprehensive loss $(5,384,623) $(295,374) $(13,405,058) $(2,122,903)
=========== ========= ============ ===========
(5) Bank Credit Facility and Mortgage
At September 30, 2001 we had a $5 million line of credit facility. We
have not borrowed under this line, so as of September 30, 2001 and the date of
this report, no amounts were outstanding under this facility. The line of credit
was contracted to expire on April 1, 2003. However, our lender has notified us
on October 22, 2001 that it has terminated our line because it considers an
event of default to have occurred as a result of our operating performance. We
have contested the lender's default assertion and we are conferring with an
outside attorney regarding this matter. A potential alternative lender with
which we were negotiating a replacement facility notified us that in light of
current market conditions and the economic uncertainties following the September
11 attack on New York, it was withdrawing its commitment to provide us with such
funding. We are in discussions with another potential alternative lender to
obtain a replacement facility. We cannot assure that this replacement facility
will be available on favorable terms, if at all. At the date of this report
(November 14, 2001) we have in excess of $4.6 million in cash and cash
equivalents with no borrowings other than the 20-year mortgage described below.
7
On January 10, 2001 the Company obtained a mortgage for $6 million on
the real estate property located at 201 and 207 South Street, Boston,
Massachusetts. This is a 20-year direct reduction mortgage. The interest rate is
fixed for one year, based on the one-year Federal Home Loan Bank rate plus 2.5%
per annum. The rate is adjusted on January 10th of each calendar year commencing
on January 10, 2002. The current rate of interest as of September 30, 2001 was
7.76% and interest expense for the third quarter and nine months ending
September 30, 2001 was $121,331 and $336,761, respectively.
(6) Income Taxes
The Company recorded an increase in its net deferred tax asset valuation
allowance of $3.8 million in the third quarter of 2001. The increase reflects
management's assessment, based on historical financial results and current
economic conditions, that based on the "more likely than not" criteria of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", the Company may not be able to recover a portion of its net deferred tax
assets. The Company's remaining net deferred tax assets balance at September 30,
2001 is based on feasible tax planning strategies available to the Company at
this time. Income tax expense was $3.8 million for the three and nine months
ending September 30, 2001, compared to an income tax benefit of $25,442 and
$898,412 in the three and nine months ending September 30, 2000, respectively.
(7) Segment and Geographic Information
The Company's operations are classified into one reportable segment.
The Company's domestic net sales and international sales for the three months
and nine months ending September 30, 2001 and 2000, respectively, were comprised
as follows:
Three Months Three Months Nine Months Nine Months
Ending % of Ending % of Ending % of Ending % of
September 30, Total September 30, Total September 30, Total September 30, Total
-------------- ----- -------------- ----- ------------- ----- ------------- -----
2001 2000 2001 2000
---- ---- ---- ----
North America $ 8,291,235 67% $13,056,410 81% $21,705,728 65% $32,059,719 74%
International 4,026,665 33% 3,120,845 19% 11,702,488 35% 11,418,169 26%
----------- --- ----------- --- ----------- --- ----------- ---
Total $12,317,900 100% $16,177,255 100% $33,408,216 100% $43,477,888 100%
=========== === =========== === =========== === =========== ===
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction
with the "Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995, stated below, as well as the risk factors set forth in our Annual
Report on Form 10-K. Readers should also be cautioned that results of any
reported period are often not indicative of results for any future period.
Results of Operations
Our net sales were $12.3 million and our net loss was $5.5 million for
the third quarter ending September 30, 2001 compared to net sales of $16.2
million and a net loss of $50.0 thousand for the third quarter ending September
30, 2000. Our loss per share was $0.70 for the third quarter of 2001 compared to
a loss per share of $0.01 for the third quarter of 2000. Our net sales were
$33.4 million and our net loss was $13.4 million for the nine months ending
September 30, 2001 compared to net sales of $43.5 million and a net loss of $1.9
million for the nine months ending September 30, 2000. The net loss per share
was $1.70 for the nine months ending on September 30, 2001 versus a net loss per
share of $0.25 for the nine months ending September 30, 2000.
Net sales for the quarter ending September 30, 2001 were 23.9% lower
than the prior year's third quarter. Unit volume and average selling price both
declined in our primary revenue product category, dial-up modems. Revenues
declined in our North American non-OEM sales area, and also in our worldwide OEM
sales area. Revenues increased in our International non-OEM sales area,
reflecting increased sales in the U.K., our second largest country market, and
also in Western Europe, where we have a new sales manager.
Net sales for the nine months ending September 30, 2001 were 23.2%
lower than the comparable period in the prior year. Unit volume and average
selling price both declined in our primary revenue product category, dial-up
modems, and revenues declined both inside and outside North America, reflecting
continuing weakness in the dial-up modem market.
The major reason for our $5.5 million higher net loss in Q3 2001 over
Q3 2000 was a $3.8 million income tax expense recorded against our Q3 2001
before-tax loss of $1.7 million. This tax expense resulted from an increase in
our deferred tax asset valuation allowance reserve. See the Income Tax
discussion below.
Our before-tax loss in Q3 2001 was $1.7 million versus a before-tax
loss of $.1 million in Q3 2000. The major reason for the $1.6 million higher
before-tax loss was $2.8 million lower gross profit, partially offset by a
reduction of $1.2 million in operating expenses. Gross profit for the three
months ending September 30, 2001 was $3.4 million, or 27.8% of net sales,
compared to $6.2 million, or 38.2% of net sales, for the three months ending
September 30, 2000. The $2.8 million gross profit decrease was due to
lower sales volume and selling prices, which was partially offset by reduced
material costs and manufacturing expenses, and also due to a $.7 million higher
inventory valuation write-down reflecting lower of cost or market tests applied
to our inventory of broadband and wireless products. The write-down resulted
from both our low sales for these products and the industry decline in component
and finished goods prices for these categories.
9
The major reasons for our $11.4 million higher net loss in the nine
months ending September 30, 2001 versus the nine months ending September 30,
2001 was $8.6 million lower gross profit and $4.7 million higher income tax
expense, partially offset by a reduction of $1.9 million in operating expenses
and other income. Gross profit as a percent of net sales decreased to 19.6% for
the nine months ending September 30, 2001, compared to 34.8% for the nine months
ending September 30, 2000. The $8.6 million decrease was due to lower sales
volume and selling prices, which was partially offset by reduced material costs
and manufacturing expenses, and also due to a $3.4 million higher inventory
valuation write-down, primarily reflecting lower of cost or market tests applied
to our inventory of broadband and wireless products. The write-down resulted
from both our low sales for these products and the industry decline in component
and finished goods prices for these categories.
In order to reduce expenses, we have reduced our worldwide staff,
across all functional areas, from 330 employees on December 31, 2000 to 226
employees on September 30, 2001. We have also implemented a temporary wage
freeze and controls on discretionary spending.
Selling expenses in the third quarter ending September 30, 2001
decreased in dollars to $2.4 million or 19.5% of net sales from $3.5 million or
21.9% of net sales in the third quarter ending September 30, 2000. The dollar
decrease was mainly due to reduced advertising and promotion expense, primarily
for cooperative advertising programs by resellers of our modems, reduced
commissions, and outside services.
Selling expenses for the nine months ending September 30, 2001
decreased in dollars to $7.3 million or 21.7% of net sales from $9.3 million or
21.5% of net sales in the nine months ending September 30, 2000. The dollar
decrease was mainly due to reduced advertising and promotion expense, primarily
for cooperative advertising programs by resellers of our modems, reduced
commissions, and reduced selling expenses in our U.K. office.
General and administrative expenses were $1.4 million or 11.6% of net
sales in the third quarter ending September 30, 2001 compared to $1.6 million or
9.9% of net sales in the third quarter ending September 30, 2000. The dollar
decrease was primarily the result of reduced personnel costs, legal expenses,
and other operating expenses. The expense decreases were partially offset by a
$.3 million expense increase from the write-down of goodwill associated with a
1996 acquisition.
General and administrative expenses for the nine months ending
September 30, 2001 increased in dollars to $4.6 million or 13.7% of net sales
from $4.4 million or 10.1% of net sales in the nine months ending September 30,
2000. The dollar increase was predominantly the result of the $.3 million
expense increase from the write-down of goodwill associated with a 1996
acquisition, increased bad debt expense, higher legal fees, and higher business
insurance costs. The expense increases were partially offset by reduced
personnel costs and lower general and administrative expenses in our U.K.
office.
Research and development expenses were $1.3 million or 10.8% of net
sales in the third quarter ending September 30, 2001 compared to $1.3 million or
7.8% of net sales in the third quarter ending September 30, 2000.
Research and development expenses for the nine months ending September
30, 2001 decreased in dollars to $4.2 million or 12.4% of net sales from $4.7
million or 10.7% of net sales in the nine months ending September 30, 2000. The
decrease was primarily due to reduced personnel expenses, lower expenses for
industry and government product approvals, reduced expenses for recruiting, and
lower expenses for production materials used in product development.
In the third quarter ending September 30, 2001 other income, net was
approximately $23,000, compared to other income, net of $136,000 in the third
quarter ending September 30, 2000. The reduction in other income, net was
primarily due to the interest expense, which began in February 2001 for the debt
payments made for the $6 million mortgage of our Corporate headquarters, and a
decrease in interest income due to lower interest rates and lower average cash
balances in the third quarter of 2001 compared to the third quarter of 2000.
10
In the nine months ending September 30, 2001 other expense, net was
approximately $134,000, compared to other income, net of $419,000 in the third
quarter ending September 30, 2000 for the reasons stated above.
Income tax expense was $3.8 million for the three and nine months
ending September 30, 2001, compared to an income tax benefit of $25,442 and
$898,412 in the three and nine months ending September 30, 2000, respectively.
The Company recorded an increase in its net deferred tax asset valuation
allowance of $3.8 million in the third quarter of 2001. The increase reflects
management's assessment, based on historical financial results and current
economic conditions, that based on the "more likely than not" criteria of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", the Company may not be able to recover a portion of its net deferred tax
assets. The Company's remaining net deferred tax assets balance at September 30,
2001 is based on feasible tax planning strategies available to the Company at
this time.
Liquidity and Capital Resources
We ended the third quarter of 2001 with stockholders' equity of $23.4
million or $2.97 per share, cash and cash equivalents of $5.8 million, working
capital of $23.0 million, and a current ratio of 4.8.
