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 September 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 October 23, 1998
----- -------------
Common Stock, Par Value $.001 5,141,107
<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 September 30, 1998 and
December 31, 1997
Condensed Statements of Operations for the Three and Nine
Months Ended September 30, 1998 and 1997
Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997
Notes to Condensed Financial Statements
Item 2. -- Managements Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Liquidity and Capital Resources
Impact of the Year 2000 Issue
Additional Factors Affecting Future Performance
Part II Other Information
Items 1 through 5 are not applicable with respect to the
current reporting period.
Item 6. Exhibits and Reports on Form 8-K
Signatures
Part 1. Financial Information
Item 1. Financial Statements
HELLO DIRECT, INC.
CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,286 $5,135
Short-term investments 5,711 3,830
Trade accounts receivable, less allowance for
returns and doubtful accounts 6,717 5,752
Inventories 5,439 5,137
Deferred tax assets 765 821
Other current assets 1,111 1,771
------------- -------------
Total current assets 23,029 22,446
Notes receivable 4,317 4,542
Property and equipment, net 5,822 4,819
Long-term deferred tax assets 0 25
------------- -------------
Total assets $33,168 $31,832
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,385 $3,856
Accrued expenses 1,744 1,319
------------- -------------
Total current liabilities 4,129 5,175
Non-current liabilities 262 0
------------- -------------
Total liabilities 4,391 5,175
Stockholders' equity:
Common stock 5 5
Additional paid-in capital 28,319 28,045
Accumulated deficit 898 (948)
Less treasury stock, at cost (445) (445)
------------- -------------
Total stockholders' equity 28,777 26,657
------------- -------------
Total liabilities and stockholders' equity $33,168 $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 Nine Months Ended
September 30, September 30,
------------------- --------- ---------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $17,016 $16,727 $51,547 $47,981
Cost of goods sold 7,791 7,914 23,780 23,309
--------- --------- --------- ---------
Gross profit 9,225 8,813 27,767 24,672
Selling, general and administrative
expenses 7,771 7,816 23,848 22,080
Product development expenses 547 322 1,449 1,103
--------- --------- --------- ---------
Operating income 907 675 2,470 1,489
Other income - net 198 177 605 498
--------- --------- --------- ---------
Income before income taxes 1,105 852 3,075 1,987
Income taxes 441 342 1,229 807
--------- --------- --------- ---------
Net income $664 $510 $1,846 $1,180
========= ========= ========= =========
Basic per share amounts:
Net income $0.13 $0.10 $0.36 $0.23
========= ========= ========= =========
Weighted average shares outstanding 5,122 5,039 5,106 5,028
========= ========= ========= =========
Diluted per share amounts:
Net income $0.13 $0.10 $0.36 $0.23
========= ========= ========= =========
Weighted average shares outstanding 5,177 5,133 5,199 5,101
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
HELLO DIRECT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,846 $1,180
Adjustments to reconcile net income to net cash
provided (used in) operating activities:
Depreciation and amortization 1,237 905
Deferred income taxes 186 618
Deferred rent 135 0
Allowance for returns and doubtful accounts (38) 125
Issuance of common stock for services 15 0
Changes in items affecting operations: 0 0
Trade accounts receivable (911) (1,440)
Inventories (302) (493)
Other current assets 660 (1,215)
Accounts payable and accrued expenses (1,025) 1,441
-------- --------
Net cash provided (used) in operating activities 1,803 1,121
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (2,239) (2,069)
Decrease (increase) in investments (1,881) 2,289
Funding of note receivable 0 (1,244)
Payments received on note receivable 209 88
-------- --------
Net cash used in investing activities (3,911) (936)
-------- --------
Cash flows from financing activities:
Payments on capital lease obligations 0 (20)
Sale of common stock, net 259 194
-------- --------
Net cash provided by financing activities 259 174
-------- --------
Net decrease in cash and cash equivalents (1,849) 359
Cash and cash equivalents at beginning of period 5,135 2,492
-------- --------
Cash and cash equivalents at end of period $3,286 $2,851
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
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 nine-month periods
ended September 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
September 30, September 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Basic weighted shares outstanding 5,122,000 5,039,000 5,106,000 5,028,000
Common stock options utilizing
treasury stock method when dilutive 55,000 94,000 93,000 73,000
---------- ---------- ---------- ----------
Diluted weighted shares outstanding 5,177,000 5,133,000 5,199,000 5,101,000
========== ========== ========== ==========
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. -- Managements Discussion and Analysis of Financial
Condition and Results of Operations.
