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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required).
For the fiscal year ended December 31, 1997
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required).
For the transition period from ________________ to ________________
Commission file no. 0-25524
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HELLO DIRECT, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3043208
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
5893 RUE FERRARI, SAN JOSE, CALIFORNIA 95138
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 972-1990
---------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ______X_______
The aggregate market value of the Registrant's Common Stock, par value
$.001 per share, held by non-affiliates of the Registrant, based upon the
closing price at March 13, 1998 was approximately $16,600,000. For purposes of
this disclosure, shares of Common Stock held by persons who hold more than 5% of
the outstanding shares of Common Stock and shares held by officers and directors
of the Registrant have been excluded because such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily conclusive
for other purposes.
The number of shares of Registrant's Common Stock, par value $.001 per
share, outstanding at March 13, 1998 was 5,105,594.
Documents Incorporated By Reference
1. Portions of the Proxy Statement sent to stockholders in connection with the
Annual Meeting of Stockholders to be held on May 6, 1998 are incorporated by
reference into Part III) of this Report. Such Proxy Statement, except for the
parts therein which have been specifically incorporated by reference, shall
not be deemed "filed" for the purposes of this report on Form 10-K.
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<PAGE>
HELLO DIRECT, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
<PAGE>
PART I
Item 1. Business
This Business section and other parts of this Annual Report on Form
10-K contain 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations." 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 (*).
Founded in 1987, Hello Direct, Inc. ("Hello Direct" or the
"Company") is a Delaware corporation with principal executive offices
located at 5893 Rue Ferrari, San Jose, California 95138. The Company's
main telephone number is (408) 972-1990.
The Company is a leading direct marketer and developer of desktop
telephony products and equipment interface solutions to business end
users. The Company designs and sells its own products and also offers a
wide variety of products and accessories from other manufacturers. The
Company's primary channel to its business end users is direct mail
solicitation through catalogs. During 1997, the Company mailed 28.5
million catalogs and processed 313,000 orders from customers.
The Company offers a broad selection of commercial-grade brand name,
proprietary and private label products at competitive prices that
provide solutions to its customers' evolving telecommunications needs.
Products
The Company's products are divided into four main categories:
headset products, which amounted to 53% of net sales in 1997; telecom
products, 27% of net sales; call processing products, 16% of net sales;
and mobile communication products, 4% of net sales.
Headset Products The Company's catalog offers approximately 85
SKUs of headset products including tops amplifiers and a variety of
headset-related accessories such as adapters and hangers. Currently, the
majority of the headsets offered in the catalog belong to the Company's
"HelloSet" product line, which consists of four styles of corded
headsets (Ultralight, Solo, Dual and Executive) and the first and
broadest line of commercial-grade wireless telephone headsets currently
on the market. Headsets are available in multiple variations to address
customer preferences based on features, price, comfort, fit and feel.
Headset products have been a key Hello Direct product category since
1988. In 1991, Hello Direct introduced the first commercial-grade
wireless telephone headset by incorporating 900 Megahertz technology,
which provides the wireless headset with greater range and sound clarity
than earlier technology. Beginning in 1991, the Company also began a
transition from its private label line of corded headsets to an all new
proprietary line of corded headsets. In 1993, the Company completed this
transition and has since continued to expand and enhance its wireless
and corded headsets with new product offerings. New proprietary products
introduced during 1997 include the HelloSet ExecutiveTM, the smallest,
lightest corded headset on the market, and the ReadilineTM, an accessory
that increases the functionality of the Company's wireless headsets by
allowing the user to remotely answer and hang up calls. For a discussion
of the risks related to the Company's dependence on headset products,
see "Factors Affecting Operating Results and Market Price of Stock-
Dependence on Headset Products."
Telecom Products Hello Direct's telecom product line includes
selected telephones and answering machines, telephone accessories,
amplification products and office communications accessories. Leading
brand names include Philips/Lucent, Nortel, Panasonic, Uniden and Vtech.
Call Processing Products Hello Direct's call processing product
line includes audio conferencing products, auto switches, small business
telephone systems (under 16 stations), caller ID devices, voice
messaging products, PC-based communications products, modular hardware
and video communications products. Brand name products, from companies
such as Philips/Lucent, Nortel, Panasonic and Polycom, currently
comprise a majority of the call processing products offered by the
Company. Hello Direct private label products in this category include
fax/modem switches, and music-on-hold programs.
Mobile Communications Products Hello Direct's mobile communications
products line includes cellular and mobile office accessories and
pagers. The Company is currently one of five national resellers of
Nextel phones.
The Hello Direct Catalog
The Hello Direct catalog, the Company's primary sales tool, is a
direct response catalog which is designed to provide all the information
necessary for a customer to purchase any of the Company's
telecommunications products. The catalog includes product descriptions,
full color photographs, product specifications and prices as well as
information concerning the use and applications of telecommunications
products. It has an end-user orientation and is designed to appeal to
both technical and non-technical users. The product copy follows the
generally accepted direct response principles of presenting user
benefits, explaining product features and soliciting orders. The catalog
also features a complete easy-to-use index and "Fast Facts," a service
by which the Company will fax its customers detailed information on
specific products offered in the catalog.
In 1997, the Company's catalogs ranged from 60 to 88 pages each. The
Company mailed 28.5 million catalogs during 1997, an increase of 19%
over the 23.9 million catalogs mailed in 1996. The Company published
eight editions of its catalog annually, four for existing customers and
four for new customer prospecting. Each of the customer's editions was
produced in three versions featuring a different cover and updated
product offerings. The Company's customers received up to 12 catalogs
per year. The Company typically uses the third version of each edition
for special promotions on new products targeted to its existing customer
base.
The Company's full color catalogs are produced in-house on advanced
desk top publishing equipment ("DTP"). Substantially all of the text,
graphics and photos used in the catalog are completely digitized. Use of
DTP equipment for page production has provided the Company with
significant flexibility, speed and cost savings over traditional catalog
production methods.
The Company believes direct marketing is a cost-effective way to
market its telecommunications products to its target customers, and that
this sales channel gives the Company a distinct advantage over its
competitors using other distribution channels. Additionally, the Company
offers its full catalog product offering on the Internet at its web site
- - http://www.hello-direct.com. Although the revenue generated from the
Internet is currently about 2% of net sales, both order volume and
average order value are increasing. *
Outbound Telemarketing
The Company supplements both its printed and on-line catalog with an
outbound telemarketing effort. The Company's outbound telemarketing
efforts target corporate accounts, especially those with phone dependent
call centers. The Company believe this is a growing market segment
which typically purchases higher-margin products in larger order sizes
and does significant repeat business. The Company believes its focused
outbound telemarketing efforts represent a cost effective and
complementary sales channel to its catalog. The Company began the
expansion of its outbound telemarketing staff during the fiscal year.
Development of Proprietary Products
A key element of the Company's business strategy is to develop and
introduce new innovative proprietary products. In addition to
strengthening the product offering, increasing sales and providing
higher gross margins, the Company believes offering proprietary products
enhances awareness of the Hello Direct brand name. The Company's product
development team generates new product specifications and manages the
development process. Hello Direct works with third parties for most
engineering and design, and for all manufacturing.
The Company relies upon customer feedback and input as a primary
source of new product ideas and enhancements to currently available
products. The Company developed its wireless headset as a result of
customer requests and has continued to enhance this product since its
introduction in 1991, in response to customer feedback. Similarly, based
on customer feedback regarding existing corded headsets, in 1991 the
Company developed a proprietary family of corded headsets that address
specific customer preferences for features, price, comfort, fit and
feel. In addition to individual customer contacts, Hello Direct
regularly conducts target customer surveys and focus groups to solicit
customer feedback and generate product development ideas. The Company
also obtains product development ideas from trade shows, industry
journals and suppliers.
As part of its development process, the Company has entered and
expects to continue to enter into development agreements whereby the
Company will pay all or a portion of product development costs, license
technology and make royalty payments based on product sales.* The
Company's product development expenses were $1,592,000, $1,598,000, and
$1,326,000, in 1997, 1996 and 1995, respectively. The 1995 product
development costs were adjusted to exclude the expenses associated with
CellBase, a car kit the Company was designing to support the most
popular portable cellular phones. The Company ceased development of this
product in 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company is continually developing new products and product
enhancements. In 1998, the Company plans to offer additional
proprietary products, including enhancements to its present products.*
Some of these new products will include CODiT(TM), the Company's
proprietary interface technology.* For a discussion of the risks related
to new products and product enhancements, see "Factors Affecting
Operating Results and Market Price of Stock-Rapidly Changing Technology;
Need to Successfully Develop New Products."
CODiT (TM). Telephone accessories such as headsets and external
speakerphones typically access networks through the handset jack. Since
each manufacturer uses different interface protocols, suppliers have had
to provide telephone-specific accessories or, like the Company,
universal accessories which users must manually configure. The problem
has been exacerbated by the proliferation of proprietary telephone
systems and accessories. During 1993, the Company began development of
CODiT which uses two custom integrated circuits to automatically
interface with the protocols of a particular unit and thereby eliminate
the need for manual adjustments. The Company believes CODiT, which was
initially incorporated into its headset products, will improve product
performance by enhancing sound quality and make products more user
friendly by simplifying the installation process.* The Company believes
CODiT technology can also be used to provide access through the
telephone handset jack to other communications products such as
teleconferencing units, facsimiles and modems.* In the second half of
1996, the Company introduced the SuperPro (TM) headset amplifier which uses
the CODiT "smartchip" technology. In 1997, the Company continued
development of products which use CODiT supported technology.
Sales and Marketing
The Company relies primarily on promotional materials delivered by
mail to its customers and rented lists of prospective customers to
market its products. The Company's promotional materials contain an
order form to be completed by the customer and either telephoned, mailed
or faxed to the Company. Over 90% of customer orders are received over
the Company's network of toll-free telephone and data lines.
The Company believes that prompt and courteous customer service is
critical in encouraging customers to make repeat purchases from Hello
Direct. The objective of the Company's customer care organization, which
is responsible for inbound sales, technical support, training and all
sales-related order processing functions, is to provide excellent
customer service. The Company currently has 80 people in this
organization.
The Company maintains a comprehensive database of customers'
purchasing history which is used by the direct marketing group to
identify both high-volume and potential high-volume customers and to
target special promotions and product offerings. Representatives from
the corporate accounts sales force cultivate customers targeted through
this program and provide them with a specific representative to serve
their individual needs. The Company currently has 34 people within this
organization, which includes both the corporate account sales associates
as well as administrative assistants to identify potential customers to
be targeted.
Procurement
The Company purchases most of its products in large volumes directly
from manufacturers who deliver the merchandise to the Company's
distribution center. The Company believes that, because of its volume
purchases and its direct response channel, it has benefited from
favorable pricing, payment and delivery terms and promotional allowances
from its suppliers. The Company believes it has good relationships with
its suppliers and to date has not experienced any difficulty in
obtaining products.
A substantial portion of the Company's purchases of brand name and
private label products are concentrated with a relatively small number
of manufacturers. However, the Company believes that alternate sources
of supply are available for virtually every third-party product it
carries. Sales of brand name products represented approximately 48% of
net sales in 1997. The failure of an existing significant supplier to
provide products would materially adversely affect the Company's
operating results until the Company could develop an alternate source of
supply or an alternate product. Certain vendors provide advertising
allowances to the Company to promote sales of their products. In
addition, the Company typically receives price protections should a
vendor subsequently lower its price. Under most of the Company's
purchase agreements, the Company can return unsold inventory to its
suppliers.
All of the Company's proprietary products are manufactured by
independent contractors according to specifications and conditions set
by the Company. Each independent contractor must meet the Company's
specifications relating to the manufacturing process and quality
assurance before such contractor is selected by the Company to
manufacture Hello Direct products. The Company's strategy is to continue
using independent contractors to meet its manufacturing requirements.*
For a discussion of the risks related to its reliance on manufactures,
see "Factors Affecting Operating Results and Market Price of Stock-
Dependence on Sole or Limited Source Suppliers and Foreign
Manufacturing."
Quality Assurance
Hello Direct's quality assurance program is dedicated to maximizing
customer satisfaction. To achieve this goal, the company oversees
various aspects of quality assurance related to catalog content,
customer qualification, order entry, product fulfillment, post-sales
support and customer follow-up. The Company tests and evaluates every
product considered for inclusion in the Hello Direct catalog. The
Company's quality assurance personnel work with the Company's product
development team to assure all new proprietary products adhere to the
Company's quality standards.
Management Information and Call Processing Systems
Hello Direct is committed to using a high level of information and
communications systems to manage all aspects of its business. The
Company currently uses a Hewlett-Packard 3000 Model 928 to support
customer care, marketing, procurement, accounting and distribution. The
system allows the Company, among other things, to monitor sales trends,
make informed purchasing decisions and provide product availability and
order status information. In addition to the main system, the Company
has a system of networked personal computers, which facilitates data
sharing and provides an automated office environment. In late 1997, the
Company terminated its development of a new transaction system and began
the process of searching for a prepackaged transaction system to meet
its needs as defined in the earlier transaction system development
process.
The Company uses an Aspect 200-R Automated Call Distributor (ACD),
which includes a fully redundant hardware and software platform and
desktop software tools to provide each supervisor with accurate call
management information. Future enhancements will include the Aspect
Agility Interactive Voice Response (IVR), which will enable automated
responses to customer requests, and computer-telephony integration
(CTI). *
The Company's success is in part dependent on the accuracy and proper
utilization of its management information systems and call processing
systems. These investments are intended to continue to improve the
Company's customer care capabilities and the Company's customer
information database.*
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, 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 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. See "Factors Affecting
Operating Results and Market Price of Stock - Competition."
