UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended March 31, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________
COMMISSION FILE NUMBER 0-25524
HELLO DIRECT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3043208
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5893 RUE FERRARI 95138-1857
SAN JOSE, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 972-1990
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class April 19, 1999
----- -------------
Common Stock, Par Value $.001 5,095,432
<PAGE>
HELLO DIRECT, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. -- Financial Statements
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998
Condensed Statements of Operations for the Three Months Ended
March 31, 1999 and 1998
Condensed Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998
Notes to Condensed Financial Statements
Item 2. -- Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Liquidity and Capital Resources
Additional Factors Affecting Operating Results and Market Price
of Stock
Part II - Other Information
Item 1 and Items 3 through 5 are not applicable with respect to the current
reporting period.
Item 2. - Changes in Securities and Use of Proceeds
Item 6. - Exhibits and Reports on Form 8-K
Signatures
Part 1. Financial Information
Item 1. Financial Statements
HELLO DIRECT, INC.
CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $6,418 $5,745
Short-term investments 604 3,860
Trade accounts receivable, less allowance for
returns and doubtful accounts 7,154 5,491
Inventories 5,557 6,119
Deferred tax assets 1,064 847
Other current assets 1,298 2,474
------------- -------------
Total current assets 22,095 24,536
Notes receivable 4,159 4,239
Property and equipment, net 6,622 6,246
Goodwill, net 1,900 0
------------- -------------
Total assets $34,776 $35,021
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,232 $3,567
Accrued expenses 2,000 1,736
------------- -------------
Total current liabilities 4,232 5,303
Non-current liabilities 409 364
------------- -------------
Total liabilities 4,641 5,667
Stockholders' equity:
Common stock 5 5
Additional paid-in capital 28,641 28,319
Retained earnings 2,612 1,721
Less treasury stock, at cost (1,123) (691)
------------- -------------
Total stockholders' equity 30,135 29,354
------------- -------------
Total liabilities and stockholders' equity $34,776 $35,021
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
HELLO DIRECT, INC.
CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Net sales $19,450 $17,910
Cost of goods sold 8,933 8,319
--------- ---------
Gross profit 10,517 9,591
Selling, general and administrative
expenses 8,649 8,210
Product development expenses 607 579
--------- ---------
Operating income 1,261 802
Other income, net 224 203
--------- ---------
Income before income taxes 1,485 1,005
Income taxes 594 402
--------- ---------
Net income $891 $603
========= =========
Basic per share amounts:
Net income $0.17 $0.12
========= =========
Weighted average shares outstanding 5,158 5,087
========= =========
Diluted per share amounts:
Net income $0.17 $0.12
========= =========
Weighted average shares outstanding 5,361 5,182
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
HELLO DIRECT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $891 $603
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 576 388
Deferred income taxes (217) 77
Deferred rent 45 45
Provision for returns and doubtful accounts (66) (61)
Changes in items affecting operations: 0 0
Trade accounts receivable (1,592) (986)
Inventories 562 (873)
Other assets 1,177 430
Accounts payable and accrued expenses (1,071) (867)
-------- --------
Net cash provided by (used in) operating activities 305 (1,244)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (852) (339)
Decrease (increase) in investments 3,256 (1,369)
Payments received on note receivable 74 68
Acquisition of company (1,500) 0
-------- --------
Net cash provided by (used in) investing activities 978 (1,640)
-------- --------
Cash flows from financing activities:
Sale of common stock, net 278 119
Purchase of treasury stock (888) 0
-------- --------
Net cash provided by (used in) financing activities (610) 119
-------- --------
Net decrease in cash and cash equivalents 673 (2,765)
Cash and cash equivalents at beginning of period 5,745 5,135
-------- --------
Cash and cash equivalents at end of period $6,418 $2,370
======== ========
Non-cash financing activities:
Issuance of treasury stock for aquisition of company $500 $0
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
HELLO DIRECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Interim Financial Statements
In the opinion of the management of Hello Direct, Inc. (the "Company"),
the accompanying unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments necessary to present
fairly the financial information set forth therein.
The condensed financial statements have been prepared by the Company
without audit and are subject to year-end adjustment. Certain
information and footnote disclosures normally included in financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
It is suggested that these interim statements be read in conjunction
with the audited financial statements and notes thereto included in the
Company's annual report (Commission File Number 0-25524) filed on Form
10-K for the fiscal year ended December 31, 1998.
