UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934 For the quarterly period ended September 30, 1997
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 0-25524
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.
5893 RUE FERRARI 95138-1858
SAN JOSE, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 972-199
Indicate by check mark whether the registrant (1) has filed all rep
required to be filed by Section 13 or 15(d) of the Securities Exchange A
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
filing requirements for the past 90 days.
Yes X No .
----- -----
Indicate the number of shares outstanding of each of the issuer's classe
common stock, as of the latest practicable date.
Outstanding at
Class October 31, 1997
----- -------------
Common Stock, Par Value $.001 5,057,263
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
HELLO DIRECT, INC.
CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, Decemb
1997 1996
------------- ------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2,851
Short-term investments 3,718
Trade accounts receivable, less allowance for
returns and doubtful accounts 6,698
Inventories 5,780
Deferred tax assets 559
Other current assets 2,023
------------- ------
Total current assets 21,629
Notes receivable 4,653
Property and equipment, net 4,956
Long-term deferred tax assets 523
------------- ------
Total assets $31,761 $
============= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,482
Accrued expenses 1,262
------------- ------
Total current liabilities 5,744
Stockholders' equity:
Common stock 5
Additional paid-in capital 28,001
Accumulated deficit (1,544)
Less treasury stock, at cost (445)
------------- ------
Total stockholders' equity 26,017
------------- ------
Total liabilities and stockholders' equity $31,761 $
============= ======
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
HELLO DIRECT, INC.
CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Month
September 30, Septembe
------------------- -----------
1997 1996 1997 1
--------- --------- --------- -
<S> <C> <C> <C> <
Net sales $16,727 $13,111 $47,981
Cost of goods sold 7,914 6,463 23,309
--------- --------- --------- -
Gross profit 8,813 6,648 24,672
Selling, general and administrative
expenses 7,816 6,297 22,080
Product development expenses 322 313 1,103
--------- --------- --------- -
Operating income 675 38 1,489
Other income - net 177 197 498
--------- --------- --------- -
Income before income taxes 852 235 1,987
Income taxes 342 90 807
--------- --------- --------- -
Net income $510 $145 $1,180
========= ========= ========= =
Net income per share $0.10 $0.03 $0.23
========= ========= ========= =
Weighted average shares outstanding 5,133 5,043 5,101
========= ========= ========= =
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
HELLO DIRECT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Septembe
---------------
1997 19
----------- --
<S> <C> <C
Cash flows from operating activities:
Net income $1,180
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 905
Deferred income taxes 618
Allowance for returns and doubtful accounts 125
Changes in items affecting operations: 0
Trade accounts receivable (1,440)
Inventories (493)
Other current assets (1,215)
Accounts payable and accrued expenses 1,441
----------- --
Net cash provided by operating activities 1,121
----------- --
Cash flows from investing activities:
Purchases of property and equipment (2,069)
Decrease in investments 2,289
Increase in notes receivable (1,156)
----------- --
Net cash used in investing activities (936)
----------- --
Cash flows from financing activities:
Payments on capital lease obligations (20)
Sale of common stock, net 194
----------- --
Net cash provided by financing activities 174
----------- --
Net increase (decrease) in cash and cash equivalents 359
Cash and cash equivalents at beginning of period 2,492
----------- --
Cash and cash equivalents at end of period $2,851
=========== ==
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
HELLO DIRECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Interim Financial Statements
In the opinion of the management of Hello Direct, Inc. (the "Company"),
accompanying unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments necessary to present fai
the financial information set forth therein.
The condensed financial statements have been prepared by the Company wit
audit and are subject to year-end adjustment. Certain information and
footnote disclosures normally included in financial statements prepared
accordance with generally accepted accounting principles have been conde
or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission.
It is suggested that these interim statements be read in conjunction wit
audited financial statements and notes thereto included in the Company's
annual report (Commission File Number 0-25524) filed on Form 10-K for th
fiscal year ended December 31, 1996.
Results of operations for the three and nine-month periods ended Septemb
1997 are not necessarily indicative of future financial results.
2. Net Income Per Share
Net income per share has been computed using the weighted average number
common and common equivalent shares outstanding when dilutive.
Item 2. -- Management's Discussion and Analysis of Financial Condition a
Results of Operations.
This Management's Discussion and Analysis section contains forward-looki
statements that involve risks and uncertainties. The Company's actual r
may differ significantly from the results discussed in the forward-looki
statements. Factors that might cause such a difference include, but are
limited to, those discussed below and in the Company's reports filed wit
Securities and Exchange Commission including the Company's Annual Report
Form 10-K for the year ended December 31, 1996 (the "Form 10-K"). The
forward-looking statements contained herein are made as of the date here
and the Company assumes no obligation to update such forward-looking
statements or to update reasons actual results could differ materially f
those anticipated in such forward-looking statements. Forward-looking
statements are identified with an asterisk (*).