Sales of the Company's proprietary headset products accounted for
more than 50% of the Company's total net sales for 1997. Hello Direct
faces competition in this product category from a variety of sources.
The Company believes Plantronics, Inc., the leading manufacturer of
telephone headset products, has sales representing approximately 60% of
the headset market, but it currently does not sell directly to end
users. In traditional telecommunications sales channels, such as
distributors and telephone systems dealers, headset products are
generally sold as "add-on sales" in connection with other purchases. The
Company believes specialized headset product distributors such as
Communitech and GBH Distributors generally focus their sales efforts on
fulfilling existing demand from traditional high-volume headset users,
such as large call centers, and devote little or no resources to
marketing to small and medium-sized businesses. Hello Direct, through
its corporate accounts telemarketing program, markets to these
relatively under-served small and medium size headset users. Certain
office and computer products dealers also sell headset products which
are primarily consumer-grade.
Telecom and cellular products are sold through a wide variety of
channels ranging from large discount chains and mass merchandisers to
specialized catalog operations. Hello Direct faces strong competition in
this area and has responded by focusing its efforts on providing strong
customer service and product support and by focusing on a selection of
superior, high-quality, value-added national brand products that may be
difficult to find elsewhere or are sufficiently early in their product
life cycle to appeal to customers seeking innovative telecommunications
solutions. This product category is comprised primarily of brand name
products which are widely available through alternate suppliers. The
Company competes with such suppliers on the basis of features and price;
however, because the Company limits its branded product offering to
innovative and high quality value-added products, the Company does not
compete for commodity sales.
In the call processing product category, Hello Direct faces
competition primarily from dealers of specialty systems which sell
telephone systems using a direct sales force. Such dealers, however,
generally focus their resources on call processing systems and products
in the $5,000 and over price range. In contrast, Hello Direct is a
direct marketer of commercial-grade telecommunications products selling
for under $5,000. While certain retail stores sell lower-priced
processing systems and accessories, selection and support in such retail
outlets is minimal.
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. 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 currently no pending material claims that the Company's
products, trademarks or other proprietary rights significantly infringe
the proprietary rights of third parties. In the event of litigation and
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. See "Factors Affecting Operating Results
and Market Price of Stock - Risks Associated with Intellectual Property
Rights."
Personnel
The Company had 212 full-time employees at February 28, 1998. The
Company sponsors a number of employee benefit plans including
medical/dental insurance plans, life and long-term disability insurance
plans, flexible spending accounts, an employee stock purchase plan and a
401(k) salary deferral plan. None of the Company's employees are
represented by a collective bargaining agreement. The Company believes
that its relations with its employees are good.
Executive Officers of the Company
Name of Executive Officer Age Positions with the Company
- ------------------------- ---- -----------------------------------
E. Alexander Glover 54 President, Chief Executive Officer
and Director
Ronald J. Becht, Jr. 42 Vice President of Product Marketing
Raymond E. Nystrom 54 Vice President of Operations, Chief
Financial Officer and Secretary
Charles E. Volwiler 42 Vice President and Director
Dennis P. Waldera 49 Vice President of Direct Marketing
The Company's executive officers are traditionally elected to office
at the first meeting of the Board of Directors following the Annual
Meeting of Stockholders. Each officer holds office until the first
meeting of the Board following the next Annual Meeting and until a
successor is chosen. Biographical information for the executive officers
follows:
E. Alexander Glover joined the Company in 1995. From 1983 to 1994,
Mr. Glover was Senior Vice President, Marketing and R&D for Kransco
Group Companies ("Kransco"), a toy and sporting goods company. Mr.
Glover was also a member of the Corporate Executive Committee at
Kransco. From 1969 to 1983, Mr. Glover progressed through various senior
marketing management positions with Procter & Gamble Co., in its Paper
and Packaged Soap/Detergent Divisions. Mr. Glover holds an M.B.A. from
Stanford University.
Ronald J. Becht, Jr. joined the Company in 1993. From 1991 to
September 1993, he was President and Chief Executive Officer of Personal
Computing Tools, a direct marketer of data acquisition and control
products which was acquired by Software Developers Corporation, a direct
marketer of engineering, software and hardware products. From 1981 to
1991, he served in various marketing positions with Inmac Corp., a
direct marketer of computer hardware and software products, most
recently as Director of Worldwide Marketing. Mr. Becht holds a B.S. in
Business from the University of San Diego.
Raymond E. Nystrom joined the Company in 1996. From 1983 until 1996,
Mr. Nystrom held various senior level financial and accounting positions
with Inmac Corp., a direct marketer of computer hardware and software
products, and was most recently Vice President, General Manager of North
American Operations and Chief Financial Officer. Mr. Nystrom held
various financial and accounting positions with Hewlett Packard Company
from 1974 to 1983. Mr. Nystrom holds an M.B.A. from the University of
Santa Clara and is a Certified Public Accountant in the State of
California.
Charles E. Volwiler co-founded the Company in 1987. Prior to co-
founding Hello Direct, Mr. Volwiler was Director of Marketing for
Devoke. In 1977 Mr. Volwiler joined Devoke, which was owned by New
England Business Service ("NEBS") from 1983 to 1989. Mr. Volwiler
remained with NEBS until 1987. Mr. Volwiler holds a B.S. in Commerce
from Santa Clara University.
Dennis P. Waldera joined the Company in 1996. From 1983 through
early 1996, Mr. Waldera held various positions, lastly Executive Vice
President, Managing Director, with Clarion Marketing and Communications,
one of the largest marketing consulting, sales promotion, and direct
marketing services firms in the United States. He was also a member of
Clarion's Management Committee and Board of Directors. From 1978
through 1982 Mr. Waldera was a Vice President of Glendinning Associates,
a marketing, promotion and sales consulting company. Mr. Waldera began
his career at Procter & Gamble Co. where from 1972 to 1978 he progressed
through various marketing management positions in the Paper Products
Division. Mr. Waldera holds an M.B.A. degree from Northwestern
University.
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. At December 31, 1997, the Company
had an accumulated deficit of $948,000. 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 and First Quarter
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 1997 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
52% of the Company's net sales in 1997. 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. See "Business-
Competition."
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.
Control by Officers and Directors. The Company's officers, directors
and their affiliates will beneficially own approximately 60% of the
outstanding shares of the Company's Common Stock. As a result, such
persons, acting together, have the ability to control all matters
requiring stockholder approval (including the election of all directors,
and any merger, consolidation or sale of all or substantially all of the
Company's assets) and also control the management and affairs of the
Company. Accordingly, such concentration of ownership may have the
effect of delaying, deferring or preventing a change in control of the
Company.
- ---------------
* 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 entitled "Factors
Affecting Operating Results and Market Price of Stock" for a discussion
of factors that could affect future performance.
Item 2. Properties
The Company leases a 76,800 square foot facility in San Jose,
California under a 15 year lease, expiring December 31, 2011. All
operations including sales, technical support, marketing, engineering,
distribution, warehousing and administration are located in this
facility. The Company anticipates this facility will meet its growth
needs for the foreseeable future. See "Factors Affecting Operating
Results and Market Price of Stock - Dependence on Single Facility."
Item 3. Legal Proceedings
No material legal proceedings are pending on the date hereof to
which the Company is a party or to which any property of the Company is
subject.
Item 4. Submission of matters to a vote of security holders
None.
PART II
Item 5. Market for the registrant's common equity and related stockholder
matters
The Company's Common Stock has been quoted on the Nasdaq National
Market under the Nasdaq symbol "HELO" since the Company's initial public
offering in April 1995. The following table sets forth, for the periods
indicated, the high and low closing sale prices for the Common Stock on
such market.
High Low
--------- ---------
1996:
First quarter ended March 31, 1996...................... $8.00 $5.50
Second quarter ended June 30, 1996...................... 8.25 6.13
Third quarter ended September 30, 1996.................. 7.25 4.63
Fourth quarter ended December 31, 1996.................. 5.13 4.00
1997:
First quarter ended March 31, 1997...................... 5.88 4.75
Second quarter ended June 30, 1997...................... 7.00 5.13
Third quarter ended September 30, 1997.................. 7.25 5.63
Fourth quarter ended December 31, 1997.................. 8.13 5.88
At March 13, 1998, the Company had 42 holders of record of its
Common Stock. The Company estimates the number of beneficial owners of
the Company's Common Stock at March 13, 1998 to be 1,800.
The market price of the Company's Common Stock has been volatile.
For a discussion of the factors affecting the Company's stock price, see
"Factors Affecting Operating Results and Market Price of Stock -
Volatility of Stock Price."
The Company has not paid cash dividends on its Common Stock or other
securities. The Company currently anticipates that it will retain all
of its future earnings for use in the expansion and operation of its
business and does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. Under the Company's existing credit
facility, the Company cannot declare and pay dividends without prior
written approval from the lender.
Item 6. Selected Financial Data (in thousands except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ................................... $63,846 $51,590 $36,823 $26,216 $15,240
Cost of goods sold .......................... 30,759 25,181 16,916 12,179 7,102
---------- ---------- ---------- ---------- ----------
Gross profit .......................... 33,087 26,409 19,907 14,037 8,138
Selling, general and administrative
expenses ................................. 29,234 24,277 17,050 11,335 7,067
Product development expenses ................ 1,592 1,598 1,326 843 359
CellBase expenses ........................... -- -- 2,096 523 27
---------- ---------- ---------- ---------- ----------
Operating income (loss) ............... 2,261 534 (565) 1,336 685
Interest income (expense), net .............. 667 720 579 (195) (129)
Other income (expense), net ................. 32 (20) (37) 142 400
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes ..... 2,960 1,234 (23) 1,283 956
Provision (credit) for income taxes ......... 1,184 493 (2,112) 34 22
---------- ---------- ---------- ---------- ----------
Income before extraordinary item ...... 1,776 741 2,089 1,249 934
Extraordinary item .......................... -- -- 137 -- --
---------- ---------- ---------- ---------- ----------
Net income (1) ........................ $1,776 $741 $1,952 $1,249 $934
========== ========== ========== ========== ==========
Basic per share amounts:
Income before extraordinary item ............ $0.35 $0.15 $0.48 $0.46 $0.38
========== ========== ========== ========== ==========
Net income ................................. $0.35 $0.15 $0.44 $0.46 $0.38
========== ========== ========== ========== ==========
Weighted average common shares and
equivalents(2) .......................... 5,036 4,982 4,387 2,726 2,428
========== ========== ========== ========== ==========
Diluted per share amounts:
Income before extraordinary item ............ $0.35 $0.15 $0.46 $0.39 $0.32
========== ========== ========== ========== ==========
Net income ................................. $0.35 $0.15 $0.43 $0.39 $0.32
========== ========== ========== ========== ==========
Weighted average common shares and
equivalents(2) .......................... 5,117 5,043 4,525 3,204 2,954
========== ========== ========== ========== ==========
Balance Sheet Data:
Working capital ............................. $17,271 $16,282 $14,397 $5,267 $458
Total assets ................................ $31,832 $28,966 $25,716 $8,408 $3,510
Long-term debt and capital lease obligations $ -- $ -- $20 $1,958 $67
Redeemable preferred stock and stockholders'
equity .................................... $26,657 $24,643 $23,727 $4,333 $748
</TABLE>
- ---------
(1) Results in 1995, 1994 and 1993 reflect the application of tax loss
carryforwards. Assuming a 40% combined federal and state statutory
tax rate, net income (loss) would have been $(121,000), $770,000
and $574,000, and basic net income (loss) per share would have been
$(0.03), $0.28 and $0.24 in 1995, 1994 and 1993, respectively.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Management's Discussion and Analysis section and other parts
of this Annual Report on Form 10-K 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 "Business." 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
The following table sets forth statement of operations data as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ................................ 100.0% 100.0% 100.0%
Cost of goods sold ....................... 48.2% 48.8% 45.9%
------------ ------------ ------------
Gross profit ........................ 51.8% 51.2% 54.1%
Selling, general and administrative
expenses ............................. 45.8% 47.1% 46.3%
Product development expenses ............. 2.5% 3.1% 3.6%
CellBase expenses ........................ -- -- 5.7%
------------ ------------ ------------
Operating income (loss) ............. 3.5% 1.0% -1.5%
Other income (expense):
Interest income (expense), net ....... 1.1% 1.4% 1.6%
Other, net ........................... -- -- -0.1%
------------ ------------ ------------
Income (loss) before income taxes ... 4.6% 2.4% --
Provision (credit) for income taxes ...... 1.8% 1.0% -5.7%
------------ ------------ ------------
Income before extraordinary item .... 2.8% 1.4% 5.7%
Extraordinary item ....................... -- -- 0.4%
------------ ------------ ------------
Net income .......................... 2.8% 1.4% 5.3%
============ ============ ============
</TABLE>
1997 Compared to 1996
Net Sales Net sales reflect total sales less a provision for
returns. Net sales increased $12,256,000, or 23.8%, to $63,846,000 in
1997 from $51,590,000 in 1996. This increase was primarily attributable
to a 19% increase in the number of catalogs mailed, a 4% increase in the
number of orders and a 16% increase in the number of active customer
accounts.
Gross Profit Cost of goods sold includes merchandise cost, freight
and duties, warranty expense, and packaging and shipping supplies. Gross
profit increased $6,678,000, or 25.3%, to $33,087,000 in 1997 from
$26,409,000 in 1996. As a percentage of net sales, gross profit
increased to 51.8% in 1997 from 51.2% in 1996. The increase in gross
margin in 1997 was principally due to changes in product mix and higher
gross margin for branded products. The Company generally realizes a
higher gross margin on sales of its proprietary products than on sales
of private label or brand name products. Because the Company is
responsible for the design, development and manufacturing of its
proprietary products, the Company is able to realize the profit
attributable to these activities. During 1997, the Company began the
process of culling lower margin branded product from the catalog.