This Managements 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 September 30, 1998 Compared to Three Months
Ended September 30, 1997
Net Sales. Net sales reflect total sales less a provision for
returns. Net sales increased $289,000 or 1.7% to $17,016,000
in the three-month period ended September 30, 1998, from
$16,727,000 for the comparable period in 1997. This increase
was primarily attributable to an increase in sales generated
by the Company's corporate (outbound) telemarketing group and
an increase in the average order size, to $266 from $250
despite an 8.9% reduction in the number of catalogs mailed, to
7.2 million from 7.9 million.
Gross Profit. Gross profit increased $412,000 or 4.7% to
$9,225,000 in the three-month period ended September 30, 1998,
from $8,813,000 for the comparable period in 1997. The gross
margin for the three-month period was 54.2% for 1998 versus
52.7% for 1997. This increase in gross margin was primarily
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 decreased $45,000 or 0.6%
to $7,771,000 in the three-month period ended September 30,
1998, from $7,816,000 for the comparable period in 1997. This
decrease was primarily the result of the 8.9% reduction in
catalog mailings discussed above. As a percentage of net
sales, these expenses for the three-month period decreased to
45.7% in 1998 as compared to 46.7% 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
increased $225,000 or 69.9% to $547,000 for the three-month
period ended September 30, 1998, from $322,000 for the
comparable period in 1997. As a percentage of net sales,
these expenses for the three-month period were 3.2% for 1998
versus 1.9% for the same three-month period in 1997. This
increase was primarily due to a ramp up of product development
efforts for 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
$194,000 for the three-month period ended September 30, 1998
versus $169,000 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 $154,000 or 30.2% to $664,000
in the three-month period ended September 30, 1998, from
$510,000 for the comparable period in 1997. This increase was
primarily due to the reasons discussed above.
Nine Months Ended September 30, 1998 Compared to Nine Months
Ended September 30, 1997
Net Sales. Net sales increased $3,566,000 or 7.4% to
$51,547,000 in the nine-month period ended September 30, 1998,
from $47,981,000 for the comparable period in 1997.
Gross Profit. Gross profit increased $3,095,000 or 12.5%
to $27,767,000 in the nine-month period ended September 30,
1998, from $24,672,000 for the comparable period in 1997. The
gross margin for the nine-month period was 53.9% for 1998
versus 51.4% for 1997. This increase in gross margin was
primarily 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 $1,768,000 or
8.0% to $23,848,000 in the nine-month period ended September
30, 1998, from $22,080,000 for the comparable period in 1997.
This dollar increase was primarily the result of planned
headcount additions to the Company's corporate (outbound)
telemarketing group, administrative management group, product
management team, customer care activities and consulting
costs, partially offset by a reduction in the number of
catalogs mailed in the third quarter. As a percentage of net
sales, these expenses for the nine-month period increased to
46.3% in 1998 as compared to 46.0% for the same nine-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 $346,000 or 31.4% to $1,449,000 for the nine-month
period ended September 30, 1998, from $1,103,000 for the
comparable period in 1997. As a percentage of net sales,
these expenses for the nine-month period were 2.8% for 1998
versus 2.3% for the same nine-month period in 1997. The
increase was primarily 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
$602,000 for the nine-month period ended September 30, 1998
versus $488,000 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 $666,000 or 56.4% to
$1,846,000 in the nine-month period ended September 30, 1998,
from $1,180,000 for the comparable period in 1997. This
increase was primarily 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 provided by operating activities during the nine-month
period ended September 30, 1998 was $1,803,000. This was the
result of $3,381,000 provided by net income, depreciation and
amortization and other non-cash charges offset by $1,578,000
of changes in operating assets and liabilities. Cash used in
investing activities for the nine-month period ended September
30, 1998 was $3,911,000, due primarily to purchases of
property and equipment of $2,239,000 and an increase in short-
term investments of $1,881,000, offset by $209,000 of
principal payments received on the note receivable. Cash
provided by financing activities during the nine-month period
ended September 30, 1998, was $259,000, relating primarily to
the issuance of common stock pursuant to the Company's
employee stock purchase plan.