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to Three Months Ended Sep
30, 1996
Net Sales. Net sales reflect total sales less a provision for retur
sales increased $3,616,000 or 27.6% to $16,727,000 in the three-month pe
ended September 30, 1997, from $13,111,000 for the comparable period in
This increase was primarily attributable to a 17.9% increase in the numb
catalogs mailed, to 7.9 million from 6.7 million, and a 15.2% increase i
average catalog order size, to $250 from $217. During the quarter, the
Company continued to use a 60 page prospecting catalog (introduced Sprin
1996) in addition to the full line catalog of 88 pages which is mailed t
house list.
Gross Profit. Gross profit increased $2,165,000 or 32.6% to $8,813,00
the three-month period ended September 30, 1997, from $6,648,000 for the
comparable period in 1996. The gross margin for the three-month period
52.7% for 1997 versus 50.7% for 1996. This increase in gross margin was
result of a more favorable product mix which included increased sales of
higher-margin proprietary products and price reductions from our vendors
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,519,000 or 24.1% to $7,816,000 in t
three-month period ended September 30, 1997, from $6,297,000 for the
comparable period in 1996. The dollar increase for the three-month peri
1997 expense compared to 1996 was the result of headcount additions to t
Company's administrative management group, product management team, and
customer care activities coupled with the higher cost of the new larger
corporate headquarters facility. As a percentage of net sales, these ex
for the three-month period declined to 46.7% in 1997 as compared to 48.0
the same three-month period in 1996. A significant portion of the Compa
selling, general and administrative expenses are related to the producti
printing and distribution of its catalog. Recent savings in catalog
production and printing costs contributed to the lower selling, general
administrative expenses as a percentage of net sales. Any significant
increases in the cost of paper or postage, or deterioration in the respo
rates to mailings, would have a material adverse effect on the Company's
operating results.
Product Development Expenses. Product development expenses increased $
2.9% to $322,000 for the three-month period ended September 30, 1997, fr
$313,000 for the comparable period in 1996. As a percentage of net sale
these expenses for the three-month period were 1.9% for 1997 versus 2.4%
the same three-month period in 1996. It is anticipated these expenses w
fluctuate from time to time based upon the number and character of the
products being developed, however, the Company believes these expenses,
percentage of net sales, will be approximately the same for the year end
December 31, 1997, as they were for the year ended December 31, 1996 .*
Other Income-net. Other income includes interest income of $169,000 for
three-month period ended September 30, 1997 versus $198,000 for the comp
period in 1996. The interest income relates to interest earned on the
remaining proceeds from the Company's initial public offering in April 1
Net Income. Net income increased $365,000 or 252% to $510,000 in the
month period ended September 30, 1997, from $145,000 for the comparable
in 1996. This increase was due to the reasons discussed above.
Nine months Ended September 30, 1997 Compared to Nine months Ended Septe
30, 1996
Net Sales. Net sales increased $10,415,000 or 27.7% to $47,981,000
nine-month period ended September 30, 1997, from $37,566,000 for the
comparable period in 1996.
Gross Profit. Gross profit increased $5,190,000 or 26.6% to $24,672,0
in the nine-month period ended September 30, 1997, from $19,482,000 for
comparable period in 1996. The gross margin for the nine-month period w
51.4% for 1997 versus 51.9% for 1996. This decrease in gross margin was
result of a shift in product mix toward a larger percentage of branded a
private-label products in the first two quarters, which carry lower gros
margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $4,587,000 or 26.2% to $22,080,000 in
nine-month period ended September 30, 1997, from $17,493,000 for the
comparable period in 1996. The dollar increase for the nine-month perio
1997 expense compared to 1996 was the result of planned headcount additi
the Company's administrative management group, product management team,
customer care activities coupled with the Company's move into its new
headquarters facility. However, as a percentage of net sales, these exp
for the nine-month period declined to 46.0% in 1997 as compared to 46.6%
the same nine-month period in 1996.
Product Development Expenses. Product development expenses decreased $
or 20.5% to $1,103,000 for the nine-month period ended September 30, 199
from $1,388,000 for the comparable period in 1996. As a percentage of n
sales, these expenses for the nine-month period were 2.3% for 1997 versu
for the same nine-month period in 1996. The decline was due to the comp
of development of two new products that were introduced in the October 1
catalog. It is anticipated these expenses will fluctuate from time to t
based upon the number and character of the products being developed, how
the Company believes these expenses, as a percentage of net sales, will
approximately the same for the year ending December 31, 1997, as they we
the year ended December 31, 1996.*
Other Income-net. Other income includes interest income of $488,000 for
nine-month period ended September 30, 1997 versus $569,000 for the compa
period in 1996. The interest income relates to interest earned on the
remaining proceeds from the Company's initial public offering in April 1
Net Income. Net income increased $475,000 or 67.4% to $1,180,000 in
month period ended September 30, 1997, from $705,000 for the comparable
in 1996. This increase was due to the reasons discussed above.
