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 EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 1998
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) 972-1990
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.
Outstanding at
Class July 24, 1998
----- -------------
Common Stock, Par Value $.001 5,112,757
<PAGE>
HELLO DIRECT, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. -- Financial Statements
Condensed Balance Sheets as of June 30, 1998 and December 31, 1997
Condensed Statements of Operations for the Three and Six Months
Ended June 30, 1998 and 1997
Condensed Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997
Notes to Condensed Financial Statements
Item 2. -- Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Liquidity and Capital Resources
Additional Factors Affecting Future Performance
Part II - Other Information
Items 1 through 3 and Item 5 are not applicable with respect to the
current reporting period.
Item 4 - Submission of matters to a vote of security holders
Item 6. - Exhibits and Reports on Form 8-K
Signatures
Part 1. Financial Information
Item 1. Financial Statements
HELLO DIRECT, INC.
CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,707 $5,135
Short-term investments 6,499 3,830
Trade accounts receivable, less allowance for
returns and doubtful accounts 6,524 5,752
Inventories 6,111 5,137
Deferred tax assets 677 821
Other current assets 1,453 1,771
------------- -------------
Total current assets 22,971 22,446
Notes receivable 4,393 4,542
Property and equipment, net 4,663 4,819
Long-term deferred tax assets - 25
------------- -------------
Total assets $32,027 $31,832
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,669 $3,856
Accrued expenses 1,176 1,319
------------- -------------
Total current liabilities 3,845 5,175
Non-current liabilities 200 -
------------- -------------
Total liabilities 4,045 5,175
Stockholders' equity:
Common stock 5 5
Additional paid-in capital 28,188 28,045
Accumulated deficit 234 (948)
Less treasury stock, at cost (445) (445)
------------- -------------
Total stockholders' equity 27,982 26,657
------------- -------------
Total liabilities and stockholders' equity $32,027 $31,832
============= =============
</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 Six Months Ended
June 30, June 30,
------------------- --------- ---------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $16,620 $15,318 $34,530 $31,254
Cost of goods sold 7,670 7,542 15,989 15,395
--------- --------- --------- ---------
Gross profit 8,950 7,776 18,541 15,859
Selling, general and administrative
expenses 7,866 6,923 16,076 14,264
Product development expenses 323 371 902 781
--------- --------- --------- ---------
Operating income 761 482 1,563 814
Other income - net 204 152 407 321
--------- --------- --------- ---------
Income before income taxes 965 634 1,970 1,135
Income taxes 386 264 788 465
--------- --------- --------- ---------
Net income $579 $370 $1,182 $670
========= ========= ========= =========
Basic per share amounts:
Net income $0.11 $0.07 $0.23 $0.13
========= ========= ========= =========
Weighted average shares outstanding 5,111 5,031 5,100 5,023
========= ========= ========= =========
Diluted per share amounts:
Net income $0.11 $0.07 $0.23 $0.13
========= ========= ========= =========
Weighted average shares outstanding 5,242 5,110 5,211 5,089
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
HELLO DIRECT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,182 $670
Adjustments to reconcile net income to net cash
provided (used in) operating activities:
Depreciation and amortization 800 584
Deferred income taxes 257 364
Deferred rent 90 -
Allowance for returns and doubtful accounts (75) 109
Changes in items affecting operations:
Trade accounts receivable (687) (1,086)
Inventories (974) (806)
Other current assets 318 (1,010)
Accounts payable and accrued expenses (1,308) 1,301
----------- -----------
Net cash provided (used) in operating activities (397) 126
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (643) (1,861)
Decrease (increase) in investments (2,669) 2,400
Funding of note receivable - (1,227)
Payments received on note receivable 138 -
----------- -----------
Net cash used in investing activities (3,174) (688)
----------- -----------
Cash flows from financing activities:
Payments on capital lease obligations - (18)
Sale of common stock, net 143 95
----------- -----------
Net cash provided by financing activities 143 77
----------- -----------
Net decrease in cash and cash equivalents (3,428) (485)
Cash and cash equivalents at beginning of period 5,135 2,492
----------- -----------
Cash and cash equivalents at end of period $1,707 $2,007
=========== ===========
</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"), the accompanying unaudited financial statements include
all adjustments, consisting only of normal recurring adjustments
necessary to present fairly the financial information set forth
therein.
The condensed financial statements have been prepared by the Company
without audit and are subject to year-end adjustment. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed 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
with the audited financial statements and notes thereto included in
the Company's annual report (Commission File Number 0-25524) filed on
Form 10-K for the fiscal year ended December 31, 1997.
Results of operations for the three and six-month periods ended June
30, 1998 are not necessarily indicative of future financial results.
2. Net Income Per Share
There were no adjustments to net income for purposes of the
calculation of diluted net income per share. The table below
reconciles basic weighted average shares outstanding to diluted
weighted average shares outstanding:
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Basic weighted shares outstanding 5,111,000 5,031,000 5,100,000 5,023,000
Common stock options utilizing
treasury stock method when dilutive 131,000 79,000 111,000 66,000
---------- ---------- ---------- ----------
Diluted weighted shares outstanding 5,242,000 5,110,000 5,211,000 5,089,000
========== ========== ========== ==========
3. Recently Adopted Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The Company
adopted both of these standards on January 1, 1998. The adoption of
SFAS No. 130 and SFAS No. 131 did not have a material effect on the
financial statements of the Company.
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, 1997 (the "Form 10-K"). The forward-
looking statements contained herein are made as of the date hereof,
and the Company assumes no obligation to update such forward-looking
statements or to update reasons actual results could differ materially
from those anticipated in such forward-looking statements. Forward-
looking statements are identified with an asterisk (*).
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June
30, 1997
Net Sales. Net sales reflect total sales less a provision for
returns. Net sales increased $1,302,000 or 8.5% to $16,620,000 in the
three-month period ended June 30, 1998, from $15,318,000 for the
comparable period in 1997. This increase was primarily attributable to
a 1.5% increase in the number of catalogs mailed, to 6.7 million from
6.6 million, and an increase in the average order size, to $257 from
$253.
Gross Profit. Gross profit increased $1,174,000 or 15.1% to
$8,950,000 in the three-month period ended June 30, 1998, from
$7,776,000 for the comparable period in 1997. The gross margin for
the three-month period was 53.8% for 1998 versus 50.8% for 1997. This
increase in gross margin was the result of a shift in product mix
toward higher margin products including a larger percentage of
proprietary products which carry higher gross margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $943,000 or 13.6% to $7,866,000 in
the three-month period ended June 30, 1998, from $6,923,000 for the
comparable period in 1997. The increase for the three-month period in
1998 compared to the same period in 1997 was associated with planned
headcount additions to the Company's corporate (outbound)
telemarketing group and administrative management group, and to
consulting costs incurred in the initial evaluation and selection of
software solutions as part of the Company's systems evolution and
upgrade plan. As a percentage of net sales, these expenses for the
three-month period increased to 47.3% in 1998 as compared to 45.2%
for the same three-month period in 1997. A significant portion of
the Company's selling, general and administrative expenses are
related to the production, printing and distribution of its
catalog. Any significant increase in the cost of paper or postage,
or deterioration in the response rates to mailings, would have a
material adverse effect on the Company's operating results.
Product Development Expenses. Product development expenses declined
$48,000 or 12.9% to $323,000 for the three-month period ended June 30,
1998, from $371,000 for the comparable period in 1997. As a
percentage of net sales, these expenses for the three-month period
were 1.9% for 1998 versus 2.4% for the same three-month period in
1997. The decline was due to a project schedule revision for the
development of new products to be introduced later this year. It is
anticipated these expenses will fluctuate from time to time based upon
the number and character of the products under development, however,
the Company believes these expenses, as a percentage of net sales,
will increase for the year ending December 31, 1998, over the prior
year.*
Other Income-net. Other income includes interest income of $203,000
for the three-month period ended June 30, 1998 versus $152,000 for the
comparable period in 1997. The interest income relates to interest
earned on cash investments, short-term investments and on the
outstanding note receivable.
Net Income. Net income increased $209,000 or 56.5% to $579,000 in the
three month period ended June 30, 1998, from $370,000 for the
comparable period in 1997. This increase was due to the reasons
discussed above.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30,
1997
Net Sales. Net sales increased $3,276,000 or 10.5% to $34,530,000 in
the six-month period ended June 30, 1998, from $31,254,000 for the
comparable period in 1997.
Gross Profit. Gross profit increased $2,682,000 or 16.9% to
$18,541,000 in the six-month period ended June 30, 1998, from
$15,859,000 for the comparable period in 1997. The gross margin for
the six-month period was 53.7% for 1998 versus 50.7% for 1997. This
increase in gross margin was the result of a shift in product mix
toward higher margin products including a larger percentage of
proprietary products which carry higher gross margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,812,000 or 12.7% to $16,076,000
in the six-month period ended June 30, 1998, from $14,264,000 for the
comparable period in 1997. The dollar increase for the six-month
period in 1998 compared to the same period in 1997 was associated with
planned headcount additions to the Company's corporate (outbound)
telemarketing group, administrative management group, product
management team, customer care activities and consulting costs. As a
percentage of net sales, these expenses for the three-month period
increased to 46.6% in 1998 as compared to 45.6% for the same
six-month period in 1997. A significant portion of the Company's
selling, general and administrative expenses are related to the
production, printing and distribution of its catalog. Any
significant increase in the cost of paper or postage, or
deterioration in the response rates to mailings, would have a
material adverse effect on the Company's operating results.