Operating activities used $2.3 million in cash during the nine months
ending September 30, 2001. Our use of cash included a net loss of $13.4 million,
the reduction of accounts payable by $3.9 million, and the increase of prepaid
expenses and other assets of $0.3 million. These uses were partially offset by
cash and non cash items provided from the reduction of inventory of $9.0
million, a reduction (write-down) in our net deferred income tax asset of $3.8
million, depreciation and amortization of $1.6 million, and a decrease in
accounts receivable of $0.6 million. The reduction of accounts payable reflected
our reduced inventory levels. The decrease in inventories in the first nine
months of 2001 resulted from our reduced inventory purchases following the
inventory buildup in 2000, our $3.4 million inventory valuation write-down
recorded primarily in Q1 2001 and Q3 2001, and the return of inventories to key
suppliers. Our deferred income tax asset was written-down by recording a $3.8
million additional valuation reserve in Q3 2001. Our decrease in accounts
receivable primarily reflected our lower sales volume.
Investing activities used approximately $622,000 in cash during the
nine months ending September 30, 2001. This cash was primarily used to fund the
capital expenditures of $547,000, which consisted primarily of the continuing
improvements to our headquarters building, purchases of computer software and
hardware, and purchases of equipment and tooling. We also made an additional
$75,000 investment in an affiliate. We do not have any significant capital
commitments, and we anticipate that we will continue with modest investments in
equipment and in improvements to our facilities during the year.
During the nine months ending September 30, 2001, we received cash from
financing activities of $6.0 million from the proceeds of a 20-year mortgage of
our headquarters building. Principal on the loan is amortized on a 20-year
basis. The interest rate is adjusted annually in January of each year based on
the one-year Federal Home Loan Bank rate plus 2.5 % per annum. The interest rate
for the current year is 7.76%.
At September 30, 2001, we also had a $5 million line of credit
facility. We have not borrowed under this line, so as of September 30,
2001 and the date of this report, no amounts were outstanding under this
facility. The line of credit was contracted to expire on April 1, 2003. However,
our lender has notified us on October 22, 2001 that it has terminated our line
because it considers an event of default to have occurred as a result of our
operating performance. We have contested the lender's default assertion and we
are conferring with an outside attorney regarding this matter. A potential
alternative lender with which we were negotiating a replacement facility
notified us that in light of current market conditions and the economic
uncertainties following the September 11 attack on New York, it was withdrawing
its commitment to provide us with such funding. We are in discussions with
another potential alternative lender to obtain a replacement facility. We cannot
assure that this replacement facility will be available on favorable terms, if
at all. At the date of this report (November 14, 2001) we have in excess of $4.6
million in cash and cash equivalents with no borrowings other than our 20-year
mortgage. However, if we are not able to reinstate our line or obtain a
replacement facility we may require additional sources of cash to support our
business over the next twelve months.
11
Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 expresses the view of the SEC staff in applying generally
accepted accounting principles to certain revenue recognition issues. We adopted
SAB 101 in the fourth quarter of 2000, and have adjusted previously reported
revenue, cost of revenue, accounts receivable and inventory balances related to
the manner in which we had historically recorded and reported sales returns
reserves. There was no net impact on our previously reported gross margins or
net income (loss). We have reclassified the statement of operations for the
periods ended September 30, 2000 to reflect this change.
FASB Emerging Issues Task Force Issue No. 00-14 "Accounting for Certain
Sales Incentives" addresses the recognition, measurement, and income statement
classification for certain types of sales incentives. The application of the
guidance in Issue No. 00-14 will result in a change in the manner in which the
Company records certain types of discounts and sales and marketing incentives
that are provided to its customers. The Company has historically recorded
certain types of these incentives as marketing expenses. Under Issue No. 00-14,
the Company will record these discounts and incentives as reductions of revenue.
In April 2001, the FASB Emerging Issues Task Force reached a consensus on Issue
No. 00-25 "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products". Issue No.
00-25 addresses whether certain consideration offered by a vendor to a
distributor, including slotting fees, cooperative advertising arrangements and
"buy-down" programs, should be characterized as operating expenses or reductions
of revenue. Issue No. 00-14 and 00-25 are required to be implemented no later
than the first fiscal quarter of 2002, at which time prior period reported
amounts will be reclassified to conform to the new presentation. The pro forma
disclosures below reflect the reclassification of both previously reported as
well as current quarter and the nine month reported revenues and sales and
marketing expenses based on the application of the guidance in Issue No. 00-14
and Issue No. 00-25. There is no current quarter or historical impact on the
Company's balance sheets.
Three Months Ending September 30, Nine Months Ending September 30,
--------------------------------- --------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
As previously reported $12,317,900 $16,177,255 $33,408,216 $43,477,888
As reclassified $11,719,317 $15,706,528 $31,991,512 $41,749,052
Selling expenses:
As previously reported $ 2,400,686 $ 3,540,337 $ 7,254,360 $ 9,334,961
As reclassified $ 1,802,103 $ 3,069,610 $ 5,837,656 $ 7,606,125
12
In June 2001, the FASB issued SFAS No. 141, "Business Combinations"
which addresses the financial accounting and reporting for business combinations
and supersedes Accounting Principles Board (APB) Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Pre-acquisition Contingencies of
Purchased Enterprises." SFAS No. 141 requires that all business combinations be
accounted for by a single method, the purchase method, modifies the criteria for
recognizing intangible assets, and expands disclosure requirements. The
provisions of SFAS No. 141 apply to all business combinations initiated after
June 30, 2001. We do not expect the adoption of SFAS No. 141 will have a
material effect on our results of operations or statements of financial
position.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" which addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets should be accounted for in
financial statements upon their acquisition and after they have been initially
recognized in the financial statements. SFAS No. 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but rather
tested at least annually for impairment, and intangible assets that have finite
useful lives be amortized over their useful lives. SFAS No. 142 provides
specific guidance for testing goodwill and intangible assets that will not be
amortized for impairment. In addition, SFAS No. 142 expands the disclosure
requirements about goodwill and other intangible assets in the years subsequent
to their acquisition. SFAS No. 142 is effective for our fiscal year 2002.
Impairment losses for goodwill and indefinite-life intangible assets that arise
due to the initial application of SFAS No. 142 are to be reported as resulting
from a change in accounting principle. However, goodwill and intangible assets
acquired after June 30, 2001 will be subject immediately to provisions of SFAS
142. We are in the process of determining the impact that adoption will have on
our consolidated financial statements.
Statement of Financial Accounting Standards No. 143, "Accounting For
Asset Retirement Obligations", ("SFAS 143"), issued in June 2001, addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and for the associated retirement
costs. SFAS 143 which applies to all entities that have a legal obligation
associated with the retirement of a tangible long-lived asset is effective for
fiscal years beginning after June 15, 2002. The Company does not expect the
implementation of SFAS 143 to have a material impact on its financial condition
or results of operations.
Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," ("SFAS 144"), issued in August
2001, addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144, which applies to all entities, is
effective for fiscal years beginning after December 15, 2001. We are in the
process of determining the impact that adoption will have on our consolidated
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 consists entirely of
money market funds, which are 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. The 20 year
mortgage of our headquarters building is a variable rate loan with the interest
rate adjusted annually. A 1% change in the interest rate would result in a
decrease or increase of approximately $60,000 of interest expense per year.
"Safe Harbor" Statement under 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 similar expressions which are
predictions of or indicate future events and trends and which do not relate to
historical matters identify forward-looking statements. These statements, which
include statements relating to the sufficiency of Zoom's cash, the availability
of replacement financing, and Zoom's anticipated investments in equipment and
improvements to its facilities, could cause Zoom's actual results to differ
materially from those anticipated. Actual results may be materially different
than those expectations as a result of known and unknown risks, including:
Zoom's ability to obtain additional financing when needed or on favorable terms;
Zoom's incurrence of substantial losses; Zoom's ability to effectively manage
its inventory and changing business; the 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 Zoom; Zoom's dependence on one or a limited number of suppliers for
certain key components; development and market acceptance 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. Except as otherwise required by law, 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) Exhibits
None
(b) No reports on Form 8-K were filed by the Company during the
quarter ending September 30, 2001.
ZOOM TELEPHONICS, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZOOM TELEPHONICS, INC.
Date: November 14, 2001 By: /s/ Frank B. Manning
---------------------------------------------
Frank B. Manning, President
Date: November 14, 2001 By: /s/ Robert Crist
---------------------------------------------
Robert Crist, Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT C
SPECIAL RESOLUTION OF THE SHAREHOLDERS OF
ZOOM CANADA (THE "COMPANY")
TO CONTINUE THE COMPANY INTO THE STATE OF DELAWARE
BE IT RESOLVED as a special resolution of the shareholders of Zoom
Telephonics, Inc. (the "Company") that:
1. The change of domicile of the Company from Canada to the United
States whereby the Company will be domesticated under the laws of the State of
Delaware pursuant to section 388 of the Delaware General Corporation Law (the
"DGCL") and discontinued under the provisions of section 188(7) of the Canada
Business Corporations Act (the "CBCA") be and the same is hereby approved and
authorized and the Company be and it is hereby authorized to apply to the
Secretary of State of the State of Delaware for the purposes of domesticating
the Company under the laws of the State of Delaware pursuant to section 388 of
the DGCL and thereafter apply to the Director under the CBCA for a Certificate
of Discontinuance pursuant to section 188(7) of the CBCA;
2. The Certificate of Incorporation and the Certificate of
Domestication, which are attached as Exhibits "E" and "F", respectively, to the
Proxy Statement/Prospectus of the Company mailed to the shareholders of the
Company for the purposes of the Special Meeting, subject to changes as the
Secretary of State of the State of Delaware may require or as the Board of
Directors of the Company may approve, be and the same are hereby adopted,
approved and authorized;
3. The Bylaws, which are attached as Exhibit "G" to the Proxy
Statement/Prospectus of the Company mailed to the shareholders of the Company
for the purposes of the Special Meeting, be and the same are hereby adopted,
approved and authorized;
4. The directors of the Company may, in their discretion, amend, delay
or abandon the application for continuation of the Company under the Delaware
Law without further approval by the shareholders of the Company; and
5. The President, Executive Vice President and Chief Financial Officer
of the Company be and each of them hereby is acting singly, authorized for and
on behalf of the Company, to do all such acts and things and to execute, deliver
and file all such deeds, documents and other instruments as may be necessary or
desirable to carry out the provisions of this resolution which, without limiting
the generality of the foregoing, shall include the execution and filing with the
Secretary of State of the State of Delaware of the Certificate of Domestication
and the Certificate of Incorporation, the application to the Director under the
CBCA to authorize and approve the Continuance, the application to the Director
under the CBCA for a Certificate of Discontinuance pursuant to section 188(7) of
the CBCA and all other requisite notices and filings in respect of the
domestication required pursuant to applicable laws.