Quarterly and Seasonal Fluctuations. The Company has experienced in the
and will experience in the future quarterly variations in net sales and
income as a result of many factors, including the timing of catalog mail
catalog response rates; product mix; the level of selling, general and
administrative expenses; the timing and level of product development exp
and the timing and success of new product introductions by the Company o
competitors.* The Company's planned operating expenditures are based on
forecasts. If net sales are below expectations in any given quarter, th
Company's business, operating results and financial position would be
materially adversely affected. Due to the foregoing factors, it is poss
that in some future quarter the Company's operating results will be belo
expectations of public market analysts and investors. In such event, th
price of the Company's common stock would likely be materially adversely
affected.
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 e
and debt financing, and borrowings under its revolving bank line of cred
Cash provided by operating activities during the nine-month period ended
September 30, 1997 was $1,121,000. This was the result of $2,828,000 pr
by operations including net income, depreciation and amortization and ot
non-cash charges offset by $1,707,000 of changes in operating assets and
liabilities. Cash used by investing activities for the nine-month perio
ended September 30, 1997 was $936,000, due primarily to purchases of pro
and equipment of $2,069,000 and funding of $1,563,000 for the financing
Company's new facility (a portion of which is accounted for as a current
as discussed below), offset by a decrease of $2,289,000 in short-term
investments. Cash provided by financing activities during the nine-mont
period ended September 30, 1997 was $174,000, relating primarily to the
issuance of common stock pursuant to the Company's employee stock purcha
plan.
Additions to equipment during the nine-month period ended September 30,
were $2,069,000 compared to $1,851,000 for same period in the prior year
This increase was anticipated and reflects the Company's investment in i
facility, a new automated call distribution phone system to support the
in sales activity and the tooling requirements for new product introduct
The Company plans to expend approximately $2,500,000 for capital equipme
the year ending December 31, 1997.*
In July 1996, the Company entered into a customized financing arrangemen
the construction of a new corporate headquarters building, call center a
distribution facility intended to serve the Company's long-term expansio
needs.* Under the arrangement, the Company committed and has advanced
$5,000,000 in financing for the construction of a new facility at a fixe
interest rate of 7.5% for a period of 12 years. Effective January 1, 19
the Company entered into a 15-year lease agreement for the facility. Th
term portion of the financing commitment ($4,593,000) is reflected in th
financial statements in notes receivable and the current portion of the
financing commitment ($276,000) is reflected in the financial statements
trade accounts receivable.
The Company believes funds generated from operations, together with avai
funds remaining from the net proceeds of its initial public offering, wi
sufficient to finance its working capital needs for the foreseeable futu
Should the Company require additional funds, it has available through a
financial institution a $5,000,000 unsecured revolving line of credit at
institution's prime lending rate. During the nine-month period ended Sep
30, 1997, the Company did not borrow against this credit facility.
ADDITIONAL FACTORS AFFECTING FUTURE PERFORMANCE
Approximately 52% of the Company's sales for the nine months ended Septe
30, 1997 were derived from sales of the Company's proprietary products (
telephone headset products) which have a higher gross margin than its ot
products. The Company anticipates that these headset products will cont
to account for a significant portion of its net sales and profits in the
foreseeable future.* If net sales of the Company's proprietary product
to decline significantly for any reason, or gross margins on such produc
were to decrease significantly for any reason, including competitive pre
or technological obsolescence, the Company's business, operating results
financial condition would be materially adversely affected.
A substantial portion of the Company's purchases of brand name and priva
label products are concentrated with a relatively small number of
manufacturers. However, the Company believes that alternate sources of s
are available for virtually every third-party product it carries. Sales
brand name products represented approximately 48% of sales in the first
months of 1997. The failure of an existing significant supplier to prov
products would materially adversely affect the Company's business, opera
results and financial condition until it could develop an alternate sour
supply or an alternate product.