Product Development Expenses. Product development expenses increased
$121,000 or 15.5% to $902,000 for the six-month period ended June 30,
1998, from $781,000 for the comparable period in 1997. As a
percentage of net sales, these expenses for the six-month period were
2.6% for 1998 versus 2.5% for the same six-month period in 1997. The
increase was due to the development of new products scheduled for
introduction later this year. It is anticipated these expenses will
fluctuate from time to time based upon the number and character of the
products under development, however, the Company believes these
expenses, as a percentage of net sales, will increase for the year
ending December 31, 1998, over the prior year.*
Other Income-net. Other income includes interest income of $408,000
for the six-month period ended June 30, 1998 versus $320,000 for the
comparable period in 1997. The interest income relates to interest
earned on cash investments, short-term investments and on the
outstanding note receivable.
Net Income. Net income increased $512,000 or 76.4% to $1,182,000 in
the six-month period ended June 30, 1998, from $670,000 for the
comparable period in 1997. This increase was due to the reasons
discussed above.
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 during the six-month period ended
June 30, 1998 was $397,000. This was the result of $2,254,000
provided by net income, depreciation and amortization and other non-
cash charges offset by $2,651,000 of changes in operating assets and
liabilities. Cash used in investing activities for the six-month
period ended June 30, 1998 was $3,174,000, due primarily to purchases
of property and equipment of $643,000 and an increase in short-term
investments of $2,669,000, offset by $138,000 of principal payments
received on the note receivable. Cash provided by financing activities
during the six-month period ended June 30, 1998, was $143,000,
relating primarily to the issuance of common stock pursuant to the
Company's employee stock purchase plan.
Additions to equipment during the six-month period ended June 30, 1998
were $643,000 compared to $1,861,000 for same period in the prior
year. The Company plans to expend between $2,000,000 and $2,500,000
for capital equipment for the year ending December 31, 1998.*
The Company believes funds generated from operations, together with
available funds remaining from the net proceeds of its initial public
offering, will be sufficient to finance its working capital needs for
the foreseeable future.* Should the Company require additional funds,
it has available though a major financial institution a $7,000,000
unsecured revolving line of credit at that institution's prime lending
rate. During the six-month period ended June 30, 1998, the Company did
not directly borrow against this credit facility.
Impact of the Year 2000 Issue
The year 2000 issue results from computer programs written using a two
digit date field rather than four to define the applicable year.
Certain of the Company's computer programs utilizing a two digit date
field may recognize a date using "00" as the year 1900 rather than the
year 2000. This could potentially result in a system failure or
miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send
invoices, or engage in other similar normal business activities. The
Company plans to upgrade its computer software to increase operational
efficiencies and information analysis and ensure that the new systems
properly recognize dates beyond December 31, 1999. The cost of this
upgrade project, as it relates to the year 2000 issue, is not expected
to have a material effect on the operations of the Company and will be
funded through operating cash flows.
ADDITIONAL FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF
STOCK
Hello Direct operates in a rapidly changing environment that
involves a number of uncertainties, some of which are beyond the
Company's control. In addition to the uncertainties described
elsewhere in this report, these uncertainties include:
Future Operating Results Uncertain. The Company has grown rapidly
and achieved profitability in the past five years as a result of a
substantial increase in catalog mailings, strong growth in the number
of active customers and the success of its product offering,
particularly of its proprietary headset products. There can be no
assurance that the Company will maintain profitability on a quarterly
or annual basis or continue to increase its net sales. Continued
growth in the Company's net sales will depend on, among other things,
the Company's ability to increase sales to existing customers, grow
its customer base and expand its product offering. The Company's
operating results could be materially adversely affected if the
Company were to experience lower than anticipated catalog response
rates from existing and prospective customers, higher than anticipated
product return rates or higher than anticipated increases in paper and
postal costs. There can be no assurance that the Company will
continue to achieve growth in net sales or that such growth will
offset increases in operating expenses. Operating results could also
be materially adversely affected by delays in new product
introductions, poor product selection and market acceptance of new
products or increased competition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Fluctuations in Quarterly Operating Results. 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 number and 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. Due to the foregoing factors, it is possible that in some
future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially
adversely affected.
Rapidly Changing Technology; Need to Successfully Develop New
Products. The market for telecommunications products is generally
characterized by rapidly changing technology that can render existing
products obsolete and unmarketable. The Company believes its current
and future success will depend on its ability to use its direct
customer contacts and product development capabilities to identify,
develop or source and successfully introduce and market in a timely
manner both enhancements to its existing products and new products
that respond effectively to technological change. The Company has
experienced delays in the past in introducing certain of its products
and could encounter similar technical difficulties in the future that
will result in delayed product introductions or expensive recalls.
There can be no assurance that the Company will be successful in
anticipating technological changes or in selecting and developing new
and enhanced products on a timely basis, or that, once developed or
sourced, any such products will gain market acceptance.
Dependence on Headset Products. More than 50% of the Company's net
sales in the first two quarters of 1998 were derived from sales of the
Company's proprietary telephone headset products, which have higher
gross margins 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.
Dependence on Sole or Limited Source Suppliers and Foreign
Manufacturing. 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 three 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 or limited source products, or to develop
alternative sources, would result in shortages of such products, which
would have a material adverse effect on the Company's net sales and
operating results.
A substantial portion of Hello Direct's proprietary products are
manufactured to its specifications by Seo Won K-Tec, Inc., located in
South Korea and the Philippines, Sinoca Enterprises Co. Ltd., located
in Taiwan, and Transtech Electronics Pte. Ltd., located in Singapore.
Each of these manufacturers is a substantial supplier to the Company,
and products manufactured by these manufacturers represented
approximately 50% of the Company's net sales in the first two quarters
of 1998. The Company has no long-term contracts with such
manufacturing sources and competes with other companies for production
facilities. 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, such as foreign governmental regulations,
political unrest, disruptions or delays in shipments and changes in
economic conditions 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 importation of its products in the future, or what effect any such
actions would have on its business, financial condition and results of
operations.
Competition. The market for customer premise telecommunications
products is highly competitive. The Company competes with a variety
of traditional dealers and retailers, including catalog companies,
electronics specialty stores and office products and computer
superstores. A variety of external and internal factors could
adversely affect the Company's ability to compete. These include the
functions, performance, price and reliability of the products offered
by the Company and its competitors, the timing and success of new
product development efforts of the Company and its competitors, and
the effectiveness of the marketing efforts of the Company and its
competitors. Certain competitors of the Company have greater
financial, technical, sales and marketing and other resources than the
Company. There can be no assurance that the Company will compete
effectively against existing competitors or against new competitors
that may enter the market. In addition, while the Company currently
does not know of any competitor specializing in distributing a broad
line of telecommunications products directly to business end-users via
catalog, there can be no assurance that the Company will be able to
compete successfully in the future in either the direct marketing
catalog channel, which may attract new market entrants, or in other
channels that the Company may enter or that may be developed for
telecommunications products for such customers.
Increase in Costs of Catalog Mailing, Paper and Printing.
Increases in postal rates and paper and printing costs increase the
cost of the Company's catalog mailings. 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Risks Associated with Managing a Growing Business. The Company has
experienced significant growth in its operations that has placed
significant demands on the Company's administrative, operational and
financial resources. The growth in the Company's customer base and
changes in its product offering have placed, and are expected to
continue to place, a significant strain on the Company's management
and operations, including on its product development, customer service
and finance and administration staffs. The Company's future
performance will depend in part on its ability to successfully
implement enhancements to its management information systems and to
adapt those systems, as necessary, to respond to changes in its
business. The inability of the Company to successfully integrate and
train new hires could have a material adverse effect on the Company's
business or results of operations. The failure of the Company's
management to respond to and manage changing business conditions could
materially adversely affect the Company's business or financial
condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Dependence on Single Facility. The Company's telemarketing,
customer service and distribution functions are housed in a single
facility in San Jose, California. The Company has taken precautions
to protect itself from events that could interrupt order fulfillment
and customer service, such as offsite storage of computer backup data
and a backup power source. Notwithstanding these precautions, there
can be no assurance that a fire, flood, earthquake or other disaster
affecting the Company's facility would not disable these functions.
Any significant damage to this facility would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Dependence on Key Personnel. The Company's future success will
depend to a significant extent on the efforts of its key management
personnel. The loss of the services of any of these individuals could
have a material adverse effect on the Company's business, financial
condition and results of operations. Except for Messrs. Glover and
Waldera, none of the Company's executive officers has entered into an
employment agreement with the Company. The Company does not maintain
key-man life insurance on any of these individuals.
Competition for employees with technical, management, customer
service and other skills is intense in the telecommunications products
industry. The Company's failure to retain and attract additional
qualified employees could negatively affect the Company's business.
State Sales Tax Collection. The Company presently collects retail
occupation tax, commonly referred to as sales tax, or other similar
tax, only on sales of products to residents of the State of
California. Several states have sought to impose on direct marketers
the burden of collecting state sales taxes on the sale of products
shipped to those states' residents. The United States Supreme Court
has held that it is unconstitutional for a state to impose tax
collection obligations on an out-of-state mail order company whose
only contacts with the taxing state are the distribution of catalogs
and other advertisement materials through the mail and whose
subsequent delivery of purchased goods is by United States mail or
interstate common carriers. In the event of a change in present law,
the imposition of a tax collection obligation on the Company by states
into which it ships products may result in additional administrative
expenses to the Company and price increases to the customer, which
could adversely affect the Company's operating results.