C-1
EXHIBIT D
SECTION 190 OF THE CANADA BUSINESS CORPORATIONS ACT
190. (1) RIGHT TO DISSENT. -- Subject to sections 191 and 241, a holder
of shares of any class of a corporation may dissent if the corporation is
subject to an order under paragraph 192(4)(d) that affects the holder or if the
corporation resolves to
a. amend its articles under section 173 or 174 to add, change or remove
any provisions restricting or constraining the issue, transfer or ownership of
shares of that class;
b. amend its articles under section 173 to add, change or remove any
restriction on the business or businesses that the corporation may carry on;
c. amalgamate otherwise than under section 184;
d. be continued under section 188; or
e. sell, lease or exchange all or substantially all of its property
under subsection 189(3).
(2) FURTHER RIGHT. -- A holder of shares of any class or series of
shares entitled to vote under section 176 may dissent if the corporation
resolves to amend its articles in a manner described in that section.
(3) PAYMENT FOR SHARES. -- In addition to any other right he may have,
but subject to subsection (26), a shareholder who complies with this section is
entitled, when the action approved by the resolution from which he dissents or
an order made under subsection 192(4) becomes effective, to be paid by the
corporation the fair value of the shares held by him in respect of which he
dissents, determined as of the close of business on the day before the
resolution was adopted or the order was made.
(4) NO PARTIAL DISSENT. -- A dissenting shareholder may only claim
under this section with respect to all the shares of a class held by him on
behalf of any one beneficial owner and registered in the name of the dissenting
shareholder.
(5) OBJECTION. -- A dissenting shareholder shall send to the
corporation, at or before any meeting of shareholders at which a resolution
referred to in subsection (1) or (2) is to be voted on, a written objection to
the resolution, unless the corporation did not give notice to the shareholder of
the purpose of the meeting and of his right to dissent.
(6) NOTICE OF RESOLUTION. -- The corporation shall, within ten days
after the shareholders adopt the resolution, send to each shareholder who has
filed the objection referred to in subsection (5) notice that the resolution has
been adopted, but such notice is not required to be sent to any shareholder who
voted for the resolution or who has withdrawn his objection.
(7) DEMAND FOR PAYMENT. -- A dissenting shareholder shall, within
twenty days after he receives a notice under subsection (6) or, if he does not
receive such notice, within twenty days after he learns that the resolution has
been adopted, send to the corporation a written notice containing
a. his name and address;
b. the number and class of shares in respect of which he dissents; and
c. a demand for payment of the fair value of such shares.
(8) SHARE CERTIFICATE. -- A dissenting shareholder shall, within thirty
days after sending a notice under subsection (7), send the certificates
representing the shares in respect of which he dissents to the corporation or
its transfer agent.
D-1
(9) FORFEITURE. -- A dissenting shareholder who fails to comply with
subsection (8) has no right to make a claim under this section.
(10) ENDORSING CERTIFICATE. -- A corporation or its transfer agent
shall endorse on any share certificate received under subsection (8) a notice
that the holder is a dissenting shareholder under this section and shall
forthwith return the share certificates to the dissenting shareholder.
(11) SUSPENSION OF RIGHTS. -- On sending a notice under subsection (7),
a dissenting shareholder cases to have any rights as a shareholder other than
the right to be paid the fair value of his shares as determined under this
section except where
a. a dissenting shareholder withdraws his notice before the corporation
makes an offer under subsection (12),
b. the corporation fails to make an offer in accordance with subsection
(12) and the dissenting shareholder withdraws his notice, or
c. the directors revoke a resolution to amend the articles under
subsection 173(2) or 174(5), terminate an amalgamation agreement under
subsection 183(6) or an application for continuance under subsection 188(6), or
abandon a sale, lease or exchange under subsection 189(9), in which case his
rights as a shareholder are reinstated as of the date he sent the notice
referred to in subsection (7).
(12) OFFER TO PAY. -- A corporation shall, not later than seven days
after the later of the day on which the action approved by the resolution is
effective or the day the corporation received the noticed referred to in
subsection (7), send to each dissenting shareholder who has sent such notice
a. a written offer to pay for his shares in an amount considered by the
directors of the corporation to be the fair value thereof, accompanied by a
statement showing how the fair value was determined; or
b. if subsection (26) applies, a notification that it is unable
lawfully to pay dissenting shareholders for their shares.
(13) SAME TERMS. -- Every offer made under subsection (12) for shares
of the same class or series shall be on the same terms.
(14) PAYMENT. -- Subject to subsection (26), a corporation shall pay
for the shares of a dissenting shareholder within ten days after an offer made
under subsection (12) has been accepted, but any such offer lapses if the
corporation does not receive an acceptance thereof within thirty days after the
offer has been made.
(15) CORPORATION MAY APPLY TO COURT. -- Where a corporation fails to
make an offer under subsection (12), or if a dissenting shareholder fails to
accept an offer, the corporation may, within fifty days after the action
approved by the resolution is effective or within such further period as a court
may allow, apply to a court to fix a fair value for the shares of any dissenting
shareholder.
(16) SHAREHOLDER APPLICATION TO COURT. -- If a corporation fails to
apply to a court under subsection (15), a dissenting shareholder may apply to a
court for the same purpose within a further period of twenty days or within such
further period as a court may allow.
(17) VENUE. -- An application under subsection (15) or (16) shall be
made to a court having jurisdiction in the place where the corporation has its
registered office or in the province where the dissenting shareholder resides if
the corporation carries on business in that province.
(18) NO SECURITY FOR COSTS. -- A dissenting shareholder is not required
to give security for costs in an application made under subsection (15) or (16).
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(19) PARTIES. -- On an application to a court under subsection (15) or
(16),
a. all dissenting shareholders whose shares have not been purchased by
the corporation shall be joined as parties and are bound by the decision of the
court; and
b. the corporation shall notify each affected dissenting shareholder of
the date, place and consequences of the application and of his right to appear
and be head in person or by counsel.
(20) POWERS OF COURT. -- On an application to a court under subsection
(15) or (16), the court may determine whether any other person is a dissenting
shareholder who should be joined as a party, and the court shall then fix a fair
value for the shares of all dissenting shareholders.
(21) APPRAISERS. -- A court may in its discretion appoint one or more
appraisers to assist the court to fix a fair value for the shares of the
dissenting shareholders.
(22) FINAL ORDER. -- The final order of a court shall be rendered
against the corporation in favour of each dissenting shareholder and for the
amount of his shares as fixed by the court.
(23) INTEREST. -- A court may in its discretion allow a reasonable rate
of interest on the amount payable to each dissenting shareholder from the date
the action approved by the resolution is effective until the date of payment.
(24) NOTICE THAT SUBSECTION (26) APPLIES. -- If subsection (26)
applies, the corporation shall, within ten days after the pronouncement of an
order under subsection (22), notify each dissenting shareholder that it is
unable lawfully to pay dissenting shareholders for their shares.
(25) EFFECT WHERE SUBSECTION (26) APPLIES. -- If subsection (26)
applies, a dissenting shareholder, by written notice delivered to the
corporation within thirty days after receiving a notice under subsection (24),
may
a. withdraw his notice of dissent, in which case the corporation is
deemed to consent to the withdrawal and the shareholder is reinstated to his
full rights as a shareholder; or
b. retain a status as a claimant against the corporation, to be paid as
soon as the corporation is lawfully able to do so or, in a liquidation, to be
ranked subordinate to the rights of creditors of the corporation but in priority
to its shareholders.
(26) LIMITATION. -- A corporation shall not make a payment to a
dissenting shareholder under this section if there are reasonable grounds for
believing that
a. the corporation is or would after the payment be unable to pay its
liabilities as they become due, or
b. the realizable value of the corporation's assets would thereby be
less than the aggregate of its liabilities.
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EXHIBIT E
ZOOM DELAWARE PROPOSED CERTIFICATE OF INCORPORATION
CERTIFICATE OF INCORPORATION
OF
ZOOM TECHNOLOGIES, INC.
The undersigned, a natural person, for the purposes of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental hereto, and generally known as the
"Delaware General Corporation Law"), hereby certifies that:
FIRST: The name of the corporation (hereinafter called the "Corporation")
is Zoom Technologies, Inc.
SECOND: The address, including street, number, city, and county, of the
registered office of the Corporation in the State of Delaware is 1209 Orange
Street, Wilmington, New Castle County, Delaware 19801; and the name of the
registered agent of the Corporation in the State of Delaware at such address is
The Corporation Trust Company.
THIRD: The nature of the business and the purposes to be conducted and
promoted by the Corporation, shall be to engage in any lawful business, to
promote any lawful purpose, and to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of the
State of Delaware.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is as follows:
25,000,000 shares of Common Stock, $.01 par value.
FIFTH: The name and mailing address of the incorporator is as follows:
NAME ADDRESS
---- -------
Frank B. Manning c/o Zoom Telephonics, Inc.
207 South Street
Boston, MA 02111
SIXTH: The name and the mailing address of the directors of the Corporation,
each of whom shall serve until the first annual meeting of shareholders and
until his or her successor is elected and qualified, are as follows:
NAME ADDRESS
---- -------
Frank B. Manning c/o Zoom Telephonics, Inc.
207 South Street
Boston, MA 02111
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Peter R. Kramer c/o Zoom Telephonics, Inc.
207 South Street
Boston, MA 02111
Bernard Furman 821 Helen Drive
Hollister, CA 95023
L. Lamont Gordon c/o Sprott Securities
Royal Bank Plaza
South Tower, Suite 2300
Toronto, Ontario M5J 2J2
J. Ronald Woods 16 Killdeer Crescent
Toronto, Ontario M4G 2W8
SEVENTH: The Corporation shall have perpetual existence.
EIGHTH: For the management of the business and for the conduct of the
affairs of the Corporation, and in further definition, limitation and regulation
of the powers of the Corporation and of its directors and of its stockholders or
any class thereof, as the case may be, it is further provided that:
1. The business of the Corporation shall be conducted by the officers of
the Corporation under the supervision of the Board of Directors.
2. The number of directors which shall constitute the whole Board of
Directors shall be fixed by, or in the manner provided in, the Bylaws. No
election of Directors need be by written ballot.
3. The Board of Directors of the Corporation may adopt, amend or repeal
the Bylaws of the Corporation at any time after the original adoption of the
Bylaws according to Section 109 of the General Corporation Law of the State of
Delaware; provided, however, that any amendment to provide for the
classification of directors of the Corporation for staggered terms pursuant to
the provisions of subsection (d) of Section 141 of the General Corporation Law
of the State of Delaware shall be set forth in an amendment to this Certificate
of Incorporation, in an initial By-Law, or in a By-Law adopted by the
stockholders of the Corporation entitled to vote.
