<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1996 COMMISSION FILE NUMBER 0-25524
HELLO DIRECT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3043208
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5884 EDEN PARK PLACE 95138-1859
SAN JOSE, CALIFORNIA (Zip Code)
(Address of principal executive offices)
(408) 972-1990
(Registrant's telephone
number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class April 30, 1996
<S> <C>
Common Stock, Par Value $.001 4,979,224
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
HELLO DIRECT, INC.
Condensed Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1996 1995
---- ----
<S> <C> <C>
Net sales $12,073,000 $8,746,000
Cost of goods sold 5,723,000 3,952,000
----------- ----------
Gross profit 6,350,000 4,794,000
Selling, general and administrative expenses 5,583,000 3,547,000
Product development expenses 535,000 357,000
CellBase expenses -- 182,000
----------- ----------
Operating income 232,000 708,000
Other income (expense) - net 193,000 (48,000)
----------- ----------
Income before income taxes 425,000 660,000
Income taxes 170,000 (150,000)
----------- ----------
Net income $ 255,000 $ 810,000
=========== ==========
Net income per share $ 0.05 $ 0.24
=========== ==========
Weighted average shares outstanding 5,013,000 3,346,000
=========== ==========
</TABLE>
See accompanying note to condensed financial statements
<PAGE>
HELLO DIRECT, INC.
Condensed Balance Sheets
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,071,000 $ 3,487,000
Short-term investments 6,378,000 4,322,000
Trade accounts receivable, less allowance for returns
and doubtful accounts 4,321,000 3,408,000
Inventories 4,338,000 3,914,000
Deferred tax assets 231,000 231,000
Other current assets 1,441,000 1,004,000
----------- -----------
Total current assets 19,780,000 16,366,000
Long-term investments 4,082,000 6,147,000
Property and equipment, net 1,500,000 1,280,000
Long-term deferred tax assets 1,752,000 1,923,000
----------- -----------
Total assets $27,114,000 $25,716,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation $ 26,000 $ 26,000
Accounts payable 2,508,000 1,593,000
Accrued expenses 495,000 350,000
----------- -----------
Total current liabilities 3,029,000 1,969,000
Long-term portion of capital lease obligation 18,000 20,000
----------- -----------
Total liabilities 3,047,000 1,989,000
Stockholders' equity:
Common stock 5,000 5,000
Additional paid-in capital 27,717,000 27,632,000
Accumulated deficit (3,210,000) (3,465,000)
Less treasury stock, at cost (445,000) (445,000)
----------- -----------
Total stockholders' equity 24,067,000 23,727,000
----------- -----------
Total liabilities and stockholders' equity $27,114,000 $25,716,000
=========== ===========
</TABLE>
See accompanying note to condensed financial statements
<PAGE>
HELLO DIRECT, INC
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 255,000 $ 810,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 78,000 81,000
Provision for returns and doubtful accounts 22,000 54,000
Deferred income taxes 171,000 (166,000)
Changes in items affecting operations:
Trade accounts receivable (935,000) (705,000)
Inventories (424,000) 921,000
Other assets (437,000) (788,000)
Accounts payable and accrued expenses 1,060,000 202,000
---------- ----------
Net cash provided by (used in) operating activities (210,000) 409,000
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (298,000) (279,000)
Decrease in investments 9,000 -
---------- ----------
Net cash used in investing activities (289,000) (279,000)
---------- ----------
Cash flows from financing activities:
Payments on capital lease obligations (2,000) (5,000)
Sale of common stock, net 85,000 31,000
---------- ----------
Net cash provided by financing activities 83,000 26,000
---------- ----------
Net increase (decrease) in cash and cash equivalents (416,000) 156,000
Cash and cash equivalents at beginning of period 3,487,000 1,699,000
---------- ----------
Cash and cash equivalents at end of period $3,071,000 $1,855,000
========== ==========
</TABLE>
See accompanying note to condensed financial statements
<PAGE>
HELLO DIRECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 1996
1. Interim Financial Statements
In the opinion of the Company, the accompanying unaudited financial statements
include all adjustments, consisting only of normal recurring adjustments
necessary to present fairly the financial information set forth therein.
Results of operations for the three month period ended March 31, 1996 are not
necessarily indicative of future financial results.
Certain notes and other information have been condensed or omitted from the
interim financial statements in the Quarterly Report on Form 10-Q. Accordingly,
these financial statements should be read in conjunction with the audited
financial statements for the fiscal year ended December 31, 1995 in the
Company's Annual Report on Form 10-K.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis section contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed below and in the Company's reports filed with the
Securities and Exchange Commission including the Company's Annual Report on Form
10-K for the year ended December 31, 1995. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. Forward-looking statements are identified with an asterisk (*).
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Net Sales. Net sales reflect total sales less a provision for returns. Net
sales increased $3,327,000 or 38.0% to $12,073,000 in the three month period
ended March 31, 1996 from $8,746,000 for the comparable period in 1995. This
increase was primarily due to the Company's growing house list of customers and
the mailing of 48% more catalogs in the first three months of 1996 compared to
1995.