Government Regulation of Mailing Lists. The Company seeks to expand
its in-house list of customers and potential customers ("House List")
by continually renting appropriate mailing lists and sending its
catalogs to prospects obtained from these lists. In the event that
the federal or state governments enact privacy legislation resulting
in the increased regulation of mailing lists, the Company's ability to
enhance and expand its House List could be adversely affected. In
such event, the Company could also experience increased costs in
complying with potentially burdensome regulations concerning the
solicitation of consents to keep or add customer names to Hello
Direct's mailing lists.
Risks Associated With Intellectual Property Rights. The Company
relies on a combination of patent, copyright, trademark and trade
secret laws and contractual provisions to protect its proprietary
rights in its products. As part of its confidentiality procedures,
the Company generally enters into non-disclosure agreements with its
employees, distributors and corporate partners, and limits access to
and distribution of its software, documentation and other proprietary
information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's products
or technology independently. In addition, effective protection of
intellectual property rights may be unavailable or limited in certain
foreign countries.
There are no currently pending material claims that the Company's
products, trademarks or other proprietary rights significantly
infringe the proprietary rights of third parties. However, there can
be no assurance that the Company will not receive in the future
communications from third parties asserting that the Company's
products infringe, or may infringe, the proprietary rights of third
parties. There can be no assurance that licenses to disputed third-
party technology would be available on reasonable commercial terms, if
at all. In the event of litigation to determine the validity of any
third-party claims, such litigation, whether or not determined in
favor of the Company, could result in significant expense to the
Company and divert the efforts of the Company's technical and
management personnel from productive tasks. In the event of an
adverse ruling in such litigation, the Company might be required to
discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain
licenses to infringing technology. In the event of a successful claim
against the Company and the failure of the Company to develop or
license a substitute technology, the Company's business and operating
results would be adversely affected.
Product Liability and Insurance. Sale of the Company's proprietary
and other products through the catalog and alternate channels entails
the risk of product liability claims, although the Company has not
experienced any claims to date. While the Company believes that its
product liability insurance coverage is currently adequate, such
coverage is limited, and there can be no assurance that such insurance
can be maintained in the future at a reasonable cost or in amounts
sufficient to protect the Company against losses due to liability. A
successful product liability claim brought against the Company in
excess of relevant insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Volatility of Stock Price. The market price of the shares of
Common Stock has been volatile and may be significantly affected by
factors such as actual or anticipated fluctuations in the Company's
operating results, announcements of technological innovations or new
products by the Company or its competitors, developments with respect
to intellectual property and proprietary rights, conditions and trends
in the telecommunications and telephone headset industries, changes in
earnings estimates or buy-sell recommendations by securities analysts,
general market conditions and other factors. In addition, the stock
market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the
common stocks of emerging growth companies and that have often been
unrelated to the operating performance of particular companies. These
broad market fluctuations may also adversely affect the market price
of the Company's Common Stock.
* 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. Investors are
strongly encouraged to review the section herein and in Form 10-K entitled
"Factors Affecting Operating Results and Market Price of Company Stock"
for a discussion of factors that could affect future performance.
PART II -- OTHER INFORMATION
Items 1 through 3 are not applicable with respect to the current
reporting period.
Item 4 - Submission of matters to a vote of security holders
At the Annual Meeting of Stockholders of the Company, held on May 6,
1998, in San Jose, California, the stockholders elected seven
directors to serve until the next Annual Meeting of Stockholders;
ratified and approved an amendment to the Company's Employee Stock
Purchase Plan increasing the number of shares of Common Stock reserved
for issuance thereunder by 150,000 to a total of 305,000; and
ratified the appointment of KPMG Peat Marwick LLP as independent
public accountants of the Company for the fiscal year ending December
31, 1998.
Broker
Item For Against Abstain Non-Vote
----------- -------- -------- --------
Election of Directors
- --------------------
C. Allen Batts 3,536,172 500 - -
John W. Combs 3,536,172 500 - -
E. Alexander Glover 3,536,172 500 - -
Deepak Kamra 3,536,172 500 - -
John B. Mumford 3,536,172 500 - -
William P. Sousa 3,536,172 500 - -
Charles E. Volwiler 3,536,172 500 - -
Approve Amendment to 1995 Stock Purchase Plan
- ---------------------------------------------
3,534,372 1,600 700 -
Approve KPMG Peat Marwick LLP
- ----------------------------
3,534,972 300 1,400 -
Item 5 - Not applicable.
Item 6. -- Exhibits and Reports on Form 8-K:
a. Exhibits
10.1 Revolving Line of Credit Note between Hello Direct, Inc. and
Wells Fargo Bank
10.2 Loan Agreement between Hello Direct, Inc. and Wells Fargo
Bank
10.3 Form of Employee Severance Agreement entered into by and between
the Company and each of its executive officers
10.4 Form of Stock Option Agreement under the 1995 Stock Plan
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 June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be
signed by on its behalf by the undersigned thereunto duly authorized.
HELLO DIRECT, INC.
(Registrant)
July 24, 1998 /s/ Raymond E. Nystrom
- ------------- --------------------------
Date Raymond E. Nystrom
Chief Financial Officer
[ARTICLE] 5
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
$7,000,000.00 San Jose, California
May 15, 1998
FOR VALUE RECEIVED, the undersigned HELLO DIRECT, INC. ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank") at its office at Santa Clara Valley RCBO, 121 Park Center
Plaza 3rd Flr, San Jose, CA 95115, or at such other place as the
holder hereof may designate, in lawful money of the United States of
America and in immediately available funds, the principal sum of
$7,000,000.00, or so much thereof as may be advanced and be
outstanding, with interest thereon, to be computed on each advance
from the date of its disbursement as set forth herein.
INTEREST/FEES:
(a) Interest. The outstanding principal balance of this Note shall
bear interest (computed on the basis of a 360-day year, actual days
elapsed) at a rate per annum equal to the Prime Rate in effect from
time to time. The "Prime Rate" is a base rate that Bank from time to
time establishes and which serves as the basis upon which effective
rates of interest are calculated for those loans making reference
thereto. Each change in the rate of interest hereunder shall become
effective on the date each Prime Rate change is announced within Bank.
(b) Payment of Interest. Interest accrued on this Note shall be
payable on the 15th day of each month, commencing June 15, 1998.
(c) Default Interest. From and after the maturity date of this
Note, or such earlier date as all principal owing hereunder becomes
due and payable by acceleration or otherwise, the outstanding
principal balance of this Note shall bear interest until paid in full
at an increased rate per annum (computed on the basis of a 360-day
year, actual days elapsed) equal to 4% above the rate of interest from
time to time applicable to this Note.
(d) Commitment Fee. Prior to the initial extension of credit under
this Note, Borrower shall pay to Bank a non-refundable commitment fee
of $10,000.00.
(e) Collection of Payments. Borrower authorizes Bank to collect all
interest and fees due hereunder by charging Borrower's demand deposit
account number 4159-321926 with Bank, or any other demand deposit
account maintained by any Borrower with Bank, for the full amount
thereof. Should there be insufficient funds in any such demand deposit
account to pay all such sums when due, the full amount of such
deficiency shall be immediately due and payable by Borrower.
SIGHT COMMERCIAL LETTER OF CREDIT SUBFEATURE:
(a) Letter of Credit Subfeature. As a subfeature under this Note,
Bank agrees from time to time during the term hereof to issue sight
commercial letters of credit for the account of Borrower to finance
Borrower's inventory purchases (each, a "Letter of Credit" and
collectively, "Letters of Credit"); provided however, that the form
and substance of each Letter of Credit shall be subject to approval by
Bank, in its sole discretion; and provided further, that the aggregate
undrawn amount of all outstanding Letters of Credit shall not at any
time exceed $7,000,000.00. Each Letter of Credit shall be issued for a
term not to exceed 180 days, as designated by Borrower; provided
however, that no Letter of Credit shall have an expiration date more
than 90 days beyond the maturity date of this Note. The undrawn amount
of all Letters of Credit shall be reserved under this Note and shall
not be available for borrowings hereunder. Each Letter of Credit shall
be subject to the additional terms and conditions of the Letter of
Credit Agreement and related documents, if any, required by Bank in
connection with the issuance thereof. Each draft paid by Bank under a
Letter of Credit shall be deemed an advance under this Note and shall
be repaid by Borrower in accordance with the terms and conditions of
this Note; provided however, that if advances hereunder are not
available, for any reason, at the time any draft is paid by Bank, then
Borrower shall immediately pay to Bank the full amount of such draft,
together with interest thereon from the date such amount is paid by
Bank to the date such amount is fully repaid by Borrower, at the rate
of interest applicable to advances hereunder. In such event Borrower
agrees that Bank, in its sole discretion, may debit any demand deposit
account maintained by Borrower with Bank for the amount of any such
draft.
(b) Letter of Credit Fees. Borrower shall pay to Bank fees upon the
issuance of each Letter of Credit, upon the payment or negotiation by
Bank of each draft under any Letter of Credit and upon the occurrence
of any other activity with respect to any Letter of Credit (including
without limitation, the transfer, amendment or cancellation of any
Letter of Credit) determined in accordance with Bank's standard fees
and charges then in effect for such activity.