4. Notwithstanding any other provision of law, all action required to be
taken by the stockholders of the Corporation shall be taken at a meeting duly
called and held in accordance with law, the Certificate of Incorporation and the
Bylaws, and not by written consent.
NINTH: (a) The Corporation may, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have power
to indemnify under said
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section from and against any and all of the expenses, liabilities or other
matters referred to in or covered by said section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights to which a
person indemnified may be entitled under any By-Law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(b) No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director. Notwithstanding the foregoing sentence, a director shall
be liable to the extent provided by applicable law (i) for breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit. No amendment to or repeal of this paragraph (b) of
this Article Ninth shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of such Director occurring prior to such amendment.
TENTH: From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the Corporation by this
Certificate of Incorporation are granted subject to the provisions of this
Article TENTH.
ELEVENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
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TWELFTH: Nominations for the election of directors at an annual meeting
of the stockholders, or special meeting in lieu of the annual meeting, may be
made by the Board of Directors or by any stockholder entitled to vote in the
election of directors at the meeting. Stockholders entitled to vote in such
election may nominate one or more persons for the election as directors only if
written notice of such stockholder's intent to make such nomination or
nominations has been given either by personal delivery, overnight (receipted)
courier or by United States mail, postage prepaid, to the secretary of the
Corporation not later than one hundred twenty days prior to the anniversary date
of the immediately preceding annual meeting or special meeting in lieu thereof.
Such notice shall set forth: (a) the name and address of the stockholder who
intends to make the nomination and of the persons or person to be nominated; (b)
a representation that the stockholder is a holder of record of stock of the
Corporation and entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder; (d) such other information regarding each nominee proposed by
such stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission; and (e)
the consent of each nominee to serve as a director of the Corporation if so
elected. The presiding officer of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.
THIRTEENTH: The Corporation was first incorporated in British Columbia
under the name 1519 Holdings Ltd. on July 7, 1986 and subsequently changed its
name to Zoom Telephonics, Inc. on October 1, 1987. On June 28, 1991, the
Corporation was continued under the Canada Business Corporations Act by filing
Articles of Continuance under that Act. Simultaneously with the filing of this
Certificate of Incorporation, the Corporation has filed a Certificate of
Domestication under Section 388 of the Delaware General Corporation Law with the
Secretary of State of the State of Delaware. Pursuant to the domestication, each
share of common stock of the Corporation outstanding on the effective date of
this Certificate of Incorporation is hereby converted into one share of common
stock of the Corporation without any further action by the Corporation or any
stockholder, and the currently outstanding share certificates representing such
shares of common stock outstanding on the effective date of this Certificate of
Incorporation shall represent one share of the Corporation's common stock until
such share certificate is surrendered for transfer or reissue.
I, the undersigned, being the incorporator, for the purpose of forming a
corporation pursuant to the Delaware General Corporation Law, do make this
Certificate of Incorporation, hereby declaring and certifying that this is my
act and deed and that the facts stated herein are true, and accordingly have
hereunto set my hand this day of , 2002.
----- --------
--------------------------------------------
Frank B. Manning, Incorporator
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EXHIBIT F
CERTIFICATE OF DOMESTICATION
OF
ZOOM TELEPHONICS, INC.
The undersigned, President of Zoom Telephonics, Inc. (the
"Corporation"), a corporation organized and existing under the laws of Canada,
in accordance with the provisions of Section 388 of Title 8, Chapter 1 of the
Delaware Code, does hereby certify as follows:
FIRST: The Corporation was incorporated in British Columbia under the
name 1519 Holdings Ltd. on July 7, 1986 and subsequently changed its name to
Zoom Telephonics, Inc. on October 1, 1986. On June 28, 1991, the Corporation was
continued under the Canada Business Corporations Act by filing Articles of
Continuance under that Act.
SECOND: The name of the Corporation immediately prior to the filing of
this Certificate of Domestication was Zoom Telephonics, Inc.
THIRD: The name of the Corporation under which it is filing a
Certificate of Incorporation is Zoom Technologies, Inc.
FOURTH: The jurisdiction that constituted the seat, siege social,
principal place of business or central administration for the Corporation or any
equivalent thereto under applicable law, immediately prior to the filing of this
Certificate of Domestication was Canada.
FIFTH: A Certificate of Incorporation of Zoom Technologies, Inc. is
being filed contemporaneously with this Certificate of Domestication.
IN WITNESS WHEREOF, I, Frank B. Manning, being the President of the
Corporation, and being duly authorized to sign this Certificate of Domestication
on behalf of the Corporation have made, signed and sealed this Certificate of
Domestication on this _____ day of ________________ , 2002.
ZOOM TELEPHONICS, INC.
By:
--------------------------------
Frank B. Manning
President
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EXHIBIT G
ZOOM DELAWARE PROPOSED BYLAWS
BYLAWS
OF
ZOOM TECHNOLOGIES, INC.
(A Delaware Corporation)
ARTICLE I
STOCKHOLDERS
SECTION 1.1 ANNUAL MEETING. The annual meeting of the stockholders of the
corporation shall be held on such date as shall be fixed by the Board of
Directors, at such time and place within or without the State of Delaware as may
be designated in the notice of meeting. If the day fixed for the annual meeting
shall fall on a legal holiday, the meeting shall be held on the next succeeding
day not a legal holiday. If the annual meeting is omitted on the day herein
provided, a special meeting may be held in place thereof, and any business
transacted at such special meeting in lieu of annual meeting shall have the same
effect as if transacted or held at the annual meeting. At the discretion of the
Board of Directors, the meeting may be conducted by remote communication to the
extent permitted by law.
SECTION 1.2 SPECIAL MEETINGS. Special meetings of the stockholders may be
called at any time by the president or by the board of directors. Special
meetings of the stockholders shall be held at such time, date and place within
or outside of the State of Delaware as may be designated in the notice of such
meeting. At the discretion of the Board of Directors, the meeting may be
conducted by remote communication to the extent permitted by law.
SECTION 1.3 NOTICE OF MEETING.
(a) A written notice stating the place, if any, date, and hour of
each meeting of the stockholders, and, in the case of a special meeting, the
purposes for which the meeting is called, shall be given to each stockholder
entitled to vote at such meeting, and to each stockholder who, under the
Certificate of Incorporation or these Bylaws, is entitled to such notice, by
delivering such notice to such person or leaving it at their residence or usual
place of business, or by mailing it to such stockholder at his address as it
appears upon the books of the corporation at least ten days and not more than 60
days before the meeting. Such notice shall be given by the secretary, an
assistant secretary, or any other officer or person designated either by the
secretary or by the person or persons calling the meeting.
(b) The requirement of notice to any stockholder may be waived
(i) by a written waiver of notice, executed before or after the meeting by the
stockholder or his attorney thereunto duly authorized, and filed with the
records of the meeting, (ii) if communication with such stockholder is unlawful,
(iii) by attendance at the meeting without protesting prior thereto or at its
commencement the lack of notice, or (iv) as otherwise excepted by law. A waiver
of notice of any regular or special meeting of the stockholders need not specify
the purposes of the meeting.
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(c) If a meeting is adjourned to another time or place, notice need not
be given of the adjourned meeting if the time and place, if any, are announced
at the meeting at which the adjournment is taken, except that if the adjournment
is for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
SECTION 1.4 QUORUM. The holders of one third of all stock issued,
outstanding and entitled to vote at a meeting shall constitute a quorum. Any
meeting may be adjourned from time to time by a majority of the votes properly
cast upon the question, whether or not a quorum is present.
SECTION 1.5 VOTING AND PROXIES. Stockholders shall have one vote for each
share of stock entitled to vote owned by them of record according to the books
of the corporation, unless otherwise provided by law or by the Certificate of
Incorporation. Stockholders may vote either in person or by written proxy, but
no proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period. Proxies shall be filed with the
secretary of the meeting, or of any adjournment thereof. Except as otherwise
limited therein, proxies shall entitle the persons authorized thereby to vote at
any adjournment of such meeting. A proxy purporting to be executed by or on
behalf of a stockholder shall be deemed valid unless challenged at or prior to
its exercise and the burden of proving invalidity shall rest on the challenger.
A proxy with respect to stock held in the name of two or more persons shall be
valid if executed by one of them unless at or prior to exercise of the proxy the
corporation receives a specific written notice to the contrary from any one of
them.
SECTION 1.6 ACTION AT MEETING. When a quorum is present at any meeting, a
plurality of the votes properly cast for election to any office shall elect to
such office, and a majority of the votes properly cast upon any question other
than election to an office shall decide such question, except where a larger
vote is required by law, the Certificate of Incorporation or these Bylaws. No
ballot shall be required for any election unless requested by a stockholder
present or represented at the meeting and entitled to vote in the election.
SECTION 1.7 ACTION WITHOUT MEETING. All action required or permitted to
be taken by the stockholders must be taken at a meeting duly called and held in
accordance with law and in accordance with this Certificate of Incorporation and
these Bylaws.
SECTION 1.8 VOTING OF SHARES OF CERTAIN HOLDERS.
(a) Shares of stock of the corporation standing in the name of
another corporation, domestic or foreign, may be voted by such officer, agent,
or proxy as the Bylaws of such corporation may prescribe, or, in the absence of
such provision, as the board of directors of such corporation may determine.
(b) Shares of stock of the corporation standing in the name of a
deceased person, a minor ward or an incompetent person, may be voted by his
administrator, executor, court-appointed guardian or conservator without a
transfer of such shares into the name of such
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administrator, executor, court appointed guardian or conservator. Shares of
capital stock of the corporation standing in the name of a trustee or fiduciary
may be voted by such trustee or fiduciary.
(c) Shares of stock of the corporation standing in the name of a
receiver may be voted by such receiver, and shares held by or under the control
of a receiver may be voted by such receiver without the transfer thereof into
his name if authority so to do be contained in an appropriate order of the court
by which such receiver was appointed.
(d) A stockholder whose shares are pledged shall be entitled to
vote such shares unless in the transfer by the pledgor on the books of the
corporation he expressly empowered the pledgee to vote thereon, in which case
only the pledgee or its proxy shall be entitled to vote the shares so
transferred.
(e) Shares of its own stock belonging to this corporation shall
not be voted, directly or indirectly, at any meeting and shall not be counted in
determining the total number of outstanding shares at any given time, but shares
of its own stock held by the corporation in a fiduciary capacity may be voted
and shall be counted in determining the total number of outstanding shares.