Additions to equipment during the nine-month period ended
September 30, 1998 were $2,239,000 compared to $2,069,000 for
same period in the prior year. The Company plans to expend
between $2,500,000 and $2,800,000 for capital equipment for
the year ending December 31, 1998.*
The Company may use a portion of its available cash or short-
term investments to repurchase shares pursuant to a stock
repurchase program. On October 7, 1998, the Company announced
that its Board of Directors had authorized the repurchase of
up to 1,000,000 shares of Common Stock in the open market from
time to time, subject to market conditions. The number of
shares of Common Stock actually acquired by the Company will
depend on subsequent developments and corporate needs, and the
repurchase program may be interrupted or discontinued at any
time. Any shares repurchased would be available for re-
issuance under the Company's employee stock plans.
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 institutions prime lending rate.
During the nine-month period ended September 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 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's internal information systems include all
hardware and software used in its computer and phone systems.
The Company has completed an assessment of its internal
information systems relative to the Year 2000 issue. The
assessment review was broken down between information systems
scheduled for replacement before the year 2000 as a part of
the Company's ongoing technology review and assessment process
and information systems that have not been scheduled for
replacement. In connection with the assessment of information
systems scheduled for replacement, the Company has confirmed
the hardware and software replacing existing hardware and
software is Year 2000 compliant. The information systems
scheduled for replacement are approximately 65% complete and
are anticipated to be complete no later than the second
quarter of 1999. However, if the information systems
currently scheduled for replacement are not replaced or are
not properly modified, the Year 2000 issue could have a
material effect on the on the operations of the Company by
impairing the Company's ability to process transactions, send
invoices and engage in normal business activities.*
In connection with systems not scheduled for replacement, the
Company has performed a complete accounting of these systems,
contacted vendors and documented its findings. The findings
indicate that although some information systems not scheduled
for replacement are not compliant, the cost of replacing or
upgrading those systems will not have a material effect on the
operations of the Company and will be funded through operating
cash flows.
In addition, the Company has initiated formal communications
with all of its significant suppliers to determine the extent
to which the Company is vulnerable to those third parties'
failure to remedy their own Year 2000 issues. The Company has
received some assurances regarding these issues from its
vendors, but there are no guarantees these third party systems
will be compliant and in the event of non-compliance would not
have a material effect on the operations of the Company. For
example, if some of the Company's product vendors are not Year
2000 compliant it could impact the Company's ability to timely
obtain products from those vendors.
The Company has evaluated its exposure to contingencies
related to the Year 2000 issues for products it has sold.
Although the Company believes that its products do not
directly contain specific calendar year functions, it is
possible customers may use the Company's products in
conjunction with systems that may perform non-compliant year
2000 date computations. Accordingly, there is a risk of
litigation associated with the possible use of the Company's
products by customers, including all the risks, costs and
uncertainties associated with litigation.*
The Company believes its exposure to the Year 2000 issue will
come mainly from third parties, either the result of these
parties not being prepared or other parties these third
parties rely upon not being prepared. Although there can be
no assurance that unforeseen problems will not be encountered,
the Company expects that all critical internal Year 2000
issues will be resolved as scheduled.*
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 an 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 Managements
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 three 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 Directs 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 three 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 Managements 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 Managements 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 Directs 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 5 are not applicable with respect to the
current reporting period.
Item 6. -- Exhibits and Reports on Form 8-K:
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities
and Exchange Commission during the quarter ended
September 30, 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)
October 23, 1998 /s/ Raymond E. Nystrom
- ---------------- ------------------------
Date Raymond E. Nystrom
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND
THE CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,286
<SECURITIES> 5,711
<RECEIVABLES> 7,402
<ALLOWANCES> 685
<INVENTORY> 5,439
<CURRENT-ASSETS> 23,029
<PP&E> 9,502
<DEPRECIATION> 3,680
<TOTAL-ASSETS> 33,168
<CURRENT-LIABILITIES> 4,129
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 28,772
<TOTAL-LIABILITY-AND-EQUITY> 33,168
<SALES> 17,016
<TOTAL-REVENUES> 17,016
<CGS> 7,791
<TOTAL-COSTS> 8,318
<OTHER-EXPENSES> (198)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,105
<INCOME-TAX> 441
<INCOME-CONTINUING> 664
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 664
<EPS-PRIMARY> $0.13
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