Although branded products as a percentage of net sales increased from
45% to 48%, this increase in lower margin product as a percentage of net
sales was offset by an improvement in the gross margin on these branded
products attributable to the culling process.
Selling, General and Administrative Expenses Selling, general and
administrative expenses increased $4,957,000, or 20.4%, to $29,234,000
in 1997 from $24,277,000 in 1996. As a percentage of net sales, these
expenses decreased to 45.8% in 1997 from 47.1% in 1996, primarily due to
a reduction in catalog costs, a reduction in advertising expenses and
process improvements. The Company expects selling, general and
administrative expenses to increase in dollars, but decrease as a
percentage of net sales, in 1998. *
Increases in postal rates, paper and printing costs increase the cost
of the Company's catalog mailings. The Postal Service recently proposed
a Postal rate increase which when effective will increase the cost of
mailing the Company's catalogs, however, this increase is not expected
to materially affect the cost of mailing. While the Company experienced
no significant paper price increases in 1997, paper costs are expected
to increase in 1998.* As a result of a three year printing contract
entered into in the fourth quarter of 1996 the Company's printing costs
per catalog page were down in 1997 when compared to 1996. See "Factors
Affecting Operating Results and Market Price of Stock_Increase in Costs
of Catalog Mailing, Paper and Printing."
Product Development Expenses A key element of the Company's
strategy is the development of proprietary products. The Company
expenses all its product development costs as incurred. Product
development expenses, decreased to $1,592,000 in 1997 from $1,598,000 in
1996, and decreased as a percentage of net sales to 2.5% in 1997 from
3.1% in 1996. The Company expects product development expenses to
increase in both dollars and as a percentage of net sales, in 1998.*
Interest Income Interest income decreased to $680,000 in 1997 from
$733,000 in 1996. Although the Company anticipates continued capital
expenditures for hardware, software and equipment in 1998, it is
expected interest income will increase slightly in 1998.*
Provision for Income Taxes The provision for income taxes of
$1,184,000 in 1997 and $493,000 in 1996, represents a combined federal
and state effective tax rate of 40%. The Company anticipates no change
in the effective tax rate for 1998.*
Net Income Net income increased to $1,776,000 in 1997 from
$741,000 in 1996 for the reasons stipulated above.
Inflation The Company does not believe that inflation has had a
material effect on its results of operations in recent years. However,
there can be no assurance that the Company's business will not be
affected by inflation in the future, including higher than anticipated
increases in paper and printing costs and postal rates.
Quarterly and Seasonal Fluctuations 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.
To date, the Company's growth and changes in timing of catalog
mailings have tended to obscure the anticipated effects of seasonality,
and may continue to do so in the future. The Company expects that its
business may exhibit some measure of volatility between quarters.*
1996 Compared to 1995
Net Sales Net sales increased $14,767,000, or 40.1%, to
$51,590,000 in 1996 from $36,823,000 in 1995. This increase was
primarily attributable to a 33% increase in the number of catalogs
mailed, a 43% increase in the number of orders, and a 26% increase in
the number of active customer accounts.
Gross Profit Gross profit increased $6,502,000, or 32.7%, to
$26,409,000 in 1996 from $19,907,000 in 1995. As a percentage of net
sales, gross profit declined to 51.2% in 1996 from 54.1% in 1995. The
decrease in gross margin in 1996 was due to changes in product mix and
price promotions. Due to the increase in the number of branded products
offered and the resulting change in sales mix, sales of proprietary
headset products as a percentage of total sales declined to 54% in 1996
from 59% in 1995, and the Company's gross margin declined accordingly.
Selling, General and Administrative Expenses Selling, general and
administrative expenses increased $7,227,000, or 42.4%, to $24,277,000
in 1996 from $17,050,000 in 1995. As a percentage of net sales, these
expenses increased to 47.1% in 1996 from 46.3% in 1995, primarily due to
the increase in catalog mailings, the cost of paper and postage for
catalogs, and marketing personnel and related costs, particularly for
increased customer care activities.
While the Company experienced significant paper price increases in
1995, paper costs did not materially change in 1996. Postal rates were
increased in January 1995 and the Postal Service introduced requirements
for sorting and bar coding of third class mail. These requirements
reduced postage expense in the second half of 1996, although not
materially. In the fourth quarter of 1996 the Company negotiated a three
year printing contract at terms favorable to the Company.
Product Development Expenses Product development expenses,
excluding the CellBase product, increased to $1,598,000 in 1996 from
$1,326,000 in 1995, but decreased as a percentage of net sales to 3.1%
in 1996 from 3.6% in 1995. This dollar increase was primarily
attributable to development of several new and in process products which
were introduced in late 1996.
CellBase Expenses In December 1995, the Company discontinued the
development and marketing of its CellBase product as a result of
continuing product development issues and the unexpected level of costs
necessary to develop an alternate distribution channel.
Interest Income Interest income increased slightly to $733,000 in
1996 from $729,000 in 1995.
Interest Expense Interest expense decreased to $13,000 in 1996
from $150,000 in 1995. This decrease was due to elimination of interest
on the $2,000,000 of subordinated promissory notes issued in May 1994
and retired in April 1995 with a portion of the proceeds from the
Company's initial public offering.
Provision (Credit) for Income Taxes The provision for income taxes
of $493,000 in 1996 represents a combined federal and state effective
tax rate of 40%. The credit for income taxes of $(2,112,000) in 1995
reflects the recognition of operating loss carryforwards in accordance
with SFAS No. 109 and corresponding reduction of the valuation
allowance. For further information regarding the Company's tax provision
(credit), see Notes to Financial Statements.
Net Income Net income decreased to $741,000 in 1996 from
$1,952,000 in 1995 for the reasons stipulated above.
Liquidity and Capital Resources
Hello Direct'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 in 1997 was $4,011,000 This
was the result of $4,255,000 provided by operations including net
income, depreciation and amortization and other non-cash charges offset
by $244,000 of changes in operating assets and liabilities. Cash used by
investing activities for 1997 was $1,586,000 primarily related to
equipment purchases of $2,437,000 and funding of notes receivable of
$1,503,000 offset by a $2,177,000 decrease in short term investments and
payments received on notes receivable of $177,000. Cash provided by
financing activities was $218,000 arising primarily from the issuance of
common stock pursuant to both the employee stock purchase plan and the
employee stock option plan.
Capital expenditures of $2,437,000 in 1997 represented a reduction
from $3,288,000 expended in 1996. The capital expenditures in 1997
included investments in computer hardware capacity and the associated
software, investment in assets for the new facility, to which the
Company relocated on January 1, 1997, and tooling for proprietary
products. In 1998, the Company expects to continue to purchase
additional capital equipment for enhancements to its management
information systems and tooling for proprietary products; and such
purchases are expected to remain at 1997 levels.*
The Company believes that funds generated from operations, together
with available funds remaining from the net proceeds of its initial
public offering, will be sufficient to fund its needs for working
capital for the foreseeable future.* However, should the Company need
additional funds, it has an unsecured line of credit with a major bank
for $5,000,000 at the bank's prime lending rate. At present, the Company
has not directly borrowed under this line, however, the Company was
contingently liable for issued and open letters of credit aggregating
approximately $1,064,000, at December 31, 1997.
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.
Recent Accounting Pronouncements
In June 1997, SFAS No. 130, Reporting Comprehensive Income was
issued. SFAS No. 130 requires disclosure of all components of
comprehensive income on an annual and interim basis. Comprehensive
income includes all changes in equity during a reporting period, except
those resulting from investments by owners and distributions to owners.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. The Company will adopt this statement for its year ending December
31, 1998 and does not anticipate this statement will have a significant
impact on its financial condition or results of operations.
In July 1997, SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information was issued. SFAS No. 131 requires
certain financial and supplementary information to be disclosed on an
annual and interim basis for each reportable segment of an enterprise.
SFAS No. 131 is effective for fiscal years beginning after December 15,
1997. Unless impracticable, companies would be required to restate prior
period information upon adoption. The Company will adopt this statement
for its year ending December 31, 1998 and does not anticipate this
statement will have a significant impact on its financial condition or
results of operations.
- ---------------
* 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 entitled "Factors
Affecting Operating Results and Market Price of Stock" for a discussion
of factors that could affect future performance.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Independent Auditors' Report
Balance Sheets at December 31, 1997 and 1996
Statements of Operations for the years ended December 31, 1997, 1996
and 1995
Statements of Stockholders' Equity for the years ended December 31,
1997, 1996 and 1995
Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995
Notes to Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hello Direct, Inc. :
We have audited the accompanying balance sheets of Hello Direct,
Inc. as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hello
Direct, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
San Jose, California
January 26, 1998
<PAGE>
HELLO DIRECT, INC.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $5,135,000 $2,492,000
Short-term investments ........................... 3,830,000 6,007,000
Trade accounts receivable, less allowance for
returns and doubtful accounts of $723,000 and
$508,000 in 1997 and 1996, respectively ....... 5,752,000 4,852,000
Inventories ...................................... 5,137,000 5,287,000
Deferred tax assets .............................. 821,000 628,000
Other current assets ............................. 1,771,000 1,339,000
------------ ------------
Total current assets ........................ 22,446,000 20,605,000
Notes receivable .................................... 4,542,000 3,497,000
Property and equipment, net ......................... 4,819,000 3,792,000
Long-term deferred tax assets ....................... 25,000 1,072,000
------------ ------------
Total assets ................................ $31,832,000 $28,966,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $3,856,000 $3,839,000
Accrued expenses ................................. 1,319,000 484,000
------------ ------------
Total current liabilities ................... 5,175,000 4,323,000
Stockholders' equity:
Preferred stock, $0.001 par value; authorized
2,000,000, none issued or outstanding ......... -- --
Common stock; $0.001 par value; authorized
15,000,000; 5,112,000 issued and 5,064,000
outstanding in 1997; 5,055,000 issued and
5,007,000 outstanding in 1996 ................. 5,000 5,000
Additional paid-in capital ....................... 28,045,000 27,807,000
Accumulated deficit .............................. (948,000) (2,724,000)
Less treasury stock, at cost - 48,000 shares...... (445,000) (445,000)
------------ ------------
Total stockholders' equity .................. 26,657,000 24,643,000
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity .. $31,832,000 $28,966,000
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
HELLO DIRECT, INC.
Statements of Operations
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ................................ $63,846,000 $51,590,000 $36,823,000
Cost of goods sold ....................... 30,759,000 25,181,000 16,916,000
------------ ------------ ------------
Gross profit ........................ 33,087,000 26,409,000 19,907,000
Selling, general and administrative
expenses ............................. 29,234,000 24,277,000 17,050,000
Product development expenses ............. 1,592,000 1,598,000 1,326,000
CellBase expenses ........................ -- -- 2,096,000
------------ ------------ ------------
Operating income (loss) ............. 2,261,000 534,000 (565,000)
Other income (expense):
Interest income ...................... 680,000 733,000 729,000
Interest expense ..................... (13,000) (13,000) (150,000)
Other, net ........................... 32,000 (20,000) (37,000)
------------ ------------ ------------
Income (loss) before income taxes ... 2,960,000 1,234,000 (23,000)
Provision (credit) for income taxes ...... 1,184,000 493,000 (2,112,000)
------------ ------------ ------------
Income before extraordinary item .... 1,776,000 741,000 2,089,000
Extraordinary item - loss on
extinguisment of debt, net of tax
benefit of $41,000 ................... -- -- 137,000
------------ ------------ ------------
Net income .......................... $1,776,000 $741,000 $1,952,000
============ ============ ============
Basic per share amounts:
Income before extraordinary item ..... $0.35 $0.15 $0.48
============ ============ ============
Net income ........................... $0.35 $0.15 $0.44
============ ============ ============
Weighted average shares outstanding .. 5,036,000 4,982,000 4,387,000
============ ============ ============
Diluted per share amounts:
Income before extraordinary item ..... $0.35 $0.15 $0.46
============ ============ ============
Net income ........................... $0.35 $0.15 $0.43
============ ============ ============
Weighted average shares outstanding .. 5,117,000 5,043,000 4,525,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
HELLO DIRECT
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Preferred Stock
Series I Common Stock Additional Total
--------------------- ---------------------- Paid-in Accumulated Treasury Stockholders'
Shares Amount Shares Amount Capital Deficit Stock Equity
----------- --------- ---------- ----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1994 2,339,000 $405,000 450,000 $7,112,000 $ -- ($5,417,000) -- $2,100,000
Declaration of par value -- -- -- (7,111,000) 7,111,000 -- -- --
Sale of common stock, net -- -- 1,725,000 2,000 17,881,000 -- -- 17,883,000
Conversion of Series I
preferred stock to
common stock (2,339,000) (405,000) 2,339,000 2,000 403,000 -- -- --
Conversion of Series II
preferred stock to
common stock -- -- 368,000 -- 2,233,000 -- -- 2,233,000
Conversion of warrant to
common stock -- -- 48,000 -- -- -- -- --
Common stock issued
pursuant to employee
stock purchase and
option plans -- -- 38,000 -- -- -- -- --
Common stock issued in
exchange for services -- -- 6,000 -- 4,000 -- -- 4,000
Acquisition of treasury
stock -- -- (48,000) -- -- -- (445,000) (445,000)
Net income -- -- -- -- -- 1,952,000 -- 1,952,000
----------- --------- ---------- ----------- ------------ ------------- ----------- ------------
Balances as of December
31, 1995 -- -- 4,926,000 5,000 27,632,000 (3,465,000) (445,000) 23,727,000
Common stock issued
pursuant to employee
stock purchase
and option plans -- -- 81,000 -- 175,000 -- -- 175,000
Net income -- -- -- -- -- 741,000 -- 741,000
----------- --------- ---------- ----------- ------------ ------------- ----------- ------------
Balances as of December
31, 1996 -- -- 5,007,000 5,000 27,807,000 (2,724,000) (445,000) 24,643,000
Common stock issued
pursuant to employee
stock purchase
and option plans -- -- 57,000 -- 238,000 -- -- 238,000
Net income -- -- -- -- -- 1,776,000 -- 1,776,000
----------- --------- ---------- ----------- ------------ ------------- ----------- ------------
Balances as of December
31, 1996 -- $ -- 5,064,000 $5,000 $28,045,000 ($948,000) ($445,000) $26,657,000
=========== ========= ========== =========== ============ ============= =========== ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
HELLO DIRECT, INC.
Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................... $1,776,000 $741,000 $1,952,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization .... 1,323,000 589,000 866,000
Deferred income taxes ............ 854,000 454,000 (2,154,000)
Disposal of fixed assets ......... 87,000 187,000 --
Allowance for returns and
doubtful accounts............. 215,000 41,000 107,000
Issuance of preferred stock
Series II for product
development and common
stock for services ........... -- -- 4,000
Changes in items affecting
operations:
Trade accounts receivable .... (834,000) (1,485,000) (1,049,000)
Inventories .................. 150,000 (1,373,000) (1,327,000)
Other assets ................. (432,000) (335,000) (371,000)
Accounts payable and
accrued expenses .......... 872,000 2,360,000 (151,000)
------------ ------------ ------------
Net cash provided by (used
in) operating activities ... 4,011,000 1,179,000 (2,123,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment.. (2,437,000) (3,288,000) (1,241,000)
Decrease (increase) in investments .. 2,177,000 4,462,000 (10,469,000)
Funding of notes receivable.......... (1,503,000) (3,497,000) --
Payments received on notes
receivable......................... 177,000 -- --
Other assets ........................ -- -- 118,000
------------ ------------ ------------
Net cash used in investing
activities ................. (1,586,000) (2,323,000) (11,592,000)
------------ ------------ ------------
Cash flows from financing activities:
Payments on capital lease obligations (20,000) (26,000) (23,000)
Proceeds from (payment of) note
payable and warrant .............. -- -- (1,912,000)
Purchase of treasury stock .......... -- -- (445,000)
Sale of common stock, net ........... 238,000 175,000 17,883,000
------------ ------------ ------------
Net cash provided by
financing activities ..... 218,000 149,000 15,503,000
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents ................... 2,643,000 (995,000) 1,788,000
Cash and cash equivalents at beginning
of period .......................... 2,492,000 3,487,000 1,699,000
------------ ------------ ------------
Cash and cash equivalents at end of
period ............................. $5,135,000 $2,492,000 $3,487,000
============ ============ ============
Supplemental disclosure of cash paid
during year:
Interest ........................... $13,000 $13,000 $169,000
============ ============ ============
Income taxes ....................... $336,000 $16,000 $15,000
============ ============ ============
Noncash financing activities:
Conversion of preferred stock Series
I and II into common stock ....... $ -- $ -- $2,638,000
============ ============ ============
Issuance of common stock in exchange
for services ..................... $ -- $ -- $4,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
HELLO DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) Summary of the Company and Significant Accounting Policies
The Company
Hello Direct, Inc. (the "Company") is a leading direct marketer and
developer of desktop telephony products and equipment interface
solutions to business end users. The Company designs and sells its own
products and also offers a wide variety of products and accessories from
other manufacturers. The Company markets its products through various
sales channels which include full color catalogs, the internet and
outbound telemarketing efforts aimed at current and prospective
customers.
Cash Equivalents
The Company considers all highly liquid investments purchased with
an original maturity date of three months or less to be cash
equivalents. Cash equivalents consist primarily of government agency
obligations, commercial paper and money market funds.
Investments
Short-term investments consist of high quality money market
instruments, primarily commercial paper with original maturities greater
than three months and less than twelve months.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Catalog Costs
Catalog costs are deferred and amortized over the expected revenue
stream, generally nine months.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
calculated on the straight-line method over the estimated useful lives
of the assets, generally three to seven years. Amortization of leasehold
improvements is calculated using the straight-line method over the
lesser of the estimated useful life of the asset or the term of the
respective lease.
Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets for
impairment. If events or changes indicate that the carrying amount of an
asset may not be recoverable, the Company will reduce the amount of the
asset determined not to be recoverable.
Revenue Recognition
The Company recognizes revenue at the time of the product shipment.
Appropriate provisions are provided for customer returns and exchanges
under the Company's satisfaction guarantee.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date.
Net Income Per Share
Effective for the year ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share, which replaces the presentation of primary earnings per share
("EPS") and fully diluted EPS with a presentation of basic EPS and
diluted EPS, respectively. Basic EPS excludes dilution and is computed
by dividing earnings available to common stockholders by the weighted-
average number of common shares outstanding for the period. Similar to
fully diluted EPS, diluted EPS assumes conversion of the convertible
preferred stock, the elimination of the related preferred stock dividend
requirement, and the issuance of common stock for all other potentially
dilutive equivalent shares outstanding. All prior-period EPS data have
been restated. The adoption of this new accounting standard did not have
a material effect on the Company's reported EPS amounts
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:
1997 1996 1995
----------- ------------ ------------
Basic weighted shares outstanding 5,036,000 4,982,000 4,387,000
Common stock options utilizing treasury
stock method when dilutive 81,000 61,000 138,000
----------- ------------ ------------
Diluted weighted shares outstanding 5,117,000 5,043,000 4,525,000
=========== ============ ============
Reverse Stock Split
On April 7, 1995, the Company made an underwritten IPO of 1,725,000
shares of Common Stock. For this IPO, the Company effected a reverse
stock split of its capital stock at a ratio of .5654:1 and all share
information has been restated to reflect this split.
Use of Estimates
The Company's management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Stock Option and Stock Purchase Plan Accounting
Compensation expense associated with stock option grants and stock
purchase plan purchases made subsequent to 1994 is disclosed in the
footnotes to the financial statements. The effect on net income and net
income per share is reflected in pro forma - net income, pro forma -
basic net income per share, and pro forma - diluted net income per share
amounts.
Concentration of Credit Risk
The Company offers credit terms to customers after an evaluation of
a customer's financial condition. No one customer accounts for a
substantial part of sales or receivables. The Company estimates an
allowance for doubtful accounts based on the creditworthiness of its
customers as well as general economic conditions. Consequently, an
adverse change in those factors could affect the Company's estimate of
its bad debts.
(2) Other Current Assets
A summary of other current assets as of December 31, 1997 and 1996
follows:
1997 1996
------------ ------------
Deferred catalog costs $1,521,000 $992,000
Other 250,000 347,000
------------ ------------
$1,771,000 $1,339,000
============ ============
(3) Note Receivable
In 1996 the Company entered into a loan agreement to a developer for
the construction of the Company's corporate facility. Through 1997, the
Company had loaned $5,000,000 under this loan agreement. The borrowings
under this loan agreement are secured by the building and land, bear
interest at 7.5% with principal and interest due in monthly installments
of $53,000 over 12 years. The fair value of the loan as of December 31,
1997 is estimated to approximate its face value which was calculated by
discounting the future cash flows using the current interest rate at
which a similar loan would be made to the developer for the same
remaining maturity. The note contains a provision that if the developer
defaults on the monthly payment, the Company can offset the non-payment
against their monthly rent payment. The lease agreement contains a
similar provision for non-payment.
In connection with the loan agreement, the Company entered into a 15
year lease agreement. The present value of the total future minimum
lease payments under the lease is approximately $6,965,000 as of
December 31, 1997, which approximates the fair value of the lease using
rates currently available to the Company for a lease with similar terms.
(4) Property and Equipment
A summary of property and equipment as of December 31, 1997 and 1996
follows:
1997 1996
------------ ------------
Computer equipment and software $2,673,000 $2,166,000
Furniture and fixtures 3,030,000 1,693,000
Production tooling and equipment 1,623,000 1,250,000
------------ ------------
7,326,000 5,109,000
Less accumulated depreciation and amortization 2,507,000 1,317,000
------------ ------------
$4,819,000 $3,792,000
============ ============
(5) Accrued Expenses
A summary of accrued expenses as of December 31, 1997 and 1996
follows:
1997 1996
------------ ------------
Accrued compensation and related liabilities $1,117,000 $299,000
Other 202,000 185,000
------------ ------------
$1,319,000 $484,000
============ ============
(6) Bank Line of Credit
As of December 31, 1997, the Company had a financing agreement with
a bank to provide a $5,000,000 unsecured revolving line of credit for
both letters of credit and working capital. As of December 31, 1997,
$3,936,000 was available under the agreement. Any borrowings bear
interest at the bank's prime rate (8.5% as of December 31, 1997). The
line of credit will expire on May 15, 1998. The agreement contains
various financial covenants, including profitability and financial
ratios such as quick ratio and debt to net worth. As of December 31,
1997, there were no direct borrowings under the credit facility;
however, the Company was contingently liable for issued and open letters
of credit aggregating approximately $1,064,000.
(7) Lease Commitments
As of December 31, 1997, the Company was obligated under a
noncancelable operating lease agreement expiring in December 2011, for
office and warehouse space. A summary of future minimum lease payments
follows:
Year Ending December 31, Amount
------------------------ ------------
1998 $645,000
1999 698,000
2000 698,000
2001 755,000
2002 755,000
Thereafter 8,161,000
------------
Total future minimum lease payments $11,712,000
============
Rent expense aggregated approximately $651,000, $245,000, and $207,000 for
1997, 1996 and 1995, respectively.
(8) CellBase Expenses
The development of CellBase, a universal car kit for hand held
cellular telephones, began in late 1993. In December 1995, the Company
discontinued the development and marketing of its CellBase product as a
result of product development issues and the level of costs necessary to
develop an alternate distribution channel. Costs related to
discontinuing product and market development were charged to expense in
1995.
(9) Note Payable
On May 5, 1994, a $2,000,000 subordinated note was issued along with
a detachable warrant to purchase 136,000 shares of common stock at $7.07
per share. The note was recorded at a discount reflecting the estimated
fair value of the warrant issued. Concurrent with the retirement of the
note from proceeds of the Company's IPO, the Company issued 48,000
shares of common stock under the warrant and expensed the remaining
unamortized financing costs as an extraordinary item.
(10) Benefit Plan
The Company has a 401(k) plan that covers all eligible employees as
defined. Employees can elect to defer from 1% to 15% of their
compensation limited to $9,500 in 1997. The Company may make
discretionary contributions and matching contributions. In 1997, the
Company made matching contributions of $11,000. No such matching
contributions were made by the Company in a prior year.
(11) Stock Option and Employee Stock Purchase Plans
The Company applies APB Opinion No. 25 in accounting for its various
stock option plans and Employee Stock Purchase Plan (the "stock plans").
Accordingly, no compensation cost has been recognized for the stock
plans. However, if the Company had determined compensation costs
pursuant to SFAS No. 123 for its stock plans, the Company's net income
and net income per share would have been reduced to the pro forma
amounts indicated below for the years noted:
1997 1996 1995
------------ ------------ ------------
Pro forma - net income $1,483,000 $173,000 $1,706,000
Pro forma - basic net income per share $0.29 $0.03 $0.39
Pro forma - diluted net income per share $0.29 $0.03 $0.38
Pro forma net income reflects only options granted in 1997, 1996 and
1995. Accordingly, the full impact of calculating compensation cost for
the Company's stock plans under SFAS No. 123 is not reflected in the pro
forma net income amounts presented above as compensation cost is
captured over a stock options' vesting period and compensation cost for
options granted prior to January 1, 1995 is not considered.
1992 Stock Option Plan
As of December 31, 1997, 54,633 stock options for the issuance of
common stock were outstanding pursuant to the 1992 Stock Option Plan
(the "Plan"). No new stock option grants can be issued under the plan.
Stock options outstanding pursuant to the Plan vest over two to four
years from the grant date and expire ten years from the grant date.
1995 Employee Stock Purchase Plan
The Company's 1995 Employee Stock Purchase Plan (the "Purchase
Plan") was established in 1995. As of December 31, 1997, a total of
155,000 shares of common stock are reserved for issuance and 82,833
shares have been issued pursuant to the Purchase Plan. The Purchase Plan
is administered by the Compensation Committee of the Board of Directors.
The Purchase Plan permits eligible employees, as defined, to purchase
common stock through payroll deductions, which may not exceed 15% of the
employee's base compensation. No employee may purchase more than $25,000
worth of stock in any calendar year. The price of shares purchased under
the Purchase Plan is 85% of the lower of the fair market value of the
common stock on (i) the first day of the offering period; or (ii) the
last day of the offering period. Employees may end their participation
in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the
Company.
1995 Director Option Plan
The 1995 Director Option Plan (the "Director Plan") was established
in 1995. As of December 31, 1997, a total of 75,000 shares of common
stock are reserved for issuance, 36,000 stock options remain outstanding
and no shares have been issued pursuant to an exercise of stock options
pursuant to the Director Plan. The Director Plan provides for the grant
of non-statutory stock options to non-employee directors of the Company
("Outside Directors") pursuant to a non-discretionary grant mechanism.
The exercise price of options granted to Outside Directors must be 100%
of the fair market value of the Company's common stock on the date of
grant. Options granted to the Outside Directors have a 10 year term, or
shorter upon termination of their tenure as a director.