BORROWING AND REPAYMENT:
(a) Use of Proceeds. Advances under this Note shall be available
solely to finance working capital requirements.
(b) Borrowing and Repayment. Borrower may from time to time during
the term of this Note borrow, partially or wholly repay its
outstanding borrowings, and re-borrow, subject to all of the
limitations, terms and conditions of this Note and of any document
executed in connection with, or at any tame as a supplement to, this
Note; provided however, that the total outstanding borrowings under
this Note shall not at any time exceed the principal amount stated
above. The unpaid principal balance of this obligation at any time
shall be the total amounts advanced hereunder by the holder hereof
less the amount of any principal payments made hereon by or for any
Borrower, which balance may be endorsed hereon from time to time by
the holder. The outstanding principal balance of this Note shall be
due and payable in full on May 15, 1999; except with respect to any
draft paid by Bank under a commercial Letter of Credit subsequent to
said date, the full amount of which shall be due and payable by
Borrower immediately upon payment by Bank.
(c) Advances. Advances hereunder, to the total amount of the
principal sum available hereunder, may be made by the holder at the
oral or written request of (i) E. Alexander Glover or Raymond E.
Nystrom or Kermit Nolan, any one acting alone, who are authorized to
request advances and direct the disposition of any advances until
written notice of the revocation of such authority is received by the
holder at the office designated above, or (ii) any person, with
respect to advances deposited to the credit of any account of any
Borrower with the holder, which advances, when so deposited, shall be
conclusively presumed to have been made to or for the benefit of each
Borrower 'regardless of the fact that persons other than those
authorized to request advances may have authority to draw against such
account. The holder shall have no obligation to determine whether any
person requesting an advance is or has been authorized by any
Borrower.
EVENTS OF DEFAULT:
Any default in the payment or performance of any obligation under
this Note, or any defined event of default under any loan agreement
now or at any time hereafter in effect between Borrower and Bank
(whether executed prior to, concurrently with or at any time after
this Note), shall constitute an "Event of Default" under this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the
holder of this Note, at the holder's option, may declare all sums of
principal, interest, fees and charges outstanding hereunder to be
immediately due and payable without presentment, demand, notice of
nonperformance, notice of protest, protest or notice of dishonor, all
of which are expressly waived by each Borrower, and the obligation, if
any, of the holder to extend any fur[her credit hereunder shall
immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments; advances,
charges, costs and expenses, including reasonable attorneys' fees (to
include outside counsel fees and all allocated costs of the holder's
in-house counsel), expended or incurred by the holder in connection
with the enforcement of the holder's rights and/or the collection of
any amounts which become due to the holder under this Note, and the
prosecution or defense of any action in any way related to this Note,
including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without
limitation, any adversary proceeding, contested matter or motion
brought by Bank or any other person) relating to any Borrower or any
other person or entity.
(b) Obligations Joint and Several. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such
Borrower shall be joint and several.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the state of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as
of the date first written above.
HELLO DIRECT, INC.
By: /s/ Raymond E. Nystrom
Title: V.P. Operations, CFO
[ARTICLE] 5
WELLS FARGO BANK LOAN AGREEMENT
This Loan Agreement (this "Agreement") is entered into by and
between HELLO DIRECT, INC. ("Borrower") and WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") and sets forth the terms and conditions which
govern all Borrower's commercial credit accommodations from Bank,
whether now existing or hereafter granted (each, a "Credit" and
collectively, "Credits"), which terms and conditions are in addition
to those set forth in any other contract, instrument or document
(collectively with this Agreement, the "Loan Documents") required by
this Agreement or heretofore or at any time hereafter delivered to
Bank in connection with any Credit.
I. REPRESENTATIONS AND WARRANTIES. Borrower makes the following
representations and warranties to Bank, which representations and
warranties shall be true as of the date hereof and on the date of each
extension of credit under each Credit with the same effect as though
made on each such date:
(a) Legal Status. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the State of Delaware,
and is qualified or licensed to do business in all jurisdictions in
which such qualification or licensing is required or in which the
failure to be qualified or licensed could have a material adverse
effect on Borrower.
(b) Authorization and Validity. Each of the Loan Documents has been
duly authorized, and upon its execution and delivery to Bank will
constitute a legal, valid and binding obligation of Borrower or the
party which executes the same, enforceable in accordance with its
respective terms.
(c) No Violation. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of
law or regulation, or contravene any provision of Borrower's Articles
of Incorporation or By-Laws, or result in any breach of or default
under any agreement, indenture or other instrument to which Borrower
is a party or by which Borrower may be bound.
(d) No Litigation. There are no pending, or to the best of
Borrower's knowledge threatened, actions, Claims, investigations,
suits or proceedings by or before any governmental authority,
arbitrator, court or administrative agency which could have a material
adverse effect on the financial condition or operation of Borrower
except as disclosed by Borrower to Bank in writing prior to the date
hereof.
(e) .Financial Statements The most recent annual financial
statement of Borrower, and all interim financial statements delivered
to Bank since the date of said annual financial statement, true copies
of which have been delivered by Borrower to Bank prior to the date
hereof, are complete and correct, present fairly the financial
condition of Borrower and disclose all liabilities of Borrower, and
have been prepared in accordance with generally accepted accounting
principles. Since the dates of such financial statements there has
been no material adverse change in the financial condition of
Borrower, nor has Borrower mortgaged, pledged, granted a security
interest in or otherwise encumbered any of its assets or properties
except in favor of Bank or as otherwise permitted by Bank in writing.
(0 Tax Returns. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to
any year except as disclosed by Borrower to Bank in writing prior to
the date hereof.
II. ADDITIONAL TERMS.
(a) Conditions Precedent. The obligation of Bank to grant any
Credit is subject to the condition that Bank shall have received all
contracts, instruments and documents, duly executed where applicable,
deemed necessary by Bank to evidence such Credit and all terms and
conditions applicable thereto, all of which shall be in form and
substance satisfactory to Bank.
(b) Application of Payment, Each payment made on each Credit shall
be applied first, to any interest then due, second, to any fees and
charges then due, and third, to the outstanding principal balance
thereof.
III. COVENANTS. So long as any Credit remains available or any
amounts under any Credit remain outstanding, Borrower shall, unless
Bank otherwise consents in writing:
(a) Insurance. Maintain and keep in force, for each business in
which Borrower is engaged, insurance of the types and in amounts
customarily carried in similar lines of business, including but not
limited to fire, extended coverage, public liability, property damage
and workers' compensation, carried with companies and in amounts
satisfactory to Bank, and deliver to Bank from time to time at Bank's
request schedules setting forth all insurance then in effect.
(b) Compliance: Laws and Regulations; Year 2000
(i) Preserve and maintain all licenses, permits, governmental
approvals, rights, privileges and franchises necessary for the conduct
of Borrower's business; and comply with the provisions of all
documents pursuant to which Borrower is organized and/or which govern
Borrower's continued existence and with the requirements of all laws,
rules, regulations and orders of any governmental authority applicable
to Borrower and/or its business, and all state or federal
environmental, hazardous waste, health and safety statutes, and any
rules or regulations adopted pursuant thereto, which govern or affect
any operations and/or properties of Borrower.
(ii) Perform all acts reasonably necessary to ensure that (A)
Borrower and any business in which/ Borrower holds a substantial
interest, and (B) all customers, suppliers and vendors that are
material to Borrower's business, become Year 2000 Compliant in a
timely manner. Such acts shall include, without limitation, performing
a comprehensive review and assessment of all of Borrower's systems and
adopting a detailed plan, with itemized budget, for the remediation,
monitoring and testing of such systems. As used herein, "Year 2000
Compliant" shall mean, in regard to any entity, that all software,
hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such
entity, will properly perform date sensitive functions before, during
and after the year 2000. Borrower shall, immediately upon request,
provide to Bank such certifications or other evidence of Borrower's
compliance with the terms hereof as Bank may from time to time
require.
(c) Other Indebtedness. Not create, incur, assume or permit to
exist any indebtedness or other liabilities, whether secured or
unsecured, matured or unmatured, liquidated or unliquidated, joint or
several, direct or contingent (including any contingent liability
under any guaranty of the obligations of any person or entity), except
(i) the liabilities of Borrower to Bank, (ii) trade debt incurred by
Borrower in the normal course of its business, and (iii) any other
liabilities of Borrower existing as of, and disclosed to Bank in
writing prior to, the date hereof.
(d) Merger; Consolidation; Transfer of Assets. Not merge into or
consolidate with any other entity; nor make any substantial change in
the nature of Borrower's business as conducted as of the date hereof;
nor acquire all or substantially all of the assets of any other person
or entity; nor sell, lease, transfer or otherwise dispose of all or a
substantial or material portion of Borrower's assets except in the
ordinary course of its business.
(e) Pledge of Assets. Not mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of
Borrower's assets now owned or hereafter acquired, except in favor of
Bank and except any of the foregoing existing as of, and disclosed to
Bank in writing prior to, the date hereof.
(f) Financial Statements. Provide to Bank all of the following, in
form and detail satisfactory to Bank, together with such current
financial and other information as Bank from time to time may
reasonably request:
(i) As soon as available, but in no event later than 90 days after
and as of the end of each fiscal year, an audited financial statement
of Borrower, prepared by an independent certified public accountant
acceptable to Bank, to include a balance sheet, income statement and
statement of cash flow, together with all supporting schedules and
footnotes.