All of the Company's proprietary products are manufactured by independen
contractors according to specifications and conditions set by the Compan
Each independent contractor must meet the Company's specifications relat
the manufacturing process and quality assurance before such contractor i
selected by the Company to manufacture Hello Direct products. The Compan
strategy is to continue using independent contractors to meet manufactur
requirements.* A substantial portion of the Company's private label and
proprietary products are manufactured by a relatively small number of
manufacturers and all proprietary headset products are manufactured by t
sources. To date, the Company has been able to obtain adequate supplies
these products, although on occasion the Company has incurred additional
delivery costs to air ship products to obtain inventory in a timely mann
The Company's inability in the future to obtain sufficient quantities of
or limited source products, or to develop alternate sources, would resul
shortages of such products, which would have a material adverse effect o
Company's business, operating results and financial condition.
A substantial portion of Hello Direct's proprietary products are manufac
to its specifications by Seo Won K-Tec, Inc., located in South Korea, Si
Enterprises Co. Ltd., located in Taiwan, and Transtech Electronics Pte.
located in Singapore. The Company has no long-term contracts with these
manufacturing sources and competes with other companies for production
facilities. Although the Company believes that it has established close
relationships with each of its foreign manufacturing sources, the Compan
future success will depend in large measure upon its ability to maintain
relationships. The Company's business is subject to the risks generally
associated with doing business abroad, such as foreign governmental
regulations, political unrest, disruptions or delays in shipments and ch
in economic conditions in countries in which the Company's manufacturing
sources are located. The Company cannot predict the effect that such fac
will have on its business arrangements with foreign manufacturing source
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
reason, the Company's business, operating results and financial conditio
could be adversely affected. Further, the Company cannot predict whether
additional United States duties, taxes or other charges or restrictions
be imposed upon the importation of its products in the future, or what e
any such actions would have on the Company's business, operating results
financial condition.
Catalog production, printing and distribution costs represent a signific
portion of the Company's selling, general and administrative costs. Inc
in postal rates, paper and printing costs increase the cost of the Compa
catalog mailings. A sharp increase in postal rates or higher than antic
paper costs would have a material adverse effect on the Company's busine
operating results and financial position to the extent that the Company
unable to pass such increase directly on to customers by raising prices
offset such increase by implementing more efficient mailing, and deliver
systems. The Postal Service recently proposed a rate increase with an
effective date of April 1, 1998.
The Company's sales volume is highly dependent on the quantity of catalo
mailed and timing of those mailings. In the event the Company is unable
obtain and distribute printed catalogs in appropriate quantities, the
Company's business, operating results and financial position would be
materially adversely affected.
* This statement is a forward-looking statement reflecting current expe
There can be no assurance that the Company's actual future performance
meet the Company's current expectations due to factors described in
"Management's Discussion and Analysis of Financial Condition and Result
Operations" and "Additional Factors Affecting Future Performance" herei
the Form 10-K.
PART II -- OTHER INFORMATION
Items 1 through 5 are not applicable with respect to the current
reporting period.
Item 6. -- Exhibits and Reports on Form 8-K:
a. Exhibits
11.1 Computation of net income per share.
27.1 Financial Data Schedule
b. Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended September 30,
1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
amended, the Registrant has duly caused this report to be signed by on i
behalf by the undersigned thereunto duly authorized.
HELLO DIRECT, INC.
(Registrant)
November 7, 1997 /s/ Raymond E. Nystrom
- ---------------- --------------------------
Date Raymond E. Nystrom
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------- -----------------------
11.1 Computation of net income per share.
27.1 Financial Data Schedule
[ARTICLE] 5
[MULTIPLIER] 1,000
Part II. Other information, Item 6a.
EXHIB
HELLO DIRECT, INC.
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Month
September 30, Septemb
------------------- ------------
1997 1996 1997 19
--------- --------- --------- --
<S> <C> <C> <C> <C
Net income $510 $145 $1,180
Weighted average common shares
outstanding 5,039 4,986 5,028
Common stock options, using treasury
stock method when dilutive 94 57 73
--------- --------- --------- --
Weighted average shares outstanding 5,133 5,043 5,101
========= ========= ========= ==
Net income per share $0.10 $0.03 $0.23
========= ========= ========= ==
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACT
FROM THE CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AN
THE CONDENSED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,851
<SECURITIES> 3,718
<RECEIVABLES> 6,698
<ALLOWANCES> 0
<INVENTORY> 5,780
<CURRENT-ASSETS> 21,629
<PP&E> 4,956
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,761
<CURRENT-LIABILITIES> 5,744
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 26,012
<TOTAL-LIABILITY-AND-EQUITY> 31,761
<SALES> 47,981
<TOTAL-REVENUES> 47,981
<CGS> 23,309
<TOTAL-COSTS> 23,309
<OTHER-EXPENSES> 23,183
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,987
<INCOME-TAX> 807
<INCOME-CONTINUING> 1,180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,180
<EPS-PRIMARY> $0.23
<EPS-DILUTED> $0.23
</TABLE>