Gross Profit. Gross profit increased $1,556,000 or 32.5% to $6,350,000 in the
three month period ended March 31, 1996 from $4,794,000 from the comparable
period in 1995. As a percentage of net sales, gross profit for the three month
period was 52.6% for 1996 versus 54.8% for 1995. This decrease in gross margin
was the result of a shift in product mix toward a larger percentage of branded
and private label products which carry a lower gross margin but also have lower
product development and marketing expenses (as a percentage of net sales)
associated with them.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2,036,000 or 57.4% to $5,583,000 in the three
month period ended March 31, 1996 from $3,547,000 from the comparable period in
1995. As a percentage of net sales, these expenses increased to 46.2% in 1996
compared to 40.6% in 1995. This increase was planned and is the result of
planned headcount additions to the Company's product management team and
customer care activities.
Product Development Expenses. Product development expenses increased $178,000
to $535,000 for the three month period ended March 31, 1996 from $357,000 in the
comparable period in 1995. As a percentage of net sales, these expenses
increased to 4.4% in 1996 compared to 4.1% in 1995. This increase was the
result of several new and in process products which are currently planned for
introduction in 1996*.
- - ------------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in the Company's Annual Report on Form 10-K.
<PAGE>
CellBase Expenses. In December 1995, the Company announced that it had
discontinued the development and marketing of CellBase. The expense presented
for the three month period ended March 31, 1995 represents costs incurred during
that period and is related to the development and marketing of CellBase. No
expenses related to this product were incurred in the comparable 1996 period.
Other Income (Expense). Other income includes interest income of $193,000 for
the three month period ended March 31, 1996 on the remaining proceeds from the
Company's initial public offering. This compares to interest expense of $48,000
for the comparable period in 1995 related to the $2,000,000 Subordinated
Promissory Note issued in May 1994 and retired in April 1995 with a portion of
the proceeds from the initial public offering.
Net Income. Net income decreased $555,000 or 68.5% to $255,000 for the three
month period ended March 31, 1996 from $810,000 for the comparable period of
1995. This decrease was due to the reasons enumerated above and the effect on
the provision (credit) for income taxes from the application of tax loss
carryforwards in accordance with Statement of Financial Accounting Standards No.
109 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash flow from operations,
proceeds from its initial public offering, venture capital equity and debt
financing, and borrowings under its revolving bank line of credit.
Cash used in operating activities in the three month period ended March 31, 1996
was $210,000. This was the result of $526,000 provided by operations including
net income, depreciation and amortization and other non-cash charges offset by
$736,000 of changes in operating assets and liabilities. Cash used by investing
activities for the three month period ended March 31, 1996 was $289,000,
primarily due to the purchases of property and equipment. Cash provided by
financing activities was $83,000, relating primarily to the issuance of common
stock pursuant to the Company's employee stock purchase plan.
Additions to equipment during the three month period ended March 31, 1996 were
$298,000 compared to $279,000 for same period in the prior year. This increase
was anticipated and is reflective of the growth in sales activity and the
tooling requirements for new product introductions*. The Company also plans to
lease additional space during the remainder of 1996 to facilitate its continued
expansion*.
The Company believes that funds generated from operations, together with
available funds remaining from the net proceeds of its public offering, will be
sufficient to finance its working capital for the foreseeable future*. However,
should the Company need additional funds, it has an unsecured revolving line of
credit with a bank for $2,000,000 at the bank's prime lending rate. During the
three month period ended March 31, 1996,
<PAGE>
no borrowings were made against this line, and at present there are no
outstanding balances against this line*.
ADDITIONAL FACTORS AFFECTING FUTURE PERFORMANCE
Approximately 58% of the Company's net sales for the three months ended
March 31, 1996 were derived from sales of the Company's proprietary products
which have a higher gross margin than its other products. The Company
anticipates that these headset products will continue to account for a
significant portion of its net sales and profits in the foreseeable future. If
sales of the Company's telephone headset products were to decline significantly
for any reason, or the gross margins on such products were to decrease
significantly for any reason, including competitive pressures or technological
obsolescence, the Company's operating results would be materially adversely
affected.
A substantial portion of the Company's private label and proprietary
products are manufactured by a relatively small number of manufacturers and most
of such products, including all headset products, are manufactured by only two
sources, To date, the Company has been able to obtain adequate supplies of
these products, although on occasion the Company has incurred additional
delivery costs to air ship products to obtain inventory in a timely manner. The
Company's inability in the future to obtain sufficient quantities of sole of
limited source products, or to develop alternate sources, would result in
shortages of such products, which would have a material adverse effect on the
Company's net sales and operating results.