(ii) As soon as available, but in no event later than 45 days after
and as of the end of each fiscal quarter, a financial statement of
Borrower, prepared by Borrower and certified as correct by an officer
of Borrower authorized to borrow under the most current Corporate
Borrowing Resolution delivered by Borrower to Bank, to include a
balance sheet and income statement, together with all supporting
schedules and footnotes.
(g) Financial Condition. Maintain Borrower's financial condition as
follows using generally accepted accounting principles consistently
applied and used consistently with prior practices, except to the
extent modified by the following definitions:
(i) Total Liabilities divided by Tangible Net Worth not at any time
greater than 1.00 to 1.0, with "Total Liabilities" defined as the
aggregate of current liabilities and non-current liabilities less
subordinated debt, and with "Tangible Net Worth" defined as the
aggregate of total stockholders' equity plus subordinated debt less
any intangible assets.
(ii) Quick Ratio not at any time less than 1.25 to 1.0, with "Quick
Ratio" defined as the aggregate of unrestricted cash, unrestricted
marketable securities and receivables convertible into cash divided by
total current liabilities.
(iii) Net income after taxes not less than $1.00 on an annual
basis, determined as of each fiscal year end, and pre-tax profit not
less than $1.00 on a quarterly basis, determined as of each fiscal
quarter end.
IV. DEFAULT; REMEDIES.
(a) Events of Default. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement:
(i) The failure to pay any principal, interest, fees or
other charges when due under any of the Loan Documents.
(ii) Any representation or warranty hereunder or under any
other Loan Document shall prove to be incorrect, false or misleading
in any material respect when made.
(iii) Any violation or breach of any term or condition of this
Agreement or any other of the Loan Documents.
(iv) Any default in the payment or performance of any
obligation, or any defined event of default, under any provisions of
any contract, instrument or document pursuant to which Borrower or any
guarantor hereunder has incurred debt or any other liability of any
kind to any person or entity, including Bank.
(v) The filing of a petition by or against Borrower or any
guarantor hereunder under any provisions of the Bankruptcy Reform Act,
Title 11 of the United States Code, as amended or recodified from time
to time, or under any similar or other law relating to bankruptcy,
insolvency, reorganization or other relief for debtors; the
appointment of a receiver, trustee, custodian or liquidator of or for
any part of the assets or property of Borrower or any such guarantor;
Borrower or any such guarantor becomes insolvent, makes a general
assignment for the benefit of creditors or is generally not paying its
debts as they become due; or any attachment or like levy on any
property of Borrower or any such guarantor.
(vi) Any material adverse change, as determined solely by Bank,
in the financial condition of Borrower.
(vii) The death or incapacity of any individual guarantor
hereunder; or the dissolution or liquidation of Borrower or of any
guarantor hereunder which is a corporation, partnership or other type
of entity.
(viii) Any change in ownership during the term hereof of an
aggregate of 25% or more of the common stock of Borrower.
(b) Remedies. Upon the occurrence of any Event of Default: (i)
the entire balance of principal, interest, fees and charges on each
Credit shall, at Bank's option, become immediately due and payable in
full without presentment, demand, protest or notice of dishonor, all
of which are expressly waived by Borrower; (ii) the obligation, if
any, of Bank to extend any further credit to Borrower under any Credit
shall immediately cease and terminate; and (iii) Bank shall have all
rights, powers and remedies available under each of the Loan
Documents, or accorded by law, including without limitation the right
to resort to any security for any Credit. All rights, powers and
remedies of Bank shall be cumulative.
V. MISCELLANEOUS.
(a) No Waiver. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents
shall affect or operate as a waiver of such right, power or remedy;
nor shall any single or partial exercise of any such right, power or
remedy preclude, waive or otherwise affect any other or further
exercise thereof or the exercise of any other right, power or remedy.
Any waiver, permit, consent or approval of any kind by Bank of any
breach of or default under this Agreement, or any such waiver of any
provisions or conditions hereof, must be in writing and shall be
effective only to the extent set forth in writing.
(b) Notices. All notices, requests and demands required under
this Agreement must be in writing, addressed to the applicable party
at its address specified below or to such other address as any party
may designate by written notice to each other party, and shall be
deemed to have been given or made as follows: (i) if personally
delivered, upon delivery; (ii) if sent by mail, upon the earlier of
the date of receipt or 3 days after deposit in the U.S. mail, first
class and postage prepaid; and (iii) if sent by telecopy, upon
receipt.
(c) Costs, Expenses and Attorneys' Fees Borrower shall pay to Bank
immediately upon demand the full amount of all payments, advances,
charges, costs and expenses, including reasonable attorneys' fees (to
include outside counsel fees and all allocated costs of Bank's in-
house counsel), expended or incurred by Bank in connection with (i)
the negotiation and preparation of this Agreement and the other Loan
Documents, and Bank's continued administration of each Credit, (ii)
the enforcement of Bank's rights and/or the collection of any amounts
which become due to Bank under any of the Loan Documents, and (iii)
the prosecution or defense of any action in any way related to any of
the Loan Documents, including without limitation, any action for
declaratory relief, whether incurred at the trial or appellate level,
in an arbitration proceeding or otherwise, and including any of the
foregoing incurred in connection with any bankruptcy proceeding
(including without limitation, any adversary proceeding, contested
matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.
(d) Successors; Assignment. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators,
legal representatives, successors and assigns of the parties; provided
however, that Borrower may not assign or transfer its interests or
rights hereunder without Bank's prior written consent. Bank reserves
the right to sell, assign, transfer, negotiate or grant participations
in all or any part of, or any interest in, Bank's rights and benefits
under each of the Loan Documents. In connection therewith Bank may
disclose all documents and information which Bank now has or may
hereafter acquire relating to any Credit, Borrower or its business,
any guarantor of any Credit or the business of any such guarantor, or
any collateral for any Credit.
(e) Controlling Agreement; Amendment. In the event of any direct
conflict between any provision of this Agreement and any provision of
any other Loan Document, the terms of this Agreement shall control.
This Agreement may be amended or modified only in writing signed by
Bank and Borrower.
(f) No Third Party Beneficiaries This Agreement is made and entered
into for the sole protection and benefit of the parties hereto and
their respective permitted successors and assigns, and no other person
or entity shall be a third party beneficiary of, or have any direct or
indirect cause of action or claim in connection with, this Agreement
or any other Loan Document to which it is not a party.
(g) Severability of Provisions. If any provision of this Agreement
shall be held to be prohibited by or invalid under applicable law,
such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such
provision or any remaining provisions of this Agreement.
(h) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the state of California.
(i) Cancellation of Prior Loan Agreements. This Agreement cancels
and supersedes all prior loan agreements between Borrower and Bank
relating to any Credit.
VI. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Agreement. A "Dispute" shall mean
any action, dispute, claim or controversy of any kind, whether in
contract or tort, statutory or common law, legal or equitable, now
existing or hereafter arising under or in connection with, or in any
way pertaining to, any of the Loan Documents, or any past, present or
future extensions of credit and other activities, transactions or
obligations of any kind related directly or indirectly to any of the
Loan Documents, including without limitation, any of the foregoing
arising in connection with the exercise of any self-help, ancillary or
other remedies pursuant to any of the Loan Documents. Any party may by
summary proceedings bring an action in court to compel arbitration of
a Dispute. Any party who fails or refuses to submit to arbitration
following a lawful demand by any other party shall bear all costs and
expenses incurred by such other party in compelling arbitration of any
Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered
by the American Arbitration Association ("AAA") or such other
administrator as the parties shall mutually agree upon in accordance
with the AAA Commercial Arbitration Rules. All Disputes submitted to
arbitration shall be resolved in accordance with the Federal
Arbitration Act (Title 9 of the United States Code), notwithstanding
any conflicting choice of law provision in any of the Loan Documents.
The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any
inconsistency between the terms hereof and any such rules, the terms
and procedures set forth herein shall control. All statutes of
limitation applicable to any Dispute shall apply to any arbitration
proceeding. All discovery activities shall be expressly limited to
matters directly relevant to the Dispute being arbitrated. Judgment
upon any award rendered in an arbitration may be entered in any court
having jurisdiction; provided however, that nothing contained herein
shall be deemed to be a waiver by any party that is a bank of the
protections afforded to it under 12 U.S.C. 91 or any similar
applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-
help remedies such as setoff, foreclosure against or sale of any real
or personal property collateral or security, or to obtain provisional
or ancillary remedies, including without limitation injunctive relief,
sequestration, attachment, garnishment or the appointment of a
receiver, from a court of competent jurisdiction before, after or
during the pendency of any arbitration or other proceeding. The
exercise of any such remedy shall not waive the right of any party to
compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must
be active members of the California State Bar or retired judges of the
state or federal judiciary of California, with expertise in the
substantive laws applicable to the subject matter of the Dispute.
Arbitrators are empowered to resolve Disputes by summary rulings in
response to motions filed prior to the final arbitration hearing.
Arbitrators (i) shall resolve all Disputes in accordance with the
substantive law of the state of California, (ii) may grant any remedy
or relief that a court of the state of California could order or grant
within the scope hereof and such ancillary relief as is necessary to
make effective any award, and (iji) shall have the power to award
recovery of all costs and fees, to impose sanctions and to take such
other actions as they deem necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the California Rules
of Civil Procedure or other applicable law. Any Dispute in which the
amount in controversy is $5,000,000 or less shall be decided by a
single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By
submission to a single arbitrator, each party expressly waives any
right or claim to recover more than $5,000,000. Any Dispute in which
the amount in controversy exceeds $5,000,000 shall be decided by
majority vote of a panel of three arbitrators; provided however, that
all three arbitrators must actively participate in all hearings and
deliberations.