The Company's 1995 Stock Plan (the "Stock Plan") was established in
1995. As of December 31, 1997, a total of 900,000 shares of Common Stock
are reserved for issuance, 482,898 stock options remain outstanding and
no shares have been issued pursuant to the Stock Plan. The Stock Plan
provides for the grant to employees (including employee directors and
officers) of incentive stock options and for the grant of non-statutory
stock options and the grant of restricted stock to employees and
consultants. Non-employee directors are not eligible to participate in
the Stock Plan.
The exercise price per share of all incentive stock options granted
under the Stock Plan must be at least equal to fair market value per
share of Common Stock on the date of grant. The exercise price per share
of all non-statutory stock options and the price per share of restricted
stock granted under the Option Plan shall be determined by the
administrator on the date of grant. Options granted under the Stock
Plan generally vest over four years and expire no later than ten years
from the grant date.
The following table summarizes all option activity under the Company's
stock option plans during the three year period ended December 31, 1997:
<TABLE>
<CAPTION>
Weighted-
Weighted- average
average Exercise
Weighted- Grant Options Price
average Date Exercisable of Options
Options Exercise Fair at Exercisable
Outstanding Price Value* Year End at Year End
----------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
December 31, 1994 138,145 $0.034 42,779 $0.020
============ ============
Granted 355,000 8.663 $3.957
==========
Exerecised (37,977) 0.020
Canceled or expired (3,557) 0.020
-----------
December 31, 1995 451,611 6.819 53,573 $2.182
============ ============
Granted 196,065 6.054 $2.543
==========
Exerecised (49,312) 0.320
Canceled or expired (43,747) 8.792
-----------
December 31, 1996 554,617 6.996 186,463 $6.816
============ ============
Granted 197,500 5.293 $2.222
==========
Exerecised (15,253) 2.857
Canceled or expired (163,333) 6.744
-----------
December 31, 1997 573,531 $6.591 298,631 $7.028
=========== ============ ============
</TABLE>
* Fair Value Assumptions:
Black-Scholes option-pricing model
--------------------------------------------
Weighted-
average
Risk Average
Free Expected Dividend
Rate Life Volitility Yield
--------- --------- ----------- ---------
1995 7.67% 3.03 58% 0%
1996 5.28% 2.83 58% 0%
1997 5.50% 2.97 60% 0%
The following table summarizes information about the Company's stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Oustanding Options Exercisable
------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$0.02 - 0.71 39,133 5.28 $0.055 39,015 $0.053
4.13 - 5.50 181,065 9.09 4.807 26,450 4.408
7.00 - 8.00 209,000 7.89 7.655 110,791 7.753
8.50 - 11.50 144,333 7.71 9.061 122,375 9.162
------------ ------------
$0.02 - 11.50 573,531 8.05 6.591 298,631 7.028
============ ============
</TABLE>
(12) Income Taxes
The components of income tax expense (credit) for the years ended
December 31, 1997, 1996 and 1995 follows:
Year Ended
--------------------------------------
1997 1996 1995
------------ ------------ ------------
Current:
Federal $77,000 $15,000 $ --
State 253,000 24,000 --
------------ ------------ ------------
330,000 39,000 --
Deferred:
Federal 841,000 481,000 (1,842,000)
State 13,000 (27,000) (270,000)
------------ ------------ ------------
854,000 454,000 (2,112,000)
------------ ------------ ------------
$1,184,000 $493,000 ($2,112,000)
============ ============ ============
A reconciliation between the provision for income taxes (credit) and
the amount computed by applying the statutory federal income tax rate to
income (loss) before income taxes for the years ended December 31, 1997,
1996, and 1995 follows:
Year Ended
--------------------------------------
1997 1996 1995
------------ ------------ ------------
Statutory rate of 34% applied to
pre-tax income (loss) $1,006,000 $420,000 ($8,000)
Change in valuation allowance -- -- (1,997,000)
State tax (net of federal benefit) 176,000 -- --
Other 2,000 73,000 (107,000)
------------ ------------ ------------
$1,184,000 $493,000 ($2,112,000)
============ ============ ============
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities
as of December 31, 1997 and 1996 follows:
December 31,
-------------------------
1997 1996
Deferred tax assets: ------------ ------------
Net operating loss carryovers $ -- $1,034,000
Tax credit carryovers 523,000 500,000
Accounts receivable principally
due to allowances 313,000 244,000
Employee benefit accruals 139,000 19,000
Inventories principally due to
costs inventoried for tax purpose 84,000 17,000
Other 11,000 16,000
------------ ------------
Deferred tax assets 1,070,000 1,830,000
------------ ------------
Deferred tax liabilities:
Fixed assets (128,000) (29,000)
State income taxes (96,000) (101,000)
------------ ------------
Deferred tax liabilities (224,000) (130,000)
------------ ------------
Net deferred tax assets $846,000 $1,700,000
============ ============
Management believes that it is more likely than not that the results
of future operations will generate sufficient income to realize the
deferred tax assets, therefore no valuation allowance is necessary for
1997 or 1996.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating loss carryforwards in the event of an
ownership change, as defined by section 382 of the Internal Revenue Code
of 1986, as amended. As of December 31, 1997, the Company had utilized
all net operating loss carryovers for federal and state income tax
purposes not subject to the annual limitation. A federal net operating
loss of $309,000, subject to an annual limitation of approximately
$150,000, remains. The net operating loss expires in 2004. Any unused
annual limitation can be carried forward and added to the succeeding
years annual limitation subject to the expiration date.
(13) Quarterly Results (unaudited)
The following table (presented in thousands, except per share data)
sets forth statement of operations data for each of the four quarters of
the years ended December 31, 1997 and December 31, 1996. The unaudited
quarterly information has been prepared on the same basis as the annual
information presented elsewhere herein and, in the Company's opinion,
includes all adjustments (consisting only of normal recurring entries)
necessary for a fair presentation of the information for the quarters
presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
Three Months Ended
------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
--------- --------- --------- ---------
Net sales $15,936 $15,318 $16,727 $15,865
Cost of goods sold 7,853 7,542 7,914 7,450
--------- --------- --------- ---------
Gross profit 8,083 7,776 8,813 8,415
Selling, general and
administrative expenses 7,341 6,923 7,816 7,154
Product development expenses 410 371 322 489
--------- --------- --------- ---------
Operating income 332 482 675 772
Other income - net 169 152 177 201
--------- --------- --------- ---------
Income before income taxes 501 634 852 973
Income taxes 201 264 342 377
--------- --------- --------- ---------
Net income $300 $370 $510 $596
========= ========= ========= =========
Basic and diluted net income
per share $0.06 $0.07 $0.10 $0.12
========= ========= ========= =========
Three Months Ended
------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996
--------- --------- --------- ---------
Net sales $12,073 $12,382 $13,111 $14,024
Cost of goods sold 5,723 5,898 6,463 7,097
--------- --------- --------- ---------
Gross profit 6,350 6,484 6,648 6,927
Selling, general and
administrative expenses 5,583 5,613 6,297 6,784
Product development expenses 535 540 313 210
--------- --------- --------- ---------
Operating income 232 331 38 (67)
Other income - net 193 178 197 132
--------- --------- --------- ---------
Income before income taxes 425 509 235 65
Income taxes 170 204 90 29
--------- --------- --------- ---------
Net income $255 $305 $145 $36
========= ========= ========= =========
Basic and diluted net income
per share $0.05 $0.06 $0.03 $0.01
========= ========= ========= =========
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The sections entitled "Election of Directors - Nominees" and
"Additional Information Relating to Directors and Officers of the
Company - Section 16(a) Beneficial Ownership Reporting Compliance" of
the Company's proxy statement for the Company's Annual Meeting of
Stockholders tentatively scheduled to be held May 6, 1998 (the "Proxy
Statement") are hereby incorporated by reference. See also, the section
entitled "Executive Officers of the Company" in Item 1 above of this
Annual Report on Form 10-K.
Item 11. Executive Compensation
The section entitled "Additional Information Relating to Directors
and Officers of the Company" of the Proxy Statement is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The section entitled "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The section entitled "Additional Information Relating to Directors
and Officers of the Company - Certain Relationships and Related
Transactions" of the Proxy Statement is incorporated herein by
reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this Report.
1. Financial Statement Schedule. For the three years ended December
31, 1997, Independent Auditors' Report on Financial Statement
Schedule and Consent.
Other schedules not included here are not applicable to the Company.
Schedule II - Valuation and Qualifying Accounts. A schedule of the
allowance for doubtful accounts and allowance for returns account is presented
below:
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
beginning costs and at end
of year expenses Deductions of year
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
December 31, 1997 $248,000 $536,000 $411,000 $373,000
=========== ============ ============ ===========
December 31, 1996 $227,000 $428,000 $407,000 $248,000
=========== ============ ============ ===========
December 31, 1995 $110,000 $282,000 $165,000 $227,000
=========== ============ ============ ===========
Allowance for returns:
December 31, 1997 $260,000 $8,474,000 $8,384,000 $350,000
=========== ============ ============ ===========
December 31, 1996 $240,000 $6,856,000 $6,836,000 $260,000
=========== ============ ============ ===========
December 31, 1995 $250,000 $4,373,000 $4,383,000 $240,000
=========== ============ ============ ===========
</TABLE>
(b) Reports on Form 8-K.
None.
(c) Exhibits:
3.1* Amended and Restated Certificate of Incorporation of
Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
4.1* Specimen Common Stock Certificate.
10.1* Form of Indemnification Agreement with directors and officers.
10.2* 1992 Stock Option Plan and forms of agreement thereunder.
10.3* 1995 Stock Plan and forms of agreements thereunder.
10.4* 1995 Employee Stock Purchase Plan.
10.5* 1995 Director Option Plan.
10.6* Manufacturing Agreement with Sinoca Enterprises Co., dated
March 10, 1994.
10.7* Amended and Restated Stockholders' Agreement, as amended, dated
May 4, 1994.
10.8* Manufacturing Agreement with Seo-Won K-Tec, Inc. dated January
16, 1995.
10.9 Employment Agreement with Dennis P. Waldera, dated February 5,
1996.
10.10* Employment Agreement with E. Alexander Glover dated March 24,
1995.
10.11* Lease Agreement by and between MPJ-A and Registrant, dated May
10, 1996.
10.12* Promissory Note by and between MPJ-A and Registrant, dated May
10, 1996.
10.13* Construction Loan Agreement by and between MPJ-A and
Registrant, dated June 7, 1996.
10.14* Contract between Hello Direct, Inc. and R. R. Donnelley & Sons
Company for printing services through spring 2000, dated
November 19, 1996.
10.15* Line of Credit Agreement by and between Wells Fargo Bank and
Registrant, dated May 15, 1997.
10.16* Agreement Between Hello Direct, Inc. and Transtech Electronics
(S) Pte. Ltd., dated May 16, 1997.
10.17 First Amendment to Employment Agreement with E. Alexander
Glover, dated July 1, 1997
23.1 Report on Financial Statement Schedule and Consent of
Independent Auditors
24.1 Power of Attorney
27.1 Financial Data Schedule
- ----------------
* Previously filed
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 25, 1998
Hello Direct, Inc.
By: /S/ RAYMOND E. NYSTROM
-------------------------
Raymond E. Nystrom
Vice President of Operations
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints E. Alexander Glover and
Raymond E. Nystrom, jointly and severally, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to
sign any and all amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this
Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
- -------------------------- ----------------------------------- -------------
/s/ E. Alexander Glover President, Chief Executive Officer March 25, 1998
- ------------------------- and Director (Principal Executive
(E. Alexander Glover) Officer)
/s/ Raymond E. Nystrom Vice President of Operations and March 25, 1998
- ------------------------- Chief Financial Officer
(Raymond E. Nystrom) (Principal Financial and Accounting
Officer)
/s/ John B. Mumford Chairman of the Board and Director March 25, 1998
- -------------------------
(John B. Mumford)
/s/ C. Allen Batts Director March 25, 1998
- -------------------------
(C. Allen Batts)
/s/ John W. Combs Director March 25, 1998
- -------------------------
(John W. Combs)
/s/ Deepak Kamra Director March 25, 1998
- -------------------------
(Deepak Kamra)
/s/ William P. Sousa Director March 25, 1998
- -------------------------
(William P. Sousa)
BYLAWS
OF
HELLO DIRECT INC.
(a Delaware corporation)
Amended and Restated as of January 28, 1998
BYLAWS OF
HELLO DIRECT, INC.