Substantially all of Hello Direct's proprietary products are manufactured
to its specifications by Seo Won K-Tec, Inc. ("K-Tec"), located in south Korea,
and Sinoca Enterprises Co. Ltd. ("Sinoca"), located in Taiwan. Each of these
manufacturers is a substantial supplier to the Company and products manufactured
by Sinoca and K-Tec together represented approximately 58% of the Company's net
sales in the three month period ending March 31, 1996. The Company has no long-
term contracts with these manufacturing sources and competes with other
companies for production facilities and import quota capacity. Although the
Company believes that it has established close relationships with these foreign
manufacturing sources, the Company's future success will depend in large measure
upon its ability to maintain such relationships, The Company's business is
subject to the risks generally associated with doing business abroad, in
countries in which the Company's manufacturing sources are located. The Company
cannot predict the effect that such factors will have on its business
arrangements with foreign manufacturing sources. If any such factors were to
render the conduct of business in a particular country undesirable or
impractical, or if the Company's current foreign manufacturing sources were to
cease doing business with the Company for any reason, the Company's business and
operating results could be adversely affected. Further, the Company cannot
predict whether additional United States quotas, duties, taxes or other charges
or restrictions will be imposed upon the
- - -----------------------
* This statement is a forward-looking statement reflecting current expectations,
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in the Company's
Annual Report on Form 10-K.
<PAGE>
importation of its products in the future, or what effect any such actions would
have on its business, financial condition and results of operations.
Increases in postal rates and paper and printing costs increase the cost of
the Company's catalog mailings. While the Company experienced significant paper
price increases in 1995, the price of paper has stabilized and additional price
increases, if any, in 1996 are not anticipated to be material*. Postal rates
were increased in January 1995 and the Postal Service approved requirements for
sorting and bar coding of third class mail which will result in a small discount
from present rates for third class mail. These requirements, effective July 1,
1996, will reduce postage expense in the second half of 1996, although not
materially*. Should there be changes in the current outlook, an increase in
postal rates or higher than anticipated paper and printing costs could have a
material adverse impact on the Company's financial position and results of
operations to the extent that the Company is unable to pass such increase
directly on to customers by raising prices or to offset such increase by
implementing more efficient printing mailing and delivery systems.
The Company has experienced in the past and will experience in the future
quarterly variations in net sales and net income as a result of many factors,
including the timing of catalog mailings; catalog response rates; product mix;
the level of selling, general and administrative expenses; the timing and level
of product development expenses; and the timing and success of new product
introductions by the Company or its competitors, The Company's planned
operating expenditures are based on sales forecasts. If net sales are below
expectations in any given quarter, operating results would be materially
adversely affected.
- - ----------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in the Company's
Annual Report on Form 10-K.
<PAGE>
SIGNATURES
Pursuant to the Securities and Exchange Act of 1934, the Registrant has
duly caused this report to be signed by the undersigned, thereunto duly
authorized.
HELLO DIRECT, INC.
(Registrant)
/s/ NORMAN L. BUNAS
--------------------------------------
Norman L. Bunas,
Vice President of Operations, Chief
Financial Officer (Principal Financial
and Accounting Officer)
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBITS PAGE NUMBER
- - -------- -----------
<C> <S> <C>
11.1 Statement computation of net income (loss) per share
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 11.1
HELLO DIRECT, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---------- ----------
<S> <C> <C>
Net income $ 255,000 $ 810,000
========== ==========
Weighted average common shares outstanding 5,013,000 453,000
Common stock equivalents:
Common stock options, utilizing treasury stock method
when dilutive 0.00 137,000
Preferred stock, utilizing as if converted method when
dilutive 0.00 2,708,000
Staff Accounting Bulletin No. 83 issuances and grants (1) 0.00 48,000
---------- ----------
Weighted average shares outstanding 5,013,000 3,346,000
========== ==========
Net income per share $ 0.05 $ 0.24
========== ==========
</TABLE>
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common and preferred stock issued for consideration below the
assumed initial public offering (IPO) price, and stock options and warrants
granted with exercise prices below the IPO proce during the 12-month period
preceding the date of the initial filing of the Registration Statement,
have been included in the calculation of common equivalent shares, using
the treasury stock method, as if they were outstanding for all periods
presented.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,071,000
<SECURITIES> 6,378,000
<RECEIVABLES> 4,321,000
<ALLOWANCES> 0
<INVENTORY> 4,338,000
<CURRENT-ASSETS> 19,780,000
<PP&E> 1,500,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,114,000
<CURRENT-LIABILITIES> 3,029,000
<BONDS> 0
0
0
<COMMON> 5,000
<OTHER-SE> 24,062,000
<TOTAL-LIABILITY-AND-EQUITY> 27,114,000
<SALES> 12,073,000
<TOTAL-REVENUES> 12,073,000
<CGS> 5,723,000
<TOTAL-COSTS> 11,841,000
<OTHER-EXPENSES> (193,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 425,000
<INCOME-TAX> 170,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 255,000
<EPS-PRIMARY> .05
<EPS-DILUTED> 0
</TABLE>