(e) Judicial Review. Notwithstanding anything herein to the
contrary, in any arbitration in which the amount in controversy
exceeds $25,000,000, the arbitrators shall be required to make
specific, written findings of fact and conclusions of law. In such
arbitrations (A) the arbitrators shall not have the power to make any
award which is not supported by substantial evidence or which is based
on legal error, (B) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and
the conclusions of law are not erroneous under the substantive law of
the state of California, and (C) the parties shall have in addition to
the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (1)
whether the findings of fact rendered by the arbitrators are supported
by substantial evidence, and (2) whether the conclusions of law are
erroneous under the substantive law of the state of California.
Judgment confirming an award in such a proceeding may be entered only
if a court determines the award is supported by substantial evidence
and not based on legal error under the substantive law of the state of
California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to
arbitration if the Dispute concerns indebtedness secured directly or
indirectly, in whole or in part, by any real properly unless (i) the
holder of the mortgage, lien or security interest specifically elects
in writing to proceed with the arbitration, or (ii) all parties to the
arbitration waive any rights or benefits that might accrue to them by
virtue of the single action rule statute of California, thereby
agreeing that all indebtedness and obligations of the parties, and all
mortgages, liens and security interests securing such indebtedness and
obligations, shall remain fully valid and enforceable. If any such
Dispute is not submitted to arbitration, the Dispute shall be referred
to a referee in accordance with California Code of Civil Procedure
Section 638 et seq., and this general reference agreement is intended
to be specifically enforceable in accordance with said Section 638. A
referee with the qualifications required herein for arbitrators shall
be selected pursuant to the AAA's selection procedures. Judgment upon
the decision rendered by a referee shall be entered in the court in
which such proceeding was commenced in accordance with California Code
of Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude
any arbitration proceeding within 180 days of the filing of the
Dispute with the AAA. No arbitrator or other party to an arbitration
proceeding may disclose the existence, content or results thereof,
except for disclosures of information by a party required in the
ordinary course of its business, by applicable law or regulation, or
to the extent necessary to exercise any judicial review rights set
forth herein. If more than one agreement for arbitration by or between
the parties potentially applies to a Dispute, the arbitration
provision most directly related to the Loan Documents or the subject
matter of the Dispute shall control. This arbitration provision shall
survive termination, amendment or expiration of any of the Loan
Documents or any relationship between the parties.
IN WITNESS WHEREOF, Borrower and Bank have executed this Agreement as
of May 15, 1998.
HELLO DIRECT, INC. WELLS FARGO BANK,
By: /s/ Raymond E. Nystrom By: /s/ Douglas Carlson
---------------------- -------------------
Title: V.P. Operations, CFO Title: Senior Vice President
Address: 5893 RUE FERRARI Address: 121 Park Center Plaza
SAN JOSE, CA 95138 3rd Flr
San Jose, CA 95115
[ARTICLE] 5
EMPLOYEE SEVERANCE AGREEMENT
This Employee Severance Agreement (the "Agreement") is made and
entered into effective as of May 6, 1998, by and between
_____________("Employee") and Hello Direct, Inc. (the "Company").
WHEREAS, the Board of Directors of the Company has determined it
to be in the best interests of the Company and its stockholders to
provide Company executives with certain protection from events that
could occur in connection with certain changes of control of the
Company, and
WHEREAS, to accomplish this objective and encourage such
executives to continue employment with the Company, the Company
desires to enter into this Agreement,
NOW THEREFORE, for good and valuable consideration, the Company
and Employee hereby agree as follows:
Unless otherwise defined herein, the terms defined in the
applicable Company stock option plan and stock option and restricted
stock purchase agreements shall have the same defined meanings
therein.
1. Employee Rights in Connection with Change of
Control.
(a) Vesting Acceleration. In the event of a
"Change of Control," (i) all of Employee's rights to purchase stock
under all stock option agreements with the Company shall be
automatically vested in their entirety on an accelerated basis and be
fully exercisable and (ii) all of the Company's rights to repurchase
unvested stock under all restricted stock purchase agreements with
Employee shall lapse in their entirety on an accelerated basis as of
the date immediately preceding the first to occur of the following:
(i) such "Change of Control," in the event
any such stock option agreement or restricted stock purchase agreement
is or will be terminated or canceled (except by mutual consent) or any
successor to the Company fails to assume and agree to perform all such
stock option agreements and restricted stock purchase agreements as
provided in Section 3(a) hereof at or prior to such time as any such
person becomes a successor to the Company; or
(ii) such "Change of Control," in the event
Employee does not or will not receive upon exercise of Employee's
stock purchase rights under any such stock option agreement or in
exchange for Employee's restricted stock acquired pursuant to any such
restricted stock purchase agreement the same identical securities
and/or other consideration as is received by all other stockholders in
any merger, consolidation, sale, exchange or similar transaction
occurring upon or after such "Change of Control"; or
(iii) any "Involuntary Termination" of
Employee occurring after any such "Change of Control," or
(iv) one year after such "Change of Control."
(b) Additional Benefits. If Employee's employment
is terminated at any time following a Change of Control by the Company
or by the Employee as a result of an Involuntary Termination, then
Employee shall also receive the following severance benefits from the
Company:
(i) Continued Salary. Employee shall
receive_____ months of Employee's Annual Compensation to be paid out in
a lump sum payment within thirty (30) days of such termination and
subject to applicable tax withholding.
(ii) Continued Employee Benefits. Employee
shall be entitled to one hundred percent (100%) of Company-paid
health, dental and life insurance coverage at the same level of
coverage as was provided to such employee immediately prior to the
Change of Control (the "Company-Paid Coverage"). If such coverage
included Employee's dependents immediately prior to the Change of
Control, such dependents shall also be covered at Company expense.
Company-Paid Coverage shall continue until the earlier of
(i) ___ months from the date of termination or (ii) the date that
Employee and his dependents become covered under another employer's
group health, dental or life insurance plans that provide Employee and
his dependents with comparable benefits and levels of coverage. For
purposes of Title X of the Consolidated Budget Reconciliation Act of
1985 ("COBRA"), the date of the "qualifying event" for Employee and
his dependents shall be the date upon which the Company-Paid Coverage
terminates.
(iii) Extension of Post-Termination Exercise
Period of Nonstatutory Stock Options. The nonstatutory stock options
held by Employee shall remain exercisable for a period of three months
following Employee's termination of employment or consulting
relationship with the Company.
(iv) Accrued Management Bonus. Any accrued
Management Bonus earned by Employee shall become fully payable,
subject to applicable withholding, and shall be paid in a lump sum
payment within thirty (30) days of such termination.
(v) Executive Disability Plan. Employee
shall have the option of continuing to be covered by the Company's
Executive Disability Plan for a period of up to one year following
Employee's termination of employment or consulting relationship with
the Company; and the Company shall pay all premiums and other expenses
associated with such continued coverage.
(vi) Limitation on Payments. To the extent
that any of the payments and benefits provided for in this Agreement
or otherwise payable to Employee constitute "parachute payments"
within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), and, but for this Section 1(b)(vi)(,
would be subject to the excise tax imposed by Section 4999 of the
Code, then Employee's benefits under this Section 1 shall be payable
either
(A) in full, or
(B) as to such lesser amount as would
result in no portion of such severance benefits being subject to
excise tax under Section 4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by
Section 4999, results in the receipt by Employee on an after-tax basis
of the greatest amount of severance benefits under this Section 1,
notwithstanding that all or some portion of such severance benefits
may be taxable under Section 4999 of the Code. Unless the Company and
Employee otherwise agree in writing, any determination required under
this Section 1(b)(v;)shall be made in writing by an independent public
accounting firm reasonably acceptable to the Company other than that
used by the Company (the "Accountants"), whose determination shall be
conclusive and binding upon Employee and the Company for all purposes.
For purposes of making the calculations required by this Section
1(b)(vi), the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable,
good faith interpretations concerning the application of Sections 280G
and 4999 of the Code. The Company and Employee shall furnish to the
Accountants such information and documents as the Accountants may
reasonably request in order to make a determination under this
Section. The Company shall bear all costs the Accountants may
reasonably incur in connection with any calculations contemplated by
this Section 1(b)(vi).
2. Definitions.
(a) Annual Compensation. "Annual Compensation"
shall mean an amount equal to the salary received by Employee from the
Company during the twelve months preceding the date of termination,
excluding bonuses.
(b) Cause. "Cause" shall mean (i) any willful act
of personal dishonesty, fraud or misrepresentation taken by Employee
in connection with his or her responsibilities as an employee which
was intended to result in substantial gain or personal enrichment of
Employee at the expense of the Company and was materially and
demonstrably injurious to the Company; (ii) Employee's conviction of a
felony on account of any act which was materially and demonstrably
injurious to the Company; or (iii) Employee's willful and continued
failure to substantially perform his or her principal duties and
obligations of employment (other than any such failure resulting from
incapacity due to physical or mental illness), which failure is not
remedied in a reasonable period of time after receipt of written
notice from the Company. For the purposes of this Section 2(b), no
act or failure to act shall be considered "willful" unless done or
omitted to be done in bad faith and without reasonable belief that the
act or omission was in or not opposed to the best interests of the
Company. Any act or failure to act based upon authority given
pursuant to a resolution duly adopted by the Board of Directors of the
Company or based upon the advice of counsel for the Company shall be
conclusively presumed to be done or omitted to be done in good faith
and in the best interests of the Company.