(a Delaware corporation)
TABLE OF CONTENTS
ARTICLE I - CORPORATE OFFICES
1.1 REGISTERED OFFICE
1.2 OTHER OFFICES
ARTICLE II - MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
2.2 ANNUAL MEETING
2.3 SPECIAL MEETING
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
2.7 QUORUM
2.8 ADJOURNED MEETING; NOTICE
2.9 VOTING
2.10 [Intentionally omitted]
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
2.12 PROXIES
2.13 ORGANIZATION
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
2.15 WAIVER OF NOTICE
ARTICLE III - DIRECTORS
3.1 POWERS
3.2 NUMBER OF DIRECTORS
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
3.4 RESIGNATION AND VACANCIES
3.5 REMOVAL OF DIRECTORS
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
3.7 FIRST MEETINGS
3.8 REGULAR MEETINGS
3.9 SPECIAL MEETINGS; NOTICE
3.10 QUORUM
3.11 WAIVER OF NOTICE
3.12 ADJOURNMENT
3.13 NOTICE OF ADJOURNMENT
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
3.15 FEES AND COMPENSATION OF DIRECTORS
3.16 APPROVAL OF LOANS TO OFFICERS
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION
ARTICLE IV - COMMITTEES
4.1 COMMITTEES OF DIRECTORS
4.2 MEETINGS AND ACTION OF COMMITTEES
4.3 COMMITTEE MINUTES
ARTICLE V - OFFICERS
5.1 OFFICERS
5.2 ELECTION OF OFFICERS
5.3 SUBORDINATE OFFICERS
5.4 REMOVAL AND RESIGNATION OF OFFICERS
5.5 VACANCIES IN OFFICES
5.6 CHAIRMAN OF THE BOARD
5.7 PRESIDENT
5.8 VICE PRESIDENTS
5.9 SECRETARY
5.10 CHIEF FINANCIAL OFFICER
5.11 ASSISTANT SECRETARY
5.12 ADMINISTRATIVE OFFICERS
5.13 AUTHORITY AND DUTIES OF OFFICERS
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER
AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
6.2 INDEMNIFICATION OF OTHERS
6.3 INSURANCE
ARTICLE VII - RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
7.2 INSPECTION BY DIRECTORS
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
ARTICLE VIII - GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
8.5 SPECIAL DESIGNATION ON CERTIFICATES
8.6 LOST CERTIFICATES
8.7 TRANSFER AGENTS AND REGISTRARS
8.8 CONSTRUCTION; DEFINITIONS
ARTICLE IX - AMENDMENTS
BYLAWS
OF
HELLO DIRECT INC.
(a Delaware corporation)
Amended and Restated as of January 28, 1998
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be fixed in the
certificate of incorporation of the corporation.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or
subordinate offices at any place or places where the corporation is
qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or
outside the State of Delaware designated by the board of directors. In
the absence of any such designation, stockholders' meetings shall be
held at the principal executive office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a
date and at a time designated by the board of directors. In the absence
of such designation, the annual meeting of stockholders shall be held on
the first Tuesday in March in each year at 10:00 a.m. However, if such
day falls on a legal holiday, then the meeting shall be held at the same
time and place on the next succeeding full business day. At the
meeting, directors shall be elected, and any other proper business may
be transacted.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by
the board of directors, or by the chairman of the board, or by the
president, or by one or more stockholders holding shares in the
aggregate entitled to cast not less than ten percent (10%) of the votes
of all shares of stock owned by stockholders entitled to vote at that
meeting.
If a special meeting is called by any person or persons other than
the board of directors or the president or the chairman of the board,
then the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail
or by telegraphic or other facsimile transmission to the chairman of the
board, the president, any vice president or the secretary of the
corporation. The officer receiving the request shall cause notice to be
promptly given to the stockholders entitled to vote, in accordance with
the provisions of Sections 2.4 and 2.6 of these bylaws, that a meeting
will be held at the time requested by the person or persons calling the
meeting, so long as that time is not less than thirty-five (35) nor more
than sixty (60) days after the receipt of the request. If the notice is
not given within twenty (20) days after receipt of the request, then the
person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as
limiting, fixing or affecting the time when a meeting of stockholders
called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings of stockholders shall be sent or otherwise
given in accordance with Section 2.6 of these bylaws not less than ten
(10) nor more than sixty (60) days before the date of the meeting. The
notice shall specify the place, date and hour of the meeting and (i) in
the case of a special meeting, the purpose or purposes for which the
meeting is called (no business other than that specified in the notice
may be transacted) or (ii) in the case of the annual meeting, those
matters which the board of directors, at the time of giving the notice,
intends to present for action by the stockholders (but any proper matter
may be presented at the meeting for such action). The notice of any
meeting at which directors are to be elected shall include the name of
any nominee or nominees who, at the time of the notice, the board
intends to present for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
Subject to the rights of holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon
liquidation,
(a) nominations for the election of directors, and
(b) business proposed to be brought before any stockholder
meeting
may be made by the board of directors or proxy committee appointed by
the board of directors or by any stockholder entitled to vote in the
election of directors generally if such nomination or business proposed
is otherwise proper business before such meeting. However, any such
stockholder may nominate one or more persons for election as directors
at a meeting or propose business to be brought before a meeting, or
both, only if such stockholder has given timely notice in proper written
form of their intent to make such nomination or nominations or to
propose such business. To be timely, such stockholder's notice must be
delivered to or mailed and received by the secretary of the corporation
not less than ninety (90) days prior to the meeting; provided, however,
that in the event that less than one-hundred (100) days notice or prior
public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received
not later than the close of business on the tenth day following the day
on which such notice of the date of the meeting was mailed or such
public disclosure was made. To be in proper form, a stockholder's
notice to the secretary shall set forth:
(i) the name and address of the stockholder who intends to
make the nominations or propose the business and, as the
case may be, of the person or persons to be nominated or of
the business to be proposed;
(ii) a representation that the stockholder is a holder of
record of stock of the corporation entitled to vote at such
meeting and, if applicable, intends to appear in person or
by proxy at the meeting to nominate the person or persons
specified in the notice;
(iii) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and
any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be
made by the stockholder;
(iv) such other information regarding each nominee or each
matter of business to be proposed by such stockholder as
would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange
Commission had the nominee been nominated, or intended to be
nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and
(v) if applicable, the consent of each nominee to serve as
director of the corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the
nomination of any person or the proposal of any business not made in
compliance with the foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given
either personally or by first-class mail or by telegraphic or other
written communication. Notices not personally delivered shall be sent
charges prepaid and shall be addressed to the stockholder at the address
of that stockholder appearing on the books of the corporation or given
by the stockholder to the corporation for the purpose of notice. Notice
shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
An affidavit of the mailing or other means of giving any notice of
any stockholders' meeting, executed by the secretary, assistant
secretary or any transfer agent of the corporation giving the notice,
shall be prima facie evidence of the giving of such notice.
2.7 QUORUM
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise pro-
vided by statute or by the certificate of incorporation. If, however,
such quorum is not present or represented at any meeting of the
stockholders, then either (i) the chairman of the meeting or (ii) the
stockholders entitled to vote thereat, present in person or represented
by proxy, shall have power to adjourn the meeting in accordance with
Section 2.7 of these bylaws.
When a quorum is present at any meeting, the vote of the holders
of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which, by express provision of
the laws of the State of Delaware or of the certificate of incorporation
or these bylaws, a different vote is required, in which case such
express provision shall govern and control the decision of the question.
If a quorum be initially present, the stockholders may continue to
transact business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum, if any action taken is
approved by a majority of the stockholders initially constituting the
quorum.
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time and place, unless
these bylaws otherwise require, notice need not be given of the
adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting the
corporation may transact any business that might have been transacted at
the original meeting. If the adjournment is for more than thirty (30)
days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of Section 2.11 of
these bylaws, subject to the provisions of Sections 217 and 218 of the
General Corporation Law of Delaware (relating to voting rights of
fiduciaries, pledgors and joint owners, and to voting trusts and other
voting agreements).
Except as may be otherwise provided in the certificate of
incorporation or these bylaws, each stockholder shall be entitled to one
vote for each share of capital stock held by such stockholder.
At a stockholders' meeting at which directors are to be elected,
and to the extent permitted by the corporation's Certificate of
Incorporation, each stockholder shall be entitled to cumulate votes
(i.e., cast for any candidate a number of votes greater than the number
of votes that such stockholder normally is entitled to cast) if the
candidates' names have been properly placed in nomination (in accordance
with these bylaws) prior to commencement of the voting, and the
stockholder requesting cumulative voting has given notice prior to
commencement of the voting of the stockholder's intention to cumulate
votes. If cumulative voting is properly requested, each holder of
stock, or of any class or classes or of a series or series thereof, who
elects to cumulate votes shall be entitled to as many votes as equals
the number of votes that (absent this provision as to cumulative voting)
he or she would be entitled to cast for the election of directors with
respect to his or her shares of stock multiplied by the number of
directors to be elected by him, and he or she may cast all of such votes
for a single director or may distribute them among the number to
be voted for, or for any two or more of them, as he or she may see fit.
2.10 [Intentionally omitted]
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
For purposes of determining the stockholders entitled to notice of
any meeting or to vote thereat, the board of directors may fix, in
advance, a record date, which shall not precede the date upon which the
resolution fixing the record date is adopted by the board of directors
and which shall not be more than sixty (60) days nor less than ten (10)
days before the date of any such meeting, and in such event only
stockholders of record on the date so fixed are entitled to notice and
to vote, notwithstanding any transfer of any shares on the books of the
corporation after the record date.
If the board of directors does not so fix a record date, the
record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be at the close of business on
the business day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held.
A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of
the meeting unless the board of directors fixes a new record date for
the adjourned meeting, but the board of directors shall fix a new record
date if the meeting is adjourned for more than thirty (30) days from the
date set for the original meeting.
The record date for any other purpose shall be as provided in
Section 8.1 of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other
matter, shall have the right to do so either in person or by one or more
agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation, but no such proxy shall be voted or
acted upon after three (3) years from its date, unless the proxy
provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, telefacsimile or otherwise) by
the stockholder or the stockholder's attorney-in-fact. The revocability
of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation
Law of Delaware.
2.13 ORGANIZATION
The president, or in the absence of the president, the chairman of
the board, shall call the meeting of the stockholders to order, and
shall act as chairman of the meeting. In the absence of the president,
the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of
any meeting of stockholders shall determine the order of business and
the procedures at the meeting, including such matters as the regulation
of the manner of voting and the conduct of business. The secretary of
the corporation shall act as secretary of all meetings of the
stockholders, but in the absence of the secretary at any meeting of the
stockholders, the chairman of the meeting may appoint any person to act
as secretary of the meeting.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place where the meeting is to be held. The
list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
2.15 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of
incorporation or these bylaws, a written waiver thereof, signed by the
person entitled to notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person
at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special
meeting of the stockholders need be specified in any written waiver of
notice unless so required by the certificate of incorporation or these
bylaws.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of
Delaware and to any limitations in the certificate of incorporation or
these bylaws relating to action required to be approved by the
stockholders or by the outstanding shares, the business and affairs of
the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be determined by
resolution of the board of directors or by the stockholders.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall
be elected at each annual meeting of stockholders to hold office until
the next annual meeting. Each director, including a director elected or
appointed to fill a vacancy, shall hold office until the expiration of
the term for which elected and until a successor has been elected and
qualified.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of
directors, unless the notice specifies a later time for that resignation
to become effective. If the resignation of a director is effective at a
future time, the board of directors may elect a successor to take office
when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of
the remaining directors, even if less than a quorum, or by a sole
remaining director; however, a vacancy created by the removal of a
director by the vote of the stockholders or by court order may be filled
only by the affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares
voting affirmatively also constitute a majority of the required quorum).
Each director so elected shall hold office until the next annual
meeting of the stockholders and until a successor has been elected and
qualified.
Unless otherwise provided in the certificate of incorporation or
these bylaws:
(i) Vacancies and newly created directorships resulting
from any increase in the authorized number of directors elected by all
of the stockholders having the right to vote as a single class may be
filled by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the
provisions of the certificate of incorporation, vacancies and newly
created directorships of such class or classes or series may be filled
by a majority of the directors elected by such class or classes or
series thereof then in office, or by a sole remaining director so
elected.
If at any time, by reason of death or resignation or other cause,
the corporation should have no directors in office, then any officer or
any stockholder or an executor, administrator, trustee or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for
the person or estate of a stockholder, may call a special meeting of
stockholders in accordance with the provisions of the certificate of
incorporation or these bylaws, or may apply to the Court of Chancery for
a decree summarily ordering an election as provided in Section 211 of
the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a
majority of the whole board (as constituted immediately prior to any
such increase), then the Court of Chancery may, upon application of any
stockholder or stockholders holding at least ten (10) percent of the
total number of the shares at the time outstanding having the right to
vote for such directors, summarily order an election to be held to fill
any such vacancies or newly created directorships, or to replace the
directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the
General Corporation Law of Delaware as far as applicable.
3.5 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of
directors may be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of
directors; provided, however, that, if and so long as stockholders of
the corporation are entitled to cumulative voting, if less than the
entire board is to be removed, no director may be removed without cause
if the votes cast against his removal would be sufficient to elect him
if then cumulatively voted at an election of the entire board of
directors.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at
any place within or outside the State of Delaware that has been
designated from time to time by resolution of the board. In the absence
of such a designation, regular meetings shall be held at the principal
executive office of the corporation. Special meetings of the board may
be held at any place within or outside the State of Delaware that has
been designated in the notice of the meeting or, if not stated in the
notice or if there is no notice, at the principal executive office of
the corporation.
Any meeting of the board, regular or special, may be held by
conference telephone or similar communication equipment, so long as all
directors participating in the meeting can hear one another; and all
such participating directors shall be deemed to be present in person at
the meeting.
3.7 FIRST MEETINGS
The first meeting of each newly elected board of directors shall
be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly
elected board of directors, or in the event such meeting is not held at
the time and place so fixed by the stockholders, the meeting may be held
at such time and place as shall be specified in a notice given as
hereinafter provided for special meetings of the board of directors, or
as shall be specified in a written waiver signed by all of the
directors.
3.8 REGULAR MEETINGS
Regular meetings of the board of directors may be held without
notice at such time as shall from time to time be determined by the
board of directors. If any regular meeting day shall fall on a legal
holiday, then the meeting shall be held at the same time and place on
the next succeeding full business day.