SECTION 1.9 STOCKHOLDER LISTS. The secretary (or the corporation's
transfer agent or other person authorized by these Bylaws or by law) shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at (i) the corporation's principal place of business, (ii) at
the place where the meeting is to be held, or (iii) by making it available on an
electronic network. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1 POWERS. Except as reserved to the stockholders by law, by the
Certificate of Incorporation or by these Bylaws, the business of the corporation
shall be managed under the direction of the board of directors, who shall have
and may exercise all of the powers of the corporation. In particular, and
without limiting the foregoing, the board of directors shall have the power to
issue or reserve for issuance from time to time the whole or any part of the
capital stock of the corporation which may be authorized from time to time to
such person, for such consideration and upon such terms and conditions as they
shall determine, including the granting of options, warrants or conversion or
other rights to stock.
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SECTION 2.2 NUMBER OF DIRECTORS; QUALIFICATIONS. The board of directors
shall consist of such number of directors, as shall be fixed initially by the
incorporator(s) and thereafter by the board of directors. No director need be a
stockholder.
SECTION 2.3 NOMINATION OF DIRECTORS.
Nominations for the election of directors at an annual meeting of the
stockholders, or special meeting in lieu of the annual meeting, may be made by
the Board of Directors or by any stockholder entitled to vote in the election of
directors at the meeting. Stockholders entitled to vote in such election may
nominate one or more persons for the election as directors only if written
notice of such stockholder's intent to make such nomination or nominations has
been given either by personal delivery, overnight (receipted) courier or by
United States mail, postage prepaid, to the secretary of the Corporation not
later than one hundred twenty days prior to the anniversary date of the
immediately preceding annual meeting or special meeting in lieu thereof. Such
notice shall set forth: (a) the name and address of the stockholder who intends
to make the nomination and of the persons or person to be nominated; (b) a
representation that the stockholder is a holder of record of stock of the
Corporation and entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder; (d) such other information regarding each nominee proposed by
such stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission; and (e)
the consent of each nominee to serve as a director of the Corporation if so
elected. The presiding officer of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.
SECTION 2.4 ELECTION OF DIRECTORS. The initial board of directors shall
be designated in the certificate of incorporation, or if not so designated,
elected by the incorporator(s) at the first meeting thereof. Thereafter,
directors shall be elected by the stockholders at their annual meeting or at any
special meeting the notice of which specifies the election of directors as an
item of business for such meeting.
SECTION 2.5 VACANCIES; REDUCTION OF THE BOARD. In the case of any vacancy
in the board of directors from death, resignation, disqualification or other
cause, including a vacancy resulting from enlargement of the board, the election
of a director to fill such vacancy shall be by vote of a majority of the
directors then in office, whether or not constituting a quorum.
SECTION 2.6 . ENLARGEMENT OF THE BOARD. The board of directors may be
enlarged by the stockholders at any meeting or by vote of a majority of the
directors then in office.
SECTION 2.7 TENURE AND RESIGNATION. Except as otherwise provided by law,
by the Certificate of Incorporation or by these Bylaws, directors shall hold
office until the next annual meeting of stockholders and thereafter until their
successors are chosen and qualified. Any director may resign by delivering or
mailing postage prepaid a written resignation to the
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corporation at its principal office or to the president, secretary or assistant
secretary, if any. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
SECTION 2.8 REMOVAL. A director, whether elected by the stockholders or
directors, may be removed from office with or without cause at any annual or
special meeting of stockholders by vote of a majority of the stockholders
entitled to vote in the election of such directors, or for cause by a vote of a
majority of the directors then in office; provided, however, that a director may
be removed for cause only after reasonable notice and opportunity to be heard
before the body proposing to remove him.
SECTION 2.9 MEETINGS. Regular meetings of the board of directors may be
held without call or notice at such times and such places within or without the
State of Delaware as the board may, from time to time, determine, provided that
notice of the first regular meeting following any such determination shall be
given to directors absent from such determination. A regular meeting of the
board of directors shall be held without notice immediately after, and at the
same place as, the annual meeting of the stockholders or the special meeting of
the stockholders held in place of such annual meeting, unless a quorum of the
directors is not then present. Special meetings of the board of directors may be
held at any time and at any place designated in the call of the meeting when
called by the president, treasurer, or one or more directors. Members of the
board of directors or any committee elected thereby may participate in a meeting
of such board or committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time, and participation by such means
shall constitute presence in person at the meeting.
SECTION 2.10 NOTICE OF MEETING. It shall be sufficient notice to a
director to send notice (i) by mail at least 72 hours before the meeting
addressed to such person at his usual or last known business or residence
address, or (ii) in person, by telephone, facsimile transmission or electronic
transmission to the extent provided in Article VIII, at least 24 hours before
the meeting. Notice shall be given by the secretary, or in his absence or
unavailability, may be given by an assistant secretary, if any, or by the
officer or directors calling the meeting. The requirement of notice to any
director may be waived by a written waiver of notice, executed by such person
before or after the meeting or meetings, and filed with the records of the
meeting, or by attendance at the meeting without protesting prior thereto or at
its commencement the lack of notice. A notice or waiver of notice of a
directors' meeting need not specify the purposes of the meeting.
SECTION 2.11 AGENDA. Any lawful business may be transacted at a meeting of
the board of directors, notwithstanding the fact that the nature of the business
may not have been specified in the notice or waiver of notice of the meeting.
SECTION 2.12 QUORUM. At any meeting of the board of directors, a majority
of the directors then in office shall constitute a quorum for the transaction of
business. Any meeting may be adjourned by a majority of the votes cast upon the
question, whether or not a quorum is present, and the meeting may be held as
adjourned without further notice.
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SECTION 2.13 ACTION AT MEETING. Any motion adopted by vote of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the board of directors, except where a different vote is
required by law, by the Certificate of Incorporation or by these Bylaws. The
assent in writing of any director to any vote or action of the directors taken
at any meeting, whether or not a quorum was present and whether or not the
director had or waived notice of the meeting, shall have the same effect as if
the director so assenting was present at such meeting and voted in favor of such
vote or action.
SECTION 2.14 ACTION WITHOUT MEETING. Any action by the directors may be
taken without a meeting if all of the directors consent to the action in writing
and the consents are filed with the records of the directors' meetings. Such
consent shall be treated for all purposes as a vote of the directors at a
meeting.
SECTION 2.15 COMMITTEES. The board of directors may, by the affirmative
vote of a majority of the directors then in office, appoint an executive
committee or other committees consisting of one or more directors and may by
vote delegate to any such committee some or all of their powers except those
which by law, the Certificate of Incorporation or these Bylaws they may not
delegate. In the absence or disqualification of a member of a committee, the
members of the committee present and not disqualified, whether or not they
constitute a quorum, may by unanimous vote appoint another member of the board
of directors to act at the meeting in place of the absence or disqualified
member. Unless the board of directors shall otherwise provide, any such
committee may make rules for the conduct of its business, but unless otherwise
provided by the board of directors or such rules, its meetings shall be called,
notice given or waived, its business conducted or its action taken as nearly as
may be in the same manner as is provided in these Bylaws with respect to
meetings or for the conduct of business or the taking of actions by the board of
directors. The board of directors shall have power at any time to fill vacancies
in, change the membership of, or discharge any such committee at any time. The
board of directors shall have power to rescind any action of any committee, but
no such rescission shall have retroactive effect.
ARTICLE III
OFFICERS
SECTION 3.1 ENUMERATION. The officers shall consist of a president, a
treasurer, a secretary and such other officers and agents (including a chairman
of the board, one or more vice-presidents, assistant treasurers and assistant
secretaries), as the board of directors may, in their discretion, determine.
SECTION 3.2 ELECTION. The president, treasurer and secretary shall be
elected annually by the directors at their first meeting following the annual
meeting of the stockholders or any special meeting held in lieu of the annual
meeting. Other officers may be chosen by the directors at such meeting or at any
other meeting.
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SECTION 3.3 QUALIFICATION. An officer may, but need not, be a director
or stockholder. Any two or more offices may be held by the same person. Any
officer may be required by the directors to give bond for the faithful
performance of his duties to the corporation in such amount and with such
sureties as the directors may determine. The premiums for such bonds may be paid
by the corporation.
SECTION 3.4 TENURE. Except as otherwise provided by the Certificate of
Incorporation or these Bylaws, the term of office of each officer shall be for
one year or until his successor is elected and qualified or until his earlier
resignation or removal.
SECTION 3.5 REMOVAL. Any officer may be removed from office, with or
without cause, by the affirmative vote of a majority of the directors then in
office; provided, however, that an officer may be removed for cause only after
reasonable notice and opportunity to be heard by the board of directors prior to
action thereon.
SECTION 3.6 RESIGNATION. Any officer may resign by delivering or mailing
postage prepaid a written resignation to the corporation at its principal office
or to the president, secretary, or assistant secretary, if any, and such
resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some event.
SECTION 3.7 VACANCIES. A vacancy in any office arising from any cause
may be filled for the unexpired portion of the term by the board of directors.
SECTION 3.8 CHAIRMAN OF THE BOARD. The board of directors may appoint a
chairman of the board and may designate the chairman of the board as chief
executive officer. If the board of directors appoints a chairman of the board,
he shall perform such duties and possess such powers as are assigned to him by
the board of directors.
SECTION 3.9 PRESIDENT. The president shall be the chief executive
officer of the corporation, unless a chairman of the board is so designated.
Unless a chairman of the board is so designated or except as otherwise voted by
the board of directors, the president shall preside at all meetings of the
stockholders and of the board of directors at which present. The president shall
have such duties and powers as are commonly incident to the office and such
duties and powers as the board of directors shall from time to time designate.
SECTION 3.10 VICE-PRESIDENT(S). The vice-president(s), if any, shall have
such powers and perform such duties as the board of directors may from time to
time determine.
SECTION 3.11 CHIEF FINANCIAL OFFICER, TREASURER AND ASSISTANT TREASURERS.
The treasurer, or if the board of directors so determines, the vice-president,
finance or the chief financial officer, subject to the direction and under the
supervision and control of the board of directors, shall have general charge of
the financial affairs of the corporation. The treasurer shall have custody of
all funds, securities and valuable papers of the corporation, except as the
board of directors may otherwise provide. The treasurer shall keep or cause to
be kept full and accurate records of account which shall be the property of the
corporation, and which shall be always open
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to the inspection of each elected officer and director of the corporation. The
treasurer shall deposit or cause to be deposited all funds of the corporation in
such depository or depositories as may be authorized by the board of directors.