(c) Change of Control. "Change of Control" means
the occurrence of any of the following events:
(i) Any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 50% or more of the total voting power
represented by the Company's then outstanding voting securities; or
(ii) A change in the composition of the Board
of Directors of the Company occurring within a two-year period as a
result of which fewer than a majority of the directors are "Incumbent
Directors." "Incumbent Directors" shall mean directors who either
(A) are directors of the Company as of the date hereof, or (B) are
elected, or nominated for election, to the Board of Directors with the
affirmative votes (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a
nominee for election as a director without objection to such
nomination) of at least a majority of the Incumbent Directors at the
time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of
directors of the Company);
(iii) The consummation of (A) a merger or
consolidation of the Company with any other entity, other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity,
or the entity that controls such surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting
securities of the Company, such surviving entity or the entity that
controls the Company or such surviving entity outstanding immediately
after such merger or consolidation, or (B) the sale or disposition by
the Company of all or substantially all the Company's assets; or
(iv) the stockholders of the Company approve
a plan of complete liquidation of the Company.
(d) Involuntary Termination. "Involuntary
Termination" shall mean without Employee's written consent (i) a
termination by the Company of Employee's employment with the Company
other than for Cause; (ii) a material reduction of or variation in
Employee's duties, authority or responsibilities, relative to
Employee's duties, authority or responsibilities as in effect
immediately prior to such reduction or variation; (iii) a reduction by
the Company in the base salary of Employee as in effect immediately
prior to such reduction; (iv) a material reduction by the Company in
the kind or level of employee benefits, including bonuses, to which
Employee was entitled immediately prior to such reduction, with the
result that Employee's overall benefits package is materially reduced;
(v) the relocation of Employee to a facility or a location more than
thirty (30) miles from Employee's then present location; (vi) the
failure of the Company to obtain the assumption of this Agreement by
any successor as required in Section 4(a), or (vii) any act or set of
facts that would under applicable law constitute a constructive
termination of Employee.
3. Voluntary Resignation
(a) Voluntary Resignation; Termination For Cause.
If Employee's continuous status as an employee of the Company
terminates (i) for any reason prior to a Change of Control, (ii) after
change of control, by reason of Employee's voluntary resignation (and
not Involuntary Termination) or (iii) for Cause, then Employee shall
not be entitled to receive severance benefits under Section 1 hereof.
4. Successors.
(a) Company's Successors. Any successor to the
Company (whether direct or indirect and whether by purchase, merger or
consolidation) shall assume the obligations under this Agreement and
agree expressly to perform the obligations under this Agreement in the
same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession.
(b) Successors. The terms of this Agreement and
all rights of Employee hereunder shall inure to the benefit of, and be
enforceable by, Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees
and legatees.
5. Modification; Waiver. No provision of this
Agreement shall be modified or waived unless the modification or
waiver is agreed to in writing and signed by Employee and by an
authorized officer of the Company (other than Employee).
6. Entire Agreement. This Agreement, together with all
present and future stock option agreements and restricted stock
purchase agreements entered into between the Company and Employee
represent the entire agreement of the parties hereto with respect to
the subject matter thereof. In the event of any conflict between the
terms of this Agreement and the terms of any such present or future
stock option agreements and/or restricted stock purchase agreements,
the terms of this Agreement shall prevail.
7. Choice of Law; Arbitration. The validity,
interpretation, construction and performance of this Agreement shall
be governed by the laws of the State of California. Any dispute or
controversy arising under or in connection with this Agreement shall
be settled exclusively by arbitration in Santa Clara, California by
three arbitrators in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction. The Company
shall bear all costs and expenses arising out of or in connection with
any arbitration pursuant to this Section 7.
8. No Employment Agreement. This Agreement shall not
constitute an employment agreement. Employee's employment with the
Company shall constitute employment "at will," unless otherwise
provided in some other written agreement between the Company and
Employee.
IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer,
as of the day and year set forth above.
COMPANY HELLO DIRECT, INC.
-----------------------
Signature of Authorized
Signatory
-----------------------
Print Name and Title
"EMPLOYEE"
-----------------------
Signature
----------------------
Print Name
[ARTICLE] 5
HELLO DIRECT, INC.
1995 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan
shall have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the
Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock
Option
Term/Expiration Date: _________________________
Vesting Schedule:
This Option may be exercised, in whole or in part, in accordance
with the following schedule:
25% of the Shares subject to the Option shall vest twelve months
after the Vesting Commencement Date, and 1/48 of the Shares subject to
the Option shall vest each month thereafter.
Termination Period:
This Option may be exercised for _____ [days/months] after
termination of the Optionee's employment or consulting relationship
with the Company. Upon the death or Disability of the Optionee, this
Option may be exercised for such longer period as provided in the
Plan. In the event of the Optionee's change in status from Employee
to Consultant or Consultant to Employee, this Option Agreement shall
remain in effect. In no event shall this Option be exercised later
than the Term/Expiration Date as provided above.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company
hereby grants to the Optionee named in the Notice of Grant attached as
Part I of this Agreement (the "Optionee"), an option (the "Option") to
purchase the number of Shares, as set forth in the Notice of Grant, at
the exercise price per share set forth in the Notice of Grant (the
"Exercise Price"), subject to the terms and conditions of the Plan,
which is incorporated herein by reference. Subject to Section 15(c)
of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock
Option ("ISO"), this Option is intended to qualify as an Incentive
Stock Option under Section 422 of the Code. However, if this Option
is intended to be an Incentive Stock Option, to the extent that it
exceeds the $100,000 rule of Code Section 422(d) it shall be treated
as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable
during its term in accordance with the Vesting Schedule set out in the
Notice of Grant and the applicable provisions of the Plan and this
Option Agreement. In the event of Optionee's death, Disability or
other termination of Optionee's employment or consulting relationship,
the exercisability of the Option is governed by the applicable
provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by
delivery of an exercise notice, in the form attached as Exhibit A (the
"Exercise Notice"), which shall state the election to exercise the
Option, the number of Shares in respect of which the Option is being
exercised (the "Exercised Shares"), and such other representations and
agreements as may be required by the Company pursuant to the
provisions of the Plan. The Exercise Notice shall be signed by the
Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The Exercise Notice shall be accompanied by
payment of the aggregate Exercise Price as to all Exercised Shares.
This Option shall be deemed to be exercised upon receipt by the
Company of such fully executed Exercise Notice accompanied by such
aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this
Option unless such issuance and exercise complies with all relevant
provisions of law and the requirements of any stock exchange or
quotation service upon which the Shares are then listed. Assuming
such compliance, for income tax purposes the Exercised Shares shall be
considered transferred to the Optionee on the date the Option is
exercised with respect to such Exercised Shares.
3. Vesting Acceleration on Change of Control.
(a) Vesting Acceleration. In the event of a "Change of
Control," all of the Optionee's rights to purchase stock under this
Option Agreement with the Company shall be automatically vested in
their entirety on an accelerated basis and be fully exercisable as of
the date immediately preceding the first to occur of the following:
(i) such "Change of Control," in the event any
such stock option agreement or restricted stock purchase agreement is
or will be terminated or canceled (except by mutual consent) or any
successor to the Company fails to assume and agree to perform all such
stock option agreements and restricted stock purchase agreements as
provided in Section 4(a) hereof at or prior to such time as any such
person becomes a successor to the Company; or
(ii) such "Change of Control"in the event Optionee
does not or will not receive upon exercise of the Optionee's stock
purchase rights under this Option Agreement the same identical
securities and/or other consideration as is received by all other
stockholders in any merger, consolidation, sale, exchange or similar
transaction occurring upon or after such "Change of Control"; or
(iii) any "Involuntary Termination" of the Optionee
occurring after any such "Change of Control."
(b) Change of Control. "Change of Control" means the
occurrence of any of the following events:
(i) Any "person" (as such term is used in Sec-
tions 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 50% or more of the total voting power
represented by the Company's then outstanding voting securities; or
(ii) A change in the composition of the Board of
Directors of the Company occurring within a two-year period as a
result of which fewer than a majority of the directors are "Incumbent
Directors." "Incumbent Directors" shall mean directors who either
(A) are directors of the Company as of the date hereof, or (B) are
elected, or nominated for election, to the Board of Directors with the
affirmative votes (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a
nominee for election as a director without objection to such
nomination) of at least a majority of the Incumbent Directors at the
time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of
directors of the Company); or
(iii) The consummation of (A) a merger or
consolidation of the Company with any other entity, other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity or the entity that controls
such surviving entity) at least fifty percent (50%) of the total
voting power represented by the voting securities of the Company, such
surviving entity or the entity that controls the Company or such
surviving entity outstanding immediately after such merger or
consolidation, or (B) the sale or disposition by the Company of all or
substantially all the Company's assets; or
(iv) The stockholders of the Company approve a plan
of complete liquidation of the Company.