3.9 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or
purposes may be called at any time by the chairman of the board, the
president, any vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be
delivered personally or by telephone to each director or sent by first-
class mail, telecopy or telegram, charges prepaid, addressed to each
director at that director's address as it is shown on the records of the
corporation. If the notice is mailed, it shall be deposited in the
United States mail at least four (4) days before the time of the holding
of the meeting. If the notice is delivered personally or by telephone,
telecopy or telegram, it shall be delivered personally or by telephone
or to the telegraph company at least forty-eight (48) hours before the
time of the holding of the meeting. Any oral notice given personally or
by telephone may be communicated either to the director or to a person
at the office of the director who the person giving the notice has
reason to believe will promptly communicate it to the director. The
notice need not specify the purpose or the place of the meeting, if the
meeting is to be held at the principal executive office of the
corporation.
3.10 QUORUM
A majority of the authorized number of directors shall constitute
a quorum for the transaction of business, except to adjourn as provided
in Section 3.12 of these bylaws. Every act or decision done or made by
a majority of the directors present at a duly held meeting at which a
quorum is present shall be regarded as the act of the board of
directors, subject to the provisions of the certificate of incorporation
and applicable law.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any
action taken is approved by at least a majority of the quorum for that
meeting.
3.11 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who
signs a waiver of notice, whether before or after the meeting, or
(ii) who attends the meeting other than for the express purposed of
objecting at the beginning of the meeting to the transaction of any
business because the meeting is not lawfully called or convened. All
such waivers shall be filed with the corporate records or made part of
the minutes of the meeting. A waiver of notice need not specify the
purpose of any regular or special meeting of the board of directors.
3.12 ADJOURNMENT
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting of the board to another time and place.
3.13 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting of
the board need not be given unless the meeting is adjourned for more
than twenty-four (24) hours. If the meeting is adjourned for more than
twenty-four (24) hours, then notice of the time and place of the
adjourned meeting shall be given before the adjourned meeting takes
place, in the manner specified in Section 3.9 of these bylaws, to the
directors who were not present at the time of the adjournment.
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of
directors may be taken without a meeting, provided that all members of
the board individually or collectively consent in writing to that
action. Such action by written consent shall have the same force and
effect as a unanimous vote of the board of directors. Such written
consent and any counterparts thereof shall be filed with the minutes of
the proceedings of the board of directors.
3.15 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation,
if any, for their services and such reimbursement of expenses as may be
fixed or determined by resolution of the board of directors. This
Section 3.15 shall not be construed to preclude any director from
serving the corporation in any other capacity as an officer, agent,
employee or otherwise and receiving compensation for those services.
3.16 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of,
or otherwise assist any officer or other employee of the corporation or
any of its subsidiaries, including any officer or employee who is a
director of the corporation or any of its subsidiaries, whenever, in the
judgment of the directors, such loan, guaranty or assistance may
reasonably be expected to benefit the corporation. The loan, guaranty
or other assistance may be with or without interest and may be
unsecured, or secured in such manner as the board of directors shall
approve, including, without limitation, a pledge of shares of stock of
the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the
corporation at common law or under any statute.
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION
In the event only one director is required by these bylaws or the
certificate of incorporation, then any reference herein to notices,
waivers, consents, meetings or other actions by a majority or quorum of
the directors shall be deemed to refer to such notice, waiver, etc., by
such sole director, who shall have all the rights and duties and shall
be entitled to exercise all of the powers and shall assume all the
responsibilities otherwise herein described as given to the board of
directors.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of
the authorized number of directors, designate one (1) or more
committees, each consisting of two or more directors, to serve at the
pleasure of the board. The board may designate one (1) or more
directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. The
appointment of members or alternate members of a committee requires the
vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall
have and may exercise all the powers and authority of the board, but no
such committee shall have the power or authority to (i) amend the
certificate of incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance
of shares of stock adopted by the board of directors as provided in
Section 151(a) of the General Corporation Law of Delaware, fix the
designations and any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of
such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the
corporation), (ii) adopt an agreement of merger or consolidation under
Sections 251 or 252 of the General Corporation Law of Delaware,
(iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets,
(iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution or (v) amend the bylaws of the corporation;
and, unless the board resolution establishing the committee, the bylaws
or the certificate of incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership
and merger pursuant to Section 253 of the General Corporation Law of
Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held
and taken in accordance with, the following provisions of Article III of
these bylaws: Section 3.6 (place of meetings; meetings by telephone),
Section 3.8 (regular meetings), Section 3.9 (special meetings; notice),
Section 3.10 (quorum), Section 3.11 (waiver of notice), Section 3.12
(adjournment), Section 3.13 (notice of adjournment) and Section 3.14
(board action by written consent without meeting), with such changes in
the context of those bylaws as are necessary to substitute the committee
and its members for the board of directors and its members; provided,
however, that the time of regular meetings of committees may be
determined either by resolution of the board of directors or by
resolution of the committee, that special meetings of committees may
also be called by resolution of the board of directors, and that notice
of special meetings of committees shall also be given to all alternate
members, who shall have the right to attend all meetings of the com-
mittee. The board of directors may adopt rules for the government of
any committee not inconsistent with the provisions of these bylaws.
4.3 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and
report the same to the board of directors when required.
ARTICLE V
OFFICERS
5.1 OFFICERS
The Corporate Officers of the corporation shall be a president, a
secretary and a chief financial officer. The corporation may also have,
at the discretion of the board of directors, a chairman of the board,
one or more vice presidents (however denominated), one or more assistant
secretaries, a treasurer and one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the
same person.
In addition to the Corporate Officers of the Company described
above, there may also be such Administrative Officers of the corporation
as may be designated and appointed from time to time by the president of
the corporation in accordance with the provisions of Section 5.12 of
these bylaws.
5.2 ELECTION OF OFFICERS
The Corporate Officers of the corporation, except such officers
as may be appointed in accordance with the provisions of Section 5.3 or
Section 5.5 of these bylaws, shall be chosen by the board of directors,
subject to the rights, if any, of an officer under any contract of
employment, and shall hold their respective offices for such terms as
the board of directors may from time to time determine.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president
to appoint, such other Corporate Officers as the business of the corpo-
ration may require, each of whom shall hold office for such period, have
such power and authority, and perform such duties as are provided in
these bylaws or as the board of directors may from time to time
determine.
The president may from time to time designate and appoint
Administrative Officers of the corporation in accordance with the
provisions of Section 5.12 of these bylaws.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of a Corporate Officer under any
contract of employment, any Corporate Officer may be removed, either
with or without cause, by the board of directors at any regular or
special meeting of the board or, except in case of a Corporate Officer
chosen by the board of directors, by any Corporate Officer upon whom
such power of removal may be conferred by the board of directors.
Any Corporate Officer may resign at any time by giving written
notice to the corporation. Any resignation shall take effect at the
date of the receipt of that notice or at any later time specified in
that notice; and, unless otherwise specified in that notice, the accept-
ance of the resignation shall not be necessary to make it effective.
Any resignation is without prejudice to the rights, if any, of the
corporation under any contract to which the Corporate Officer is a
party.
Any Administrative Officer designated and appointed by the
president may be removed, either with or without cause, at any time by
the president. Any Administrative Officer may resign at any time by
giving written notice to the president or to the secretary of the
corporation.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner
prescribed in these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall,
if present, preside at meetings of the board of directors and exercise
such other powers and perform such other duties as may from time to time
be assigned to him by the board of directors or as may be prescribed by
these bylaws. If there is no president, then the chairman of the board
shall also be the chief executive officer of the corporation and shall
have the powers and duties prescribed in Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the
board of directors to the chairman of the board, if there be such an
officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors,
have general supervision, direction and control of the business and the
officers of the corporation. He or she shall preside at all meetings of
the stockholders and, in the absence or nonexistence of a chairman of
the board, at all meetings of the board of directors. He or she shall
have the general powers and duties of management usually vested in the
office of president of a corporation, and shall have such other powers
and perform such other duties as may be prescribed by the board of
directors or these bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, and if there is no
chairman of the board, the vice presidents, if any, in order of their
rank as fixed by the board of directors or, if not ranked, a vice
president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of,
and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as
from time to time may be prescribed for them respectively by the board
of directors, these bylaws, the president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the board of
directors may direct, a book of minutes of all meetings and actions of
the board of directors, committees of directors and stockholders. The
minutes shall show the time and place of each meeting, whether regular
or special (and, if special, how authorized and the notice given), the
names of those present at directors' meetings or committee meetings, the
number of shares present or represented at stockholders' meetings and
the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the
corporation's transfer agent or registrar, as determined by resolution
of the board of directors, a share register or a duplicate share
register, showing the names of all stockholders and their addresses, the
number and classes of shares held by each, the number and date of
certificates evidencing such shares and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the board of directors required to
be given by law or by these bylaws. He or she shall keep the seal of
the corporation, if one be adopted, in safe custody and shall have such
other powers and perform such other duties as may be prescribed by the
board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to
be kept and maintained, adequate and correct books and records of
accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts, disbursements,
gains, losses, capital, retained earnings and shares. The books of
account shall at all reasonable times be open to inspection by any
director for a purpose reasonably related to his position as a director.
The chief financial officer shall deposit all money and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the board of directors. He or she
shall disburse the funds of the corporation as may be ordered by the
board of directors, shall render to the president and directors,
whenever they request it, an account of all of his or her transactions
as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or these bylaws.
5.11 ASSISTANT SECRETARY
The assistant secretary, if any, or, if there is more than one,
the assistant secretaries in the order determined by the board of
directors (or if there be no such determination, then in the order of
their election) shall, in the absence of the secretary or in the event
of his or her inability or refusal to act, perform the duties and
exercise the powers of the secretary and shall perform such other duties
and have such other powers as the board of directors may from time to
time prescribe.
5.12 ADMINISTRATIVE OFFICERS
In addition to the Corporate Officers of the corporation as
provided in Section 5.1 of these bylaws and such subordinate Corporate
Officers as may be appointed in accordance with Section 5.3 of these
bylaws, there may also be such Administrative Officers of the
corporation as may be designated and appointed from time to time by the
president of the corporation. Administrative Officers shall perform
such duties and have such powers as from time to time may be determined
by the president or the board of directors in order to assist the
Corporate Officers in the furtherance of their duties. In the
performance of such duties and the exercise of such powers, however,
such Administrative Officers shall have limited authority to act on
behalf of the corporation as the board of directors shall establish,
including but not limited to limitations on the dollar amount and on the
scope of agreements or commitments that may be made by such Admini-
strative Officers on behalf of the corporation, which limitations may
not be exceeded by such individuals or altered by the president without
further approval by the board of directors.
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing powers, authority and duties, all
officers of the corporation shall respectively have such authority and
powers and perform such duties in the management of the business of the
corporation as may be designated from time to time by the board of
directors.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, indemnify any person against
expenses (including attorneys' fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred in connection with any
threatened, pending or completed action, suit, or proceeding in which
such person was or is a party or is threatened to be made a party by
reason of the fact that such person is or was a director or officer of
the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation shall mean any person (i) who is or was a
director or officer of the corporation, (ii) who is or was serving at
the request of the corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, or
(iii) who was a director or officer of a corporation which was a
predecessor corporation of the corporation or of another enterprise at
the request of such predecessor corporation.
The corporation shall be required to indemnify a director or
officer in connection with an action, suit, or proceeding (or part
thereof) initiated by such director or officer only if the initiation of
such action, suit, or proceeding (or part thereof) by the director or
officer was authorized by the Board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees)
incurred by a director or officer of the corporation entitled to
indemnification hereunder in defending any action, suit or proceeding
referred to in this Section 6.1 in advance of its final disposition;
provided, however, that payment of expenses incurred by a director or
officer of the corporation in advance of the final disposition of such
action, suit or proceeding shall be made only upon receipt of an
undertaking by the director or officer to repay all amounts advanced if
it should ultimately be determined that the director of officer is not
entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be
exclusive of any other rights which such person may have or hereafter
acquire under any statute, provision of the corporation's Certificate of
Incorporation, these bylaws, agreement, vote of the stockholders or
disinterested directors or otherwise.
Any repeal or modification of the foregoing provisions of this
Article shall not adversely affect any right or protection hereunder of
any person in respect of any act or omission occurring prior to the time
of such repeal or modification.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in
the manner permitted by the General Corporation Law of Delaware as the
same now exists or may hereafter be amended, to indemnify any person
(other than directors and officers) against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred in connection with any threatened,
pending or completed action, suit, or proceeding, in which such person
was or is a party or is threatened to be made a party by reason of the
fact that such person is or was an employee or agent of the corporation.
For purposes of this Section 6.2, an "employee" or "agent" of the
corporation (other than a director or officer) shall mean any person
(i) who is or was an employee or agent of the corporation, (ii) who is
or was serving at the request of the corporation as an employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was an employee or agent of a corporation which
was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any
such capacity, or arising out of his or her status as such, whether or
not the corporation would have the power to indemnify him or her against
such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or
at such place or places as designated by the board of directors, keep a
record of its stockholders listing their names and addresses and the
number and class of shares held by each stockholder, a copy of these
bylaws as amended to date, accounting books and other records of its
business and properties.
Any stockholder of record, in person or by attorney or other
agent, shall, upon written demand under oath stating the purpose
thereof, have the right during the usual hours for business to inspect
for any proper purpose the corporation's stock ledger, a list of its
stockholders, and its other books and records and to make copies or
extracts therefrom. A proper purpose shall mean a purpose reasonably
related to such person's interest as a stockholder. In every instance
where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of
attorney or such other writing that authorizes the attorney or other
agent to so act on behalf of the stockholder. The demand under oath
shall be directed to the corporation at its registered office in
Delaware or at its principal place of business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine (and to make copies
of) the corporation's stock ledger, a list of its stockholders and its
other books and records for a purpose reasonably related to his or her
position as a director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and
at any special meeting of the stockholders when called for by vote of
the stockholders, a full and clear statement of the business and
condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, if any, the president, any vice
president, the chief financial officer, the secretary or any assistant
secretary of this corporation, or any other person authorized by the
board of directors or the president or a vice president, is authorized
to vote, represent and exercise on behalf of this corporation all rights
incident to any and all shares of the stock of any other corporation or
corporations standing in the name of this corporation. The authority
herein granted may be exercised either by such person directly or by any
other person authorized to do so by proxy or power of attorney duly
executed by such person having the authority.