The treasurer shall have the power to endorse for deposit or collection all
notes, checks, drafts, and other negotiable instruments payable to the
corporation. The treasurer shall perform such other duties as are incidental to
the office, and such other duties as may be assigned by the board of directors.
All of the duties of the treasurer may be performed by the vice-president,
finance and/or the chief financial officer, in the discretion of the board of
directors.
Assistant treasurers, if any, shall have such powers and perform such
duties as the board of directors may from time to time determine.
SECTION 3.12 SECRETARY AND ASSISTANT SECRETARIES. The secretary or an
assistant secretary shall record, or cause to be recorded, all proceedings of
the meetings of the stockholders and directors (including committees thereof) in
the book of records of this corporation. The record books shall be open at
reasonable times to the inspection of any stockholder, director, or officer. The
secretary or an assistant secretary shall notify the stockholders and directors,
when required by law or by these Bylaws, of their respective meetings, and shall
perform such other duties as the directors and stockholders may from time to
time prescribe. The secretary or an assistant secretary shall have the custody
and charge of the corporate seal, and shall affix the seal of the corporation to
all instruments requiring such seal, and shall certify under the corporate seal
the proceedings of the directors and of the stockholders, when required. In the
absence of the secretary or an assistant secretary at any such meeting, a
temporary secretary shall be chosen who shall record the proceedings of the
meeting in the aforesaid books.
Assistant secretaries, if any, shall have such powers and perform such
duties as the board of directors may from time to time designate.
SECTION 3.13 OTHER POWERS AND DUTIES. Subject to these Bylaws and to such
limitations as the board of directors may from time to time prescribe, the
officers of the corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the board of directors.
ARTICLE IV
CAPITAL STOCK
SECTION 4.1 STOCK CERTIFICATES.
(a) Each stockholder shall be entitled to a certificate
representing the number of shares of the capital stock of the corporation owned
by such person in such form as shall, in conformity to law, be prescribed from
time to time by the board of directors. Each certificate shall be signed by the
president or vice-president and treasurer or assistant treasurer or such other
officers designated by the board of directors from time to time as permitted by
law, shall bear the seal of the corporation, and shall express on its face its
number, date of issue, class, the number
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of shares for which, and the name of the person to whom, it is issued. The
corporate seal and any or all of the signatures of corporation officers may be
facsimile if the stock certificate is manually counter-signed by an authorized
person on behalf of a transfer agent or registrar other than the corporation or
its employee.
(b) If an officer, transfer agent or registrar who has signed,
or whose facsimile signature has been placed on, a certificate shall have ceased
to be such before the certificate is issued, it may be issued by the corporation
with the same effect as if he were such officer, transfer agent or registrar at
the time of its issue.
SECTION 4.2 TRANSFER OF SHARES. Title to a certificate of stock and to
the shares represented thereby shall be transferred only on the books of the
corporation by delivery to the corporation or its transfer agent of the
certificate properly endorsed, or by delivery of the certificate accompanied by
a written assignment of the same, or a properly executed written power of
attorney to sell, assign or transfer the same or the shares represented thereby.
Upon surrender of a certificate for the shares being transferred, a new
certificate or certificates shall be issued according to the interests of the
parties.
SECTION 4.3 RECORD HOLDERS. Except as otherwise may be required by law,
by the Certificate of Incorporation or by these Bylaws, the corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect thereto, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the corporation in accordance with the requirements of these Bylaws. It shall
be the duty of each stockholder to notify the corporation of his post office
address.
SECTION 4.4 RECORD DATE.
(a) In order that the corporation may determine the stockholders
entitled to receive notice of or to vote at any meeting of stockholders or any
adjournments thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty days prior to any other action. In such case
only stockholders of record on such record date shall be so entitled
notwithstanding any transfer of stock on the books of the corporation after the
record date.
(b) If no record date is fixed: (i) the record date for
determining stockholders entitled to receive notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held; and (ii) the
record date for determining stockholders for any other purpose shall be at the
close of business on the day on which the board of directors adopts the
resolution relating thereto.
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SECTION 4.5 TRANSFER AGENT AND REGISTRAR FOR SHARES OF CORPORATION. The
board of directors may appoint a transfer agent and a registrar of the
certificates of stock of the corporation. Any transfer agent so appointed shall
maintain, among other records, a stockholders' ledger, setting forth the names
and addresses of the holders of all issued shares of stock of the corporation,
the number of shares held by each, the certificate numbers representing such
shares, and the date of issue of the certificates representing such shares. Any
registrar so appointed shall maintain, among other records, a share register,
setting forth the total number of shares of each class of shares which the
corporation is authorized to issue and the total number of shares actually
issued. The stockholders' ledger and the share register are hereby identified as
the stock transfer books of the corporation; but as between the stockholders'
ledger and the share register, the names and addresses of stockholders, as they
appear on the stockholders' ledger maintained by the transfer agent shall be the
official list of stockholders of record of the corporation. The name and address
of each stockholder of record, as they appear upon the stockholders' ledger,
shall be conclusive evidence of who are the stockholders entitled to receive
notice of the meetings of stockholders, to vote at such meetings, to examine a
complete list of the stockholders entitled to vote at meetings, and to own,
enjoy and exercise any other property or rights deriving from such shares
against the corporation. Stockholders, but not the corporation, its directors,
officers, agents or attorneys, shall be responsible for notifying the transfer
agent, in writing, of any changes in their names or addresses from time to time,
and failure to do so will relieve the corporation, its other stockholders,
directors, officers, agents and attorneys, and its transfer agent and registrar,
of liability for failure to direct notices or other documents, or pay over or
transfer dividends or other property or rights, to a name or address other than
the name and address appearing in the stockholders' ledger maintained by the
transfer agent.
SECTION 4.6 LOSS OF CERTIFICATES. In case of the loss, destruction or
mutilation of a certificate of stock, a replacement certificate may be issued in
place thereof upon such terms as the board of directors may prescribe,
including, in the discretion of the board of directors, a requirement of bond
and indemnity to the corporation.
SECTION 4.7 RESTRICTIONS ON TRANSFER. Every certificate for shares of
stock which are subject to any restriction on transfer, whether pursuant to the
Certificate of Incorporation, the Bylaws or any agreement to which the
corporation is a party, shall have the fact of the restriction noted
conspicuously on the certificate and shall also set forth on the face or back
either the full text of the restriction or a statement that the corporation will
furnish a copy to the holder of such certificate upon written request and
without charge.
SECTION 4.8 MULTIPLE CLASSES OR SERIES OF STOCK. The amount and classes
of the capital stock and the par value, if any, of the shares, shall be as fixed
in the Certificate of Incorporation. At all times when there are two or more
classes or series of stock, the several classes or series of stock shall conform
to the description and the terms and have the respective preferences, voting
powers, restrictions and qualifications set forth in the Certificate of
Incorporation and these Bylaws. Every certificate issued when the corporation is
authorized to issue more than one class or series of stock shall set forth on
its face or back either (i) the full text of the preferences, voting powers,
qualifications and special and relative rights of the shares of each class and
series
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authorized to be issued, or (ii) a statement of the existence of such
preferences, powers, qualifications and rights, and a statement that the
corporation will furnish a copy thereof to the holder of such certificate upon
written request and without charge.
ARTICLE V
DIVIDENDS
SECTION 5.1 DECLARATION OF DIVIDENDS. Except as otherwise required by
law or by the Certificate of Incorporation, the board of directors may, in its
discretion, declare what, if any, dividends shall be paid from the surplus or
from the net profits of the corporation for the current or preceding fiscal
year, or as otherwise permitted by law. Dividends may be paid in cash, in
property, in shares of the corporation's stock, or in any combination thereof.
Dividends shall be payable upon such dates as the board of directors may
designate.
SECTION 5.2 RESERVES. Before the payment of any dividend and before
making any distribution of profits, the board of directors, from time to time
and in its absolute discretion, shall have power to set aside out of the surplus
or net profits of the corporation such sum or sums as the board of directors
deems proper and sufficient as a reserve fund to meet contingencies or for such
other purpose as the board of directors shall deem to be in the best interests
of the corporation, and the board of directors may modify or abolish any such
reserve.
ARTICLE VI
POWERS OF OFFICERS TO CONTRACT
WITH THE CORPORATION
Any and all of the directors and officers of the corporation,
notwithstanding their official relations to it, may enter into and perform any
contract or agreement of any nature between the corporation and themselves, or
any and all of the individuals from time to time constituting the board of
directors of the corporation, or any firm or corporation in which any such
director may be interested, directly or indirectly, whether such individual,
firm or corporation thus contracting with the corporation shall thereby derive
personal or corporate profits or benefits or otherwise; provided, that (i) the
material facts of such interest are disclosed or are known to the board of
directors or committee thereof which authorizes such contract or agreement; (ii)
if the material facts as to such person's relationship or interest are disclosed
or are known to the stockholders entitled to vote thereon, and the contract is
specifically approved in good faith by a vote of the stockholders; or (iii) the
contract or agreement is fair as to the corporation as of the time it is
authorized, approved or ratified by the board of directors, a committee thereof,
or the stockholders. Any director of the corporation who is interested in any
transaction as aforesaid may nevertheless be counted in determining the
existence of a quorum at any meeting of the board of directors which shall
authorize or ratify any such transaction. This Article shall not be construed to
invalidate any contract or other transaction which would otherwise be valid
under the common or statutory law applicable thereto.
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ARTICLE VII
INDEMNIFICATION
SECTION 7.1 DEFINITIONS. For purposes of this Article VII the following
terms shall have the meanings indicated:
"Corporate Status" describes the status of a person who is or was a
director, officer, employee, agent, trustee or fiduciary of the Corporation or
of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such person is or was serving at the express
written request of the corporation.
"Court" means the Court of Chancery of the State of Delaware, or any other
court in which a Proceeding in respect of indemnification may properly be
brought.
"Covered Person" means any person who has a Corporate Status who the
corporation, pursuant to the provisions of Section 7.9 hereof, determines is
entitled to indemnification as provided herein. It shall in each case include
such person's legal representatives, heirs, executors and administrators.
"Disinterested" describes any individual, whether or not that individual is
a director, officer, employee or agent of the corporation who is not and was not
and is not threatened to be made a party to the Proceeding in respect of which
indemnification, advancement of expenses or other action, is sought by a Covered
Person.
"Expenses" shall include, without limitation, all reasonable attorneys'
fees, retainers, court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees, and all other disbursements or expenses
of the types customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating or being or preparing to be a
witness in a Proceeding.