(c) Involuntary Termination. "Involuntary Termination"
shall mean without the Optionee's written consent (i) a termination by
the Company of the Optionee's employment with the Company other than
for Cause; (ii) a material reduction of or variation in the Optionee's
duties, authority or responsibilities, relative to the Optionee's
duties, authority or responsibilities as in effect immediately prior
to such reduction or variation; (iii) a reduction by the Company in
the base salary of the Optionee as in effect immediately prior to such
reduction; (iv) a material reduction by the Company in the kind or
level of the Optionee benefits, including bonuses, to which the
Optionee was entitled immediately prior to such reduction, with the
result that the Optionee's overall benefits package is materially
reduced; (v) the relocation of the Optionee to a facility or a
location more than thirty (30) miles from the Optionee's then present
location; (vi) the failure of the Company to obtain the assumption of
this Option Agreement by any successor as required in Section 4(a), or
(vii) any act or set of facts that would under applicable law
constitute a constructive termination of the Optionee.
(d) Cause. "Cause" shall mean (i) any willful act of
personal dishonesty, fraud or misrepresentation taken by the Optionee
in connection with his or her responsibilities as an the Optionee
which was intended to result in substantial gain or personal
enrichment of the Optionee at the expense of the Company and was
materially and demonstrably injurious to the Company; (ii) the
Optionee's conviction of a felony on account of any act which was
materially and demonstrably injurious to the Company; or (iii) the
Optionee's willful and continued failure to substantially perform his
or her principal duties and obligations of employment (other than any
such failure resulting from incapacity due to physical or mental
illness), which failure is not remedied in a reasonable period of time
after receipt of written notice from the Company. For the purposes of
this Section 3(d), no act or failure to act shall be considered
"willful" unless done or omitted to be done in bad faith and without
reasonable belief that the act or omission was in or not opposed to
the best interests of the Company. Any act or failure to act based
upon authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company or based upon the advice of counsel
for the Company shall be conclusively presumed to be done or omitted
to be done in good faith and in the best interests of the Company.
(e) Voluntary Resignation; Termination For Cause. If the
Optionee's continuous status as an employee of the Company terminates
(i) for any reason prior to a Change of Control, (ii) by reason of the
Optionee's voluntary resignation (and not Involuntary Termination) or
(iii) for Cause, then the Optionee shall not be entitled to receive
accelerated vesting under Section 3 hereof.
4. Successors.
(a) Company's Successors. Any successor to the Company
(whether direct or indirect and whether by purchase, merger or
consolidation) shall assume the obligations under Section 3 of this
Option Agreement and agree expressly to perform the obligations under
Section 3 in the same manner and to the same extent as the Company
would be required to perform such obligations in the absence of a
succession.
(b) Successors. The terms of Section 3 and all rights
of the Optionee thereunder shall inure to the benefit of, and be
enforceable by, the Optionee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees
and legatees.
5. Method of Payment. Payment of the aggregate Exercise
Price shall be by any of the following, or a combination thereof, at
the election of the Optionee:
(a) cash; or
(b) check; or
(c) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the
broker, if applicable, shall require to effect an exercise of the
Option and delivery to the Company of the sale or loan proceeds
required to pay the exercise price; or
(d) surrender of other Shares which (i) in the case of
Shares acquired upon exercise of an option, have been owned by the
Optionee for more than six (6) months on the date of surrender, and
(ii) have a Fair Market Value on the date of surrender equal to the
aggregate Exercise Price of the Exercised Shares.
6. Non-Transferability of Option. This Option may not be
transferred in any manner otherwise than by will or by the laws of
descent or distribution and may be exercised during the lifetime of
Optionee only by the Optionee. The terms of the Plan and this Option
Agreement shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
7. Term of Option. This Option may be exercised only within
the term set out in the Notice of Grant, and may be exercised during
such term only in accordance with the Plan and the terms of this
Option Agreement.
8. Tax Consequences. Some of the federal and California tax
consequences relating to this Option, as of the date of this Option,
are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE
TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF
THE SHARES.
(a) Exercising the Option.
(i) Nonstatutory Stock Option. The Optionee may
incur regular federal income tax and California income tax liability
upon exercise of a NSO. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates)
equal to the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price.
If the Optionee is an Employee or a former Employee, the Company will
be required to withhold from his or her compensation or collect from
Optionee and pay to the applicable taxing authorities an amount in
cash equal to a percentage of this compensation income at the time of
exercise, and may refuse to honor the exercise and refuse to deliver
Shares if such withholding amounts are not delivered at the time of
exercise.
(ii) Incentive Stock Option. If this Option
qualifies as an ISO, the Optionee will have no regular federal income
tax or California income tax liability upon its exercise, although the
excess, if any, of the Fair Market Value of the Exercised Shares on
the date of exercise over their aggregate Exercise Price will be
treated as an adjustment to alternative minimum taxable income for
federal tax purposes and may subject the Optionee to alternative
minimum tax in the year of exercise. In the event that the Optionee
undergoes a change of status from Employee to Consultant, any
Incentive Stock Option of the Optionee that remains unexercised shall
cease to qualify as an Incentive Stock Option and will be treated for
tax purposes as a Nonstatutory Stock Option on the ninety-first (91st)
day following such change of status.
(b) Disposition of Shares.
(i) NSO. If the Optionee holds NSO Shares for at
least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at
least one year after exercise and two years after the grant date, any
gain realized on disposition of the Shares will be treated as long-
term capital gain for federal income tax purposes. If the Optionee
disposes of ISO Shares within one year after exercise or two years
after the grant date, any gain realized on such disposition will be
treated as compensation income (taxable at ordinary income rates) to
the extent of the excess, if any, of the lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of
exercise and the aggregate Exercise Price, or (B) the difference
between the sale price of such Shares and the aggregate Exercise
Price.
(c) Notice of Disqualifying Disposition of ISO Shares.
If the Optionee sells or otherwise disposes of any of the Shares
acquired pursuant to an ISO on or before the later of (i) two years
after the grant date, or (ii) one year after the exercise date, the
Optionee shall immediately notify the Company in writing of such
disposition. The Optionee agrees that he or she may be subject to
income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in
cash or out of the current earnings paid to the Optionee.
9. Entire Agreement; Governing Law. The Plan is incorporated
herein by reference. The Plan and this Option Agreement constitute
the entire agreement of the parties with respect to the subject matter
hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject
matter hereof, and may not be modified adversely to the Optionee's
interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by California law except for
that body of law pertaining to conflict of laws.
By your signature and the signature of the Company's
representative below, you and the Company agree that this Option is
granted under and governed by the terms and conditions of the Plan and
this Option Agreement. Optionee has reviewed the Plan and this Option
Agreement in their entirety, has had an opportunity to obtain the
advice of counsel prior to executing this Option Agreement and fully
understands all provisions of the Plan and Option Agreement. Optionee
hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to
the Plan and Option Agreement. Optionee further agrees to notify the
Company upon any change in the residence address indicated below.
OPTIONEE: HELLO DIRECT, INC.
_______________________________ By:_________________________
Signature
_______________________________ Title:______________________
Print Name
____________________________________
Residence Address
____________________________________
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves
the terms and conditions of the Plan and this Option Agreement. In
consideration of the Company's granting his or her spouse the right to
purchase Shares as set forth in the Plan and this Option Agreement,
the undersigned hereby agrees to be irrevocably bound by the terms and
conditions of the Plan and this Option Agreement and further agrees
that any community property interest shall be similarly bound. The
undersigned hereby appoints the undersigned's spouse as attorney-in-
fact for the undersigned with respect to any amendment or exercise of
rights under the Plan or this Option Agreement.
____________________________
Spouse of Optionee
EXHIBIT A
1995 STOCK PLAN
EXERCISE NOTICE
Hello Direct, Inc.
5884 Eden Park Place
San Jose, CA 95138
Attention: Secretary
1. Exercise of Option. Effective as of today,
________________, 199__, the undersigned ("Purchaser") hereby elects
to purchase ______________ shares (the "Shares") of the Common Stock
of Hello Direct, Inc. (the "Company") under and pursuant to the 1995
Stock Plan (the "Plan") and the Stock Option Agreement dated
, 19___ (the "Option Agreement"). The purchase price for the
Shares shall be $ , as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the
Company the full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that
Purchaser has received, read and understood the Plan and the Option
Agreement and agrees to abide by and be bound by their terms and
conditions.
4. Rights as Shareholder. Until the issuance (as evidenced
by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. A share
certificate for the number of Shares so acquired shall be issued to
the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued,
except as provided in Section 13 of the Plan.
5. Tax Consultation. Purchaser understands that Purchaser
may suffer adverse tax consequences as a result of Purchaser's
purchase or disposition of the Shares. Purchaser represents that
Purchaser has consulted with any tax consultants Purchaser deems
advisable in connection with the purchase or disposition of the Shares
and that Purchaser is not relying on the Company for any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option
Agreement are incorporated herein by reference. This Agreement, the
Plan and the Option Agreement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in
their entirety all prior undertakings and agreements of the Company
and Purchaser with respect to the subject matter hereof, and may not
be modified adversely to the Purchaser's interest except by means of a
writing signed by the Company and Purchaser. This agreement is
governed by California law except for that body of law pertaining to
conflict of laws.
Submitted by: Accepted by:
PURCHASER: HELLO DIRECT, INC.
_______________________________ By:_________________________
Signature
_______________________________ Title:______________________
Print Name
Address: Address:
___________________________ 5893 Rue Ferrari
___________________________ San Jose, CA 95138
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FROM THE CONDENSED BALANCE SHEET AS OF JUNE 30, 1998 AND
THE CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED
JUNE 30, 1998.
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<PERIOD-END> JUN-30-1998
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