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
The original or a copy of these bylaws, as amended or otherwise
altered to date, certified by the secretary, shall be kept at the
corporation's principal executive office and shall be open to inspection
by the stockholders of the corporation, at all reasonable times during
office hours.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights
or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other
lawful action, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing
the record date is adopted and which shall not be more than sixty (60)
days before any such action. In that case, only stockholders of record
at the close of business on the date so fixed are entitled to receive
the dividend, distribution or allotment of rights, or to exercise such
rights, as the case may be, notwithstanding any transfer of any shares
on the books of the corporation after the record date so fixed, except
as otherwise provided by law.
If the board of directors does not so fix a record date, then the
record date for determining stockholders for any such purpose shall be
at the close of business on the day on which the board of directors
adopts the applicable resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by
resolution which person or persons may sign or endorse all checks,
drafts, other orders for payment of money, notes or other evidences of
indebtedness that are issued in the name of or payable to the
corporation, and only the persons so authorized shall sign or endorse
those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these
bylaws, may authorize and empower any officer or officers, or agent or
agents, to enter into any contract or execute any instrument in the name
of and on behalf of the corporation; such power and authority may be
general or confined to specific instances. Unless so authorized or
ratified by the board of directors or within the agency power of an
officer, no officer, agent or employee shall have any power or authority
to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
The shares of the corporation shall be represented by certifi-
cates, provided that the board of directors of the corporation may
provide by resolution or resolutions that some or all of any or all
classes or series of its stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until
such certificate is surrendered to the corporation. Notwithstanding the
adoption of such a resolution by the board of directors, every holder of
stock represented by certificates and, upon request, every holder of
uncertificated shares, shall be entitled to have a certificate signed
by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by
the treasurer or an assistant treasurer, or the secretary or an
assistant secretary of such corporation representing the number of
shares registered in certificate form. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent
or registrar who has signed or whose facsimile signature has been placed
upon a certificate has ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he or she were such officer,
transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the
board of directors may designate and shall state the name of the record
holder of the shares represented thereby; its number; date of issuance;
the number of shares for which it is issued; a summary statement or
reference to the powers, designations, preferences or other special
rights of such stock and the qualifications, limitations or restrictions
of such preferences and/or rights, if any; a statement or summary of
liens, if any; a conspicuous notice of restrictions upon transfer or
registration of transfer, if any; a statement as to any applicable
voting trust agreement; if the shares be assessable, or, if assessments
are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it
shall be the duty of the corporation to issue a new certificate to the
person entitled thereto, cancel the old certificate and record the
transaction upon its books.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration
to be paid therefor. Upon the face or back of each stock certificate
issued to represent any such partly paid shares, or upon the books and
records of the corporation in the case of uncertificated partly paid
shares, the total amount of the consideration to be paid therefor and
the amount paid thereon shall be stated. Upon the declaration of any
dividend on fully paid shares, the corporation shall declare a dividend
upon partly paid shares of the same class, but only upon the basis of
the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of
stock or more than one series of any class, then the powers, the
designations, the preferences and the relative, participating, optional
or other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or
rights shall be set forth in full or summarized on the face or back of
the certificate that the corporation shall issue to represent such class
or series of stock; provided, however, that, except as otherwise
provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements there may be set forth on the face or
back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
the designations, the preferences and the relative, participating,
optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for
shares shall be issued to replace a previously issued certificate unless
the latter is surrendered to the corporation and canceled at the same
time. The board of directors may, in case any share certificate or
certificate for any other security is lost, stolen or destroyed,
authorize the issuance of replacement certificates on such terms and
conditions as the board may require; the board may require
indemnification of the corporation secured by a bond or other adequate
security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account
of the alleged loss, theft or destruction of the certificate or the
issuance of the replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
The board of directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, each of which shall be an
incorporated bank or trust company -- either domestic or foreign, who
shall be appointed at such times and places as the requirements of the
corporation may necessitate and the board of directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions,
rules of construction and definitions in the General Corporation Law of
Delaware shall govern the construction of these bylaws. Without
limiting the generality of this provision, as used in these bylaws, the
singular number includes the plural, the plural number includes the
singular, and the term "person" includes both an entity and a natural
person.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted,
amended or repealed by the stockholders entitled to vote or by the board
of directors of the corporation. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the
power, nor limit their power to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied
in the book of bylaws with the original bylaws, in the appropriate
place. If any bylaw is repealed, the fact of repeal with the date of
the meeting at which the repeal was enacted or the filing of the
operative written consent(s) shall be stated in said book.
January 23, 1996
Mr. Dennis P. Waldera
30 Iron Gate Road
Trumbull, CT 06611
Dear Denny,
I am pleased to offer you the position of Vice President, Direct
Marketing for Hello Direct, Inc., reporting to me. Attached is a list of
your key areas of responsibility.
The following outlines the terms and conditions of this offer:
1. Base starting salary of $150,000 per year, payable bi-monthly.
2. You will be eligible to participate with the Company's other
executive management personnel in the Management Bonus Plan and
receive an annual bonus of 50% of base salary if the Company
meets certain target financial results. Bonuses will be paid in
the first quarter of the fiscal year following the year in
which the bonus was earned.
3. As of the effective date of your employment, you will be
granted an incentive stock option to purchase 50,000 shares of
the Company's common stock at an exercise price equal to the
fair market value at the date of the grant. You will be
eligible to receive additional stock options in 1998. All such
options vest over four years in accordance with the company's
stock option vesting policy.
4. You will be eligible to participate in the Company's benefit
programs, which include health, dental, 401K, and life
insurance for you. There is a $36.42 payroll deduction per pay
period for health coverage; dependent coverage is available at
an additional charge. As a Company executive, you will also be
eligible to participate in the Executive Disability Plan.
5. As we discussed, in addition to seven Company scheduled paid
holidays and two floating paid holidays per year, you will
receive ten days of paid vacation in 1996 and fifteen paid
vacation days in 1997 and years thereafter.
6. In the unlikely event that during your first two years with the
Company your employment is terminated without cause or
following a change of controlling ownership of the Company, you
will receive your base salary and benefits for nine months
following the termination, your stock options shall become
fully vested and exercisable within three months from the date
of termination, and you shall have the option of continuing to
be covered by the Executive Disability Plan at your expense.
7. A starting date of on or before April 29, 1996.
Page 2
Dennis P. Waldera
January 23, 1996
Should this offer meet with your approval, please note your acceptance
by signing and dating one copy of this letter in the space provided
below and return it to me on or before February 5, 1996.
Denny, all of the officers join me in hoping that you will accept our
offer to become a member of the Hello Direct team. We know that you
would play a major leadership role in helping us to meet and exceed our
goals while contributing to sustaining the Hello Direct Principles. We
look forward to welcoming you on board!
Sincerely,
/s/ E. Alexander Glover
- -----------------------
E. Alexander Glover
Executive Vice President
Accepted by /s/ Dennis P. Waldera Date February 5, 1996
--------------------- ----------------
Dennis P. Waldera
First Amendment to Employment Agreement
This First Amendment to Employment Agreement made by and between E.
Alexander Glover ("Associate") and Hello Direct, Inc. (the "Company") ,
shall become effective July 1, 1997.
The parties hereto agree to amend the Employment Agreement made by
and between them as of March 24, 1995 ("the Agreement"), a copy of which
is attached hereto for reference, as follows:
1. Section l(a) of the Agreement is amended to provide as
follows:
The Company agrees to employ Associate under the terms of
this Agreement in the position of President and Chief Operating Officer.
Associate shall report to the Board of Directors. Associate shall have
the responsibilities normally associated with the Company's chief
operating officer.
2. Section 2(a) of the Agreement is amended to provide as
follows:
For all services to be rendered by Associate pursuant to this
Agreement, the Company agrees to pay Associate a base salary (the "Base
Salary") at an annual rate of not less than $300,000. Base Salary shall
be paid in periodic installments in accordance with the Company's
regular payroll practices.
3. Section 2 (b) of the Agreement is amended to provide that
Associate shall be eligible to participate in the Company's management
bonus plan and receive an annual bonus of not less than 50% of Base
Salary if the Company meets certain targeted financial criteria.
4. Section 2(c) is added to the Agreement to provide as follows:
The Company's Board of Directors, acting by its Compensation
Committee or another designee, shall review Associate's compensation
package, including Base Salary, bonus, employee benefits, and stock
options, on an annual basis, commencing in January, 1998. In no event,
however, shall Associate's Base Salary be reduced below $300,000 per
annum.
5. Section 3(c) (iii) of the Agreement is amended to provide as
follows:
(iii) a change in reporting from the Board of Directors to
another officer.
6. The second sentence of Section 5(a) of the Agreement is
amended to provide as follows:
The Company agrees that on each anniversary of the Effective
Date, Associate shall be granted an additional incentive stock option to
purchase a minimum of 50,000 shares of Common Stock at an exercise price
equal to the fair market value on the date of the grant; provided that,
at the discretion of the Compensation Committee of the Board of
Directors, the total exercise price for the additional options granted
pursuant to this sentence on any one anniversary may be limited to
$500,000.
7. Section 7(a) (i) of the Agreement is amended to provide that
with respect to termination occurring after March 24, 1998 the time
period for payment of the Severance Payment and the benefits referred to
therein shall be twelve (12) months.
8. The first sentence of Section 11 of the Agreement is amended
to provide as follows- This Agreement shall terminate on March 24, 2001.
9. The last sentence of Section 11 of the Agreement is amended
to provide as follows:
No payments shall be required pursuant to Section 7 (a)(i) of
this Agreement for any termination of employment occurring after March
24, 2001.
Except as amended herein, the Agreement shall remain in full
force and effect in accordance with its terms.
IN WITNESS WHEREOF, each of the parties, in the case of the Company
by its duly authorized officer or director, has executed this First
Amendment to Employment Agreement, as of the day and year first above
written.
HELLO DIRECT, INC.
By: /s/ E. Alexander Glover By: /s/ John B. Mumford
E. Alexander Glover John B. Mumford
<PAGE>
Exhibit 23.1
Report on Financial Statement Schedule
and Consent of Independent Auditors
-----------------------------------
The Board of Directors and Stockholders
Hello Direct, Inc.
The audits referred to in our report dated January 26, 1998, included
the related financial statement schedule as of December 31, 1997, and
for each of the years in the three-year period ended December 31, 1997,
included in the annual report on Form 10-K. This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement
schedule based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
We consent to incorporation by reference in the registration statement
on Form S-8 of Hello Direct, Inc. of our report dated January 26, 1998,
relating to the balance sheets of Hello Direct, Inc. as of December 31,
1997, and 1996, and the related statements of operations, stockholders'
equity, and cash flows for each of the years in the three year period
ended December 31, 1997, and the related financial statement schedule,
which report appears in this December 31, 1997, annual report on Form
10-K of Hello Direct, Inc.
/s/ KPMG Peat Marwick LLP
San Jose, California
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in the
Company's Form 10-K for the year ended December 31, 1997 and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER>1
<S> <C> <C> <C>
<FISCAL-YEAR-END> Dec-31-1997 Dec-31-1996 Dec-31-1995
<PERIOD-START> Jan-01-1997 Jan-01-1996 Jan-01-1995
<PERIOD-END> Dec-31-1997 Dec-31-1996 Dec-31-1995
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<CASH> 5,135,000 2,492,000 3,487,000
<SECURITIES> 3,830,000 6,007,000 4,322,000
<RECEIVABLES> 6,475,000 5,360,000 3,875,000
<ALLOWANCES> 723,000 508,000 467,000
<INVENTORY> 5,137,000 5,287,000 3,914,000
<CURRENT-ASSETS> 22,446,000 20,605,000 16,366,000
<PP&E> 7,326,000 5,109,000 2,246,000
<DEPRECIATION> 2,507,000 1,317,000 966,000
<TOTAL-ASSETS> 31,832,000 28,966,000 25,716,000
<CURRENT-LIABILITIES> 5,175,000 4,323,000 1,969,000
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 5,000 5,000 5,000
<OTHER-SE> 26,652,000 24,638,000 23,722,000
<TOTAL-LIABILITY-AND-EQUITY> 31,832,000 28,966,000 25,716,000
<SALES> 63,846,000 51,590,000 36,823,000
<TOTAL-REVENUES> 63,846,000 51,590,000 36,823,000
<CGS> 30,759,000 25,181,000 16,916,000
<TOTAL-COSTS> 30,759,000 25,181,000 16,916,000
<OTHER-EXPENSES> 30,826,000 25,875,000 20,472,000
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 13,000 13,000 150,000
<INCOME-PRETAX> 2,960,000 1,234,000 (23,000)
<INCOME-TAX> 1,184,000 493,000 (2,112,000)
<INCOME-CONTINUING> 1,776,000 741,000 2,089,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 137,000
<CHANGES> 0 0 0
<NET-INCOME> 1,776,000 741,000 1,952,000
<EPS-PRIMARY> $0.35 $0.15 $0.44
<EPS-DILUTED> $0.35 $0.15 $0.43
</TABLE>