"Good Faith" shall mean a Covered Person having acted in good faith and in
a manner such Covered Person reasonably believed to be in or not opposed to the
best interests of the corporation or, in the case of an employee benefit plan,
the best interests of the participants or beneficiaries of said plan, as the
case may be, and, with respect to any Proceeding which is criminal in nature,
having had no reasonable cause to believe such Covered Person's conduct was
unlawful.
"Independent Counsel" means a law firm, or a member of a law firm, that is
experienced in matters of corporation law and may include law firms or members
thereof that are regularly retained by the corporation but not by any other
party to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the standards of professional conduct then prevailing and
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applicable to such counsel, would have a conflict of interest in representing
either the corporation or the Covered Person in an action to determine the
Covered Person's rights under this Article.
"Proceeding" includes any actual, threatened or completed action, suit,
arbitration, alternate dispute resolution mechanism, investigation (including
any internal corporate investigation), administrative hearing or any other
proceeding, whether civil, criminal, administrative or investigative, other than
one initiated by the Covered Person, but including one initiated by a Covered
Person for the purpose of enforcing such Covered Person's rights under this
Article to the extent provided in Section 7.14 of this Article. "Proceeding"
shall not include any counterclaim brought by any Covered Person other than one
arising out of the same transaction or occurrence that is the subject matter of
the underlying claim.
SECTION 7.2 RIGHT TO INDEMNIFICATION IN GENERAL. The corporation may
indemnify, and advance Expenses to, each Covered Person who is, was or is
threatened to be made a party or is otherwise involved in any Proceeding, as
provided in this Article and to the fullest extent permitted by applicable law
in effect on the date hereof and to such greater extent as applicable law may
hereafter from time to time permit.
SECTION 7.3 PROCEEDINGS OTHER THAN PROCEEDINGS IN THE RIGHT OF THE
CORPORATION. Each Covered Person may be indemnified if, by reason of such
Covered Person's Corporate Status, such Covered Person is or is threatened to be
made a party to or is otherwise involved in any Proceeding, other than a
Proceeding by or in the right of the corporation. Such Covered Person may be
indemnified against Expenses, judgments, penalties, fines and amounts paid in
settlements, actually and reasonably incurred by such Covered Person or on such
Covered Person's behalf in connection with such Proceeding or any claim, issue
or matter therein, if such Covered Person acted in Good Faith.
SECTION 7.4 PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. Each
Covered Person may be indemnified if, by reason of such Covered Person's
Corporate Status, such Covered Person is, or is threatened to be made, a party
to or is otherwise involved in any Proceeding brought by or in the right of the
corporation to procure a judgment in its favor. Such Covered Person may be
indemnified against Expenses, judgments, penalties, and amounts paid in
settlement, actually and reasonably incurred by such Covered Person or on such
Covered Person's behalf in connection with such Proceeding if such Covered
Person acted in Good Faith. Notwithstanding the foregoing, no such
indemnification shall be made in respect of any claim, issue or matter in such
Proceeding as to which such Covered Person shall have been adjudged to be liable
to the corporation if applicable law prohibits such indemnification; provided,
however, that, if applicable law so permits, indemnification shall nevertheless
be made by the corporation in such event if and only to the extent that the
Court which is considering the matter shall so determine.
SECTION 7.5 INDEMNIFICATION OF A PARTY WHO IS WHOLLY OR PARTLY
SUCCESSFUL. Notwithstanding any other provision of this Article, to the extent
that a present or former director or officer or any other person who has a
Corporate Status is, by reason of such Corporate Status, a party to or is
otherwise involved in and is successful, on the merits or otherwise, in any
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Proceeding, such person shall be indemnified to the maximum extent permitted by
law, against all Expenses, judgments, penalties, fines, and amounts paid in
settlement, actually and reasonably incurred by such person or on such person's
behalf in connection therewith. If such person is not wholly successful in such
Proceeding but is successful, on the merits or otherwise, as to one or more but
less than all claims, issues or matters in such Proceeding, the corporation
shall indemnify such person to the maximum extent permitted by law, against all
Expenses, judgments, penalties, fines, and amounts paid in settlement, actually
and reasonably incurred by such person or on such person's behalf in connection
with each successfully resolved claim, issue or matter. The termination of any
claim, issue or matter in such a Proceeding by dismissal, with or without
prejudice, shall be deemed to be a successful result as to such claim, issue or
matter.
SECTION 7.6 INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding
any other provision of this Article, to the extent that a Covered Person is, by
reason of such Covered Person's Corporate Status, a witness in any Proceeding,
such Covered Person shall be indemnified against all Expenses actually and
reasonably incurred by such Covered Person or on such Covered Person's behalf in
connection therewith.
SECTION 7.7 ADVANCEMENT OF EXPENSES.
(a) Notwithstanding any provision to the contrary in this
Article, the corporation may advance all reasonable Expenses which were incurred
by or on behalf of a present director or officer by reason of such person's
Corporate Status, in connection with any Proceeding, within 20 days after the
receipt by the corporation of a statement or statements from such person
requesting such advance or advances, whether prior to or after final disposition
of such Proceeding. Such statement or statements shall reasonably evidence the
Expenses incurred by the person and shall include or be preceded or accompanied
by an undertaking by or on behalf of the person to repay any Expenses if such
person shall be adjudged to be not entitled to be indemnified against such
Expenses. Any advance and undertakings to repay made pursuant to this paragraph
shall be unsecured and interest-free. Advancement of Expenses pursuant to this
paragraph shall not require approval of the board of directors or the
stockholders of the corporation, or of any other person or body. The secretary
of the corporation shall promptly advise the Board in writing of the request for
advancement of Expenses, of the amount and other details of the advance and of
the undertaking to make repayment provided pursuant to this paragraph.
(b) Advancement of expenses to any other Covered Person shall be
upon such terms and conditions as the board of directors may determine
appropriate.
SECTION 7.8 NOTIFICATION AND DEFENSE OF CLAIM.
(a) Promptly after receipt by any person who has a Corporate
Status of a notice of the commencement of any Proceeding, such person shall, if
a claim is to be made against the corporation under this Article, notify the
corporation of the commencement of the Proceeding. The omission of such notice
will not relieve the corporation from any liability which
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it may have to such person otherwise than under this Article. With respect to
any such Proceedings as to which the corporation determines to provide
indemnification:
(i) The corporation will be entitled to participate in the
defense at its own expense.
(ii) Except as otherwise provided below, the corporation
(jointly with any other indemnifying party similarly notified) will be entitled
to assume the defense with counsel reasonably satisfactory to the Covered
Person. After notice from the corporation to the Covered Person of its election
to assume the defense of a suit, the corporation will not be liable to the
Covered Person under this Article for any legal or other expenses subsequently
incurred by the Covered Person in connection with the defense of the Proceeding
other than reasonable costs of investigation or as otherwise provided below.
(b) The Covered Person shall have the right to employ his own
counsel in such Proceeding but the fees and expenses of such counsel incurred
after notice from the corporation of its assumption of the defense shall be at
the expense of the Covered Person except as follows. The fees and expenses of
counsel shall be at the expense of the corporation if (i) the employment of
counsel by the Covered Person has been authorized by the corporation, (ii) the
Covered Person shall have concluded reasonably that there may be a conflict of
interest between the corporation and the Covered Person in the conduct of the
defense of such action and such conclusion is confirmed in writing by the
corporation's outside counsel regularly employed by it in connection with
corporate matters, or (iii) the corporation shall not in fact have employed
counsel to assume the defense of such Proceeding. The corporation shall be
entitled to participate in, but shall not be entitled to assume the defense of,
any Proceeding brought by or in the right of the corporation or as to which the
Covered Person shall have made the conclusion provided for in (ii) above and
such conclusion shall have been so confirmed by the corporation's said outside
counsel.
(c) Notwithstanding any provision of this Article to the
contrary, the corporation shall not be liable to indemnify the Covered Person
under this Article for any amounts paid in settlement of any Proceeding effected
without its written consent. The corporation shall not settle any Proceeding or
claim in any manner which would impose any penalty, limitation or
disqualification of the Covered Person for any purpose without such Covered
Person's written consent. Neither the corporation nor the Covered Person will
unreasonably withhold their consent to any proposed settlement.
(d) If it is determined that the Covered Person is entitled to
indemnification other than as afforded under subparagraph (b) above, payment to
the Covered Person of the additional amounts for which he is to be indemnified
shall be made within 10 days after such determination.
SECTION 7.9 PROCEDURES.
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(a) METHOD OF DETERMINATION FOR PRESENT OFFICERS AND DIRECTORS. A
determination (as provided for by this Article or if required by applicable law
in the specific case) with respect to entitlement to indemnification by a person
who at the date of determination is a director or officer shall be made either
(i) by a majority vote of Disinterested directors, even though less than a
quorum, or (ii) a committee of Disinterested directors designated by a majority
of disinterested Directors, even though less than a quorum, or (iii) if there
are no such Disinterested directors, or if the Disinterested directors so
direct, by Independent Counsel in a written determination to the board of
directors, a copy of which shall be delivered to the Covered Person seeking
indemnification, or (iv) by the vote of the holders of a majority of the
corporation's capital stock outstanding at the time entitled to vote thereon.
(b) METHOD OF DETERMINATION FOR OTHERS. A determination (as
provided for in this Article or if required by applicable law in the specific
case) with respect to indemnification of any person other than a present
director or officer may be made by the board of directors in such manner as it
may determine appropriate.
(c) INITIATING REQUEST. A person who seeks indemnification under
this Article shall submit a request for indemnification, including such
documentation and information as is reasonably available to such person and is
reasonably necessary to determine whether and to what extent such person is
entitled to indemnification.
(d) EFFECT OF OTHER PROCEEDINGS. The termination of any
Proceeding or of any claim, issue or matter therein, by judgment, order,
settlement or conviction, or upon a plea of guilty or of NOLO CONTENDERE or its
equivalent, shall not (except as otherwise expressly provided in this Article)
of itself adversely affect the right of a Covered Person to indemnification or
create a presumption that a Covered Person did not act in Good Faith.
SECTION 7.10 ACTION BY THE CORPORATION. Any action, payment, advance
determination (other than a determination made pursuant to Section 7.9 above),
authorization, requirement, grant of indemnification or other action taken by
the corporation pursuant to this Article shall be effected exclusively through
any Disinterested person so authorized by the board of directors of the
corporation, including the president or any vice president of the corporation.
SECTION 7.11 NON-EXCLUSIVITY. The rights to indemnification and to receive
advancement of Expenses as provided by this Article shall not be deemed
exclusive of any other rights to which a person may at any time be entitled
under applicable law, the Certificate of Incorporation, these Bylaws, any
agreement, a vote of stockholders, a resolution of the board of directors, or
otherwise.