Results of operations for the three-month period ended March 31, 1999
are not necessarily indicative of future financial results.
2. Net Income Per Share
There were no adjustments to net income for purposes of the calculation
of diluted net income per share. The table below reconciles basic
weighted average shares outstanding to diluted weighted average shares
outstanding:
Three months ended
March 31,
1999 1998
---------- ----------
Basic weighted average shares outstanding 5,158,000 5,087,000
Common stock options utilizing
treasury stock method when dilutive 203,000 95,000
---------- ----------
Diluted weighted average shares outstanding 5,361,000 5,182,000
========== ==========
3. Acquisition of PhoneZone.com, Inc.
On January 20, 1999, the Company acquired PhoneZone.com, Inc.
("PhoneZone") a privately held company for $1.5 million in cash, 50,000
shares of common stock valued at $0.5 million and the assumption of
$50,000 of outstanding debt. PhoneZone, founded in 1996 and an emerging
authority on the convergence of Internet and telecom technologies, is an
influential source of comparative research, analysis, and purchase
information on telecom and networking solutions for small- and medium-
size companies. The acquisition was accounted for using the purchase
method of accounting and the purchase price was allocated to assets
acquired based on their estimated fair values. This treatment resulted
in approximately $2.0 million of cost in excess of net assets, to be
amortized over a five-year period.
4. Recently Adopted Accounting Pronouncements
On January 1, 1999, the Company adopted Statement of Position 98-5,
Reporting on the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5
requires that costs of start-up activities be charged to expense as
incurred and broadly defines such costs. The Company had not deferred
any costs as defined in SOP 98-5, and, as such, there was no charge to
earnings for the cumulative effect of the change in accounting principle
upon adoption.
Item 2. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations.
This Management's Discussion and Analysis section contains forward-
looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed below and in
the Company's reports filed with the Securities and Exchange Commission
including the Company's annual report on Form 10-K for the year ended
December 31, 1998 (the "Form 10-K"). The forward-looking statements
contained herein are made as of the date hereof, and the Company assumes
no obligation to update such forward-looking statements or to update
reasons actual results could differ materially from those anticipated in
such forward-looking statements. Forward-looking statements are
identified with an asterisk (*).
RESULTS OF OPERATIONS
First Quarter 1999 Compared to First Quarter 1998
Net Sales. Net sales reflect total sales less a provision for returns.
Net sales increased $1,540,000, or 8.6%, to $19,450,000 in the three-
month period ended March 31, 1999, from $17,910,000 for the comparable
period in 1998. This increase was primarily attributable to an increase
in both Internet and outbound telemarketing sales offset by a decrease
in catalog sales. The decrease in catalog sales resulted in part from a
1.2% reduction in the number of catalogs distributed, to 8.2 million
from 8.3 million. Average order size increased 1.9% to $264 from $259.
Gross Profit. Cost of goods sold includes merchandise cost, freight
and duty, warranty expense, and packaging and shipping supplies. Gross
profit increased $926,000, or 9.7%, to $10,517,000 in the three-month
period ended March 31, 1999, from $9,591,000 for the comparable period
in 1998. The gross margin percentage for the three-month period was
54.1% for 1999 versus 53.6% for 1998. This increase in gross margin
reflects the continued strong performance of the Company's proprietary
products, which carry higher gross margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $439,000, or 5.3%, to $8,649,000 in
the three-month period ended March 31, 1999, from $8,210,000 for the
comparable period in 1998. The dollar increase was associated with
planned headcount additions to the Company's administrative management
and the product support groups. However, as a percentage of net sales,
these expenses for the three-month period declined to 44.5% in 1999, as
compared to 45.8% for the same three-month period in 1998. A significant
portion of the Company's selling, general and administrative expenses is
related to the production, printing and distribution of its catalog.
Any significant increase in the cost of paper or postage, or
deterioration in the response rates to mailings, would have a material
adverse effect on the Company's operating results.
Product Development Expenses. Product development expenses increased
$28,000, or 4.8%, to $607,000 for the three month period ended March 31,
1999, from $579,000 for the comparable period in 1998. As a percentage
of net sales, these expenses for the three-month period were 3.1% for
1999 versus 3.2% for the same three-month period in 1998. The increase
in absolute dollars was due to the increased staffing of the Company's
product development group reflecting the Company's commitment to new
product development. It is anticipated that these expenses will
fluctuate from time to time based upon the number and character of the
products under development; however, the Company