SECTION 7.12 INSURANCE. The corporation may maintain, at its expense, an
insurance policy or policies to protect itself and any director, officer,
employee or agent of the corporation or another enterprise against liability
arising out of this Article or otherwise, whether or not the corporation would
have the power to indemnify any such person against such liability under the
Delaware General Corporation Law.
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SECTION 7.13 NO DUPLICATIVE PAYMENT. The corporation shall not be liable
under this Article to make any payment of amounts otherwise indemnifiable
hereunder if and to the extent that a Covered Person has otherwise actually
received such payment under any insurance policy, contract, agreement or
otherwise.
SECTION 7.14 EXPENSES OF ADJUDICATION. In the event that any Covered
Person seeks a judicial adjudication, or an award in arbitration, to enforce
such Covered Person's rights under, or to recover damages for breach of, this
Article, the Covered Person shall be entitled to recover from the corporation,
and shall be indemnified by the corporation against, any and all Expenses
actually and reasonably incurred by such Covered Person in seeking such
adjudication or arbitration, but only if such Covered Person prevails therein.
If it shall be determined in such adjudication or arbitration that the Covered
Person is entitled to receive part but not all of the indemnification of
expenses sought, the expenses incurred by such Covered Person in connection with
such adjudication or arbitration shall be appropriately prorated.
SECTION 7.15 SEVERABILITY. If any provision or provisions of this Article
shall be held to be invalid, illegal or unenforceable for any reason whatsoever:
(a) the validity, legality and enforceability of the remaining
provisions of this Article (including without limitation, each portion of any
Section of this Article containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby; and
(b) to the fullest extent possible, the provisions of this
Article (including, without limitation, each portion of any Section of this
Article containing any such provision held to be invalid, illegal or
unenforceable, that is not itself held to be invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested by the
provision held invalid, illegal or unenforceable.
SECTION 7.16 NO RETROACTIVE AMENDMENT. No amendment or repeal of this
Article or any provision hereof shall affect any right of any person to be
indemnified hereunder with respect to any actions, omissions or state of facts
existing prior to the date of such amendment or repeal.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
SECTION 8.1 CERTIFICATE OF INCORPORATION. All references in these Bylaws
to the Certificate of Incorporation shall be deemed to refer to the Certificate
of Incorporation of the corporation, as amended and in effect from time to time.
SECTION 8.2 FISCAL YEAR. Except as from time to time otherwise provided
by the board of directors, the fiscal year of the corporation shall end on the
31st of December of each year.
SECTION 8.3 CORPORATE SEAL. The board of directors shall have the power
to adopt and alter the seal of the corporation.
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SECTION 8.4 EXECUTION OF INSTRUMENTS. All deeds, leases, transfers,
contracts, bonds, notes, and other obligations authorized to be executed by an
officer of the corporation on its behalf shall be signed by the president or the
treasurer except as the board of directors may generally or in particular cases
otherwise determine.
SECTION 8.5 VOTING OF SECURITIES. Unless the board of directors otherwise
provides, the president or the treasurer may waive notice of and act on behalf
of this corporation, or appoint another person or persons to act as proxy or
attorney in fact for this corporation with or without discretionary power and/or
power of substitution, at any meeting of stockholders or shareholders of any
other corporation or organization, any of whose securities are held by this
corporation.
SECTION 8.6 EVIDENCE OF AUTHORITY. A certificate by the secretary or any
assistant secretary as to any action taken by the stockholders, directors or any
officer or representative of the corporation shall, as to all persons who rely
thereon in good faith, be conclusive evidence of such action. The exercise of
any power which by law, by the Certificate of Incorporation, or by these Bylaws,
or under any vote of the stockholders or the board of directors, may be
exercised by an officer of the corporation only in the event of absence of
another officer or any other contingency shall bind the corporation in favor of
anyone relying thereon in good faith, whether or not such absence or contingency
existed.
SECTION 8.7 CORPORATE RECORDS. The original, or attested copies, of the
Certificate of Incorporation, Bylaws, records of all meetings of the
incorporators and stockholders, and the stock transfer books (which shall
contain the names of all stockholders and the record address and the amount of
stock held by each) shall be kept in Delaware at the principal office of the
corporation, or at an office of the corporation, or at an office of its transfer
agent or of the secretary or of the assistant secretary, if any. Said copies and
records need not all be kept in the same office. They shall be available at all
reasonable times to inspection of any stockholder for any purpose but not to
secure a list of stockholders for the purpose of selling said list or copies
thereof or for using the same for a purpose other than in the interest of the
applicant, as a stockholder, relative to the affairs of the corporation.
SECTION 8.8 COMMUNICATION OF NOTICES. Any notices required to be given
under these Bylaws may be given (i) by delivery in person, (ii) by mailing it,
postage prepaid, first class, (iii) by mailing it by nationally or
internationally recognized second day or faster courier service, (iv) by
facsimile transmission, or (v) by electronic transmission, in each case, to the
addressee; provided, however that facsimile transmission or electronic
transmission may only be used if the addressee has consented to such means.
SECTION 8.9 ELECTRONIC TRANSMISSIONS. Notwithstanding any reference in
these Bylaws to written instruments, all notices, meetings, consents and other
communications contemplated by these Bylaws may be conducted by means of an
electronic transmission, to the extent permitted by law, if specifically
authorized by the board of directors of the corporation.
SECTION 8.10 CHARITABLE CONTRIBUTIONS. The board of directors from time to
time may authorize contributions to be made by the corporation in such amounts
as it may determine to be
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reasonable to corporations, trusts, funds or foundations organized and operated
exclusively for charitable, scientific or educational purposes, no part of the
net earning of which inures to the private benefit of any stockholder or
individual.
ARTICLE IX
AMENDMENTS
SECTION 9.1 AMENDMENT BY STOCKHOLDERS. Prior to the issuance of stock,
these Bylaws may be amended, altered or repealed by the incorporator(s) by
majority vote. After stock has been issued, these Bylaws may be amended altered
or repealed by the stockholders at any annual or special meeting by vote or a
majority of all shares outstanding and entitled to vote, except that where the
effect of the amendment would be to reduce any voting requirement otherwise
required by law, the Certificate of Incorporation or these Bylaws, such
amendment shall require the vote that would have been required by such other
provision. Notice and a copy of any proposal to amend these Bylaws must be
included in the notice of meeting of stockholders at which action is taken upon
such amendment.
SECTION 9.2 AMENDMENT BY BOARD OF DIRECTORS.
(a) These Bylaws may be amended, altered or repealed by the board
of directors at a meeting duly called for the purpose by majority vote of the
directors then in office, except that directors shall not amend the Bylaws in a
manner which:
(i) changes the stockholder voting requirements for any
action;
(ii) alters or abolishes any preferential right or right of
redemption applicable to a class or series of stock with shares already
outstanding;
(iii) alters the provisions of Article IX hereof; or
(iv) permits the board of directors to take any action which
under law, the Certificate of Incorporation, or these Bylaws is required to be
taken by the stockholders.
(b) Any amendment of these Bylaws by the board of directors may
be altered or repealed by the stockholders at any annual or special meeting of
stockholders.
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ZOOM TELEPHONICS, INC.
207 South Street
Boston, MA 02111
FORM OF PROXY
SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE MANAGEMENT OF ZOOM
TELEPHONICS, INC. (THE "CORPORATION") FOR THE SPECIAL MEETING OF SHAREHOLDERS TO
BE HELD AT THE CORPORATION'S PRINCIPAL EXECUTIVE OFFICES LOCATED AT 207 SOUTH
STREET, BOSTON, MA 02111 ON __________, 2002, AT 9:30, A.M., EASTERN STANDARD
TIME (THE "MEETING"). The Meeting will be simultaneously held (linked by
telephone conference call) at Suite 1525, 625 Howe Street, Vancouver, B.C. V6C
2TC.
The undersigned shareholder of the Corporation hereby appoints Frank B.
Manning or, failing him, Peter R. Kramer, or, instead of any of them
__________________ as proxyholder, with full power of substitution, to attend,
act and vote in respect of all shares registered in the name of the undersigned
at the Meeting to be held on _________, 2002, at 9:30 a.m., Eastern Standard
Time, and at any adjournments thereof on the matters indicated below which are
described in the Proxy Statement/Prospectus and, at the proxyholder's
discretion, on amendments or variations to such matters and on such other
matters as may properly come before the Meeting, to the same extent and with the
same powers as if the undersigned were personally present at the meeting. The
undersigned revokes any instrument or proxy heretofore given with respect to the
Meeting or any adjournments thereof with respect only to the shares identified
below.
VOTE:
1. To consider and act upon a special resolution approving the change of the
Corporation's jurisdiction of incorporation from Canada to the State of
Delaware by way of a process known as a continuation in Canada and a
domestication in the State of Delaware.
/ /FOR / /AGAINST / /ABSTAIN
ON ANY BALLOT THAT MAY BE CALLED FOR, THE SHARES REPRESENTED BY THIS PROXY WILL
BE VOTED FOR, AGAINST OR WITHHELD FROM VOTING IN ACCORDANCE WITH THE
INSTRUCTIONS GIVEN BY THE SHAREHOLDER. IF NO CHOICE IS SPECIFIED, THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED FOR THE MATTERS LISTED ABOVE.
NOTES:
1. SHAREHOLDERS HAVE THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A
SHAREHOLDER) TO REPRESENT THEM AT THE MEETING, OTHER THAN THE MANAGEMENT
NOMINEES. To exercise this right, you should either strike out the names of
Messrs. Manning and Kramer and insert in the space provided the name of the
person you desire to designate as proxyholder, or complete another proper form
of proxy.
2. A proxy, to be valid, must be dated and signed by the shareholder.
Executors, administrators, trustees, guardians, attorneys and officers of
corporations should add their titles when signing. If this form of proxy is not
dated, it shall be deemed to bear the date on which it was mailed by the
Corporation.
3. A proxy to be effective must be deposited and received at the office of
Georgeson Shareholder Communications, Inc., 111 Commerce Road, Carlstadt, NJ
07072 before 5:00 p.m., Eastern Standard Time, on the business day before the
Meeting or, if the Meeting is adjourned or postponed, no later than 5:00 p.m.,
Eastern Standard Time, on the second business day prior to the adjourned or
postponed meeting.
Signature Name (Please Print)
------------------------- ------------------------
Address
------------------------------------------------------------------------
Date , 2002 Number of Shares to be voted
------------- ---------------
(IF LEFT BLANK, ALL SHARES REGISTERED IN YOUR NAME WILL BE DEEMED TO BE
REPRESENTED BY THIS PROXY.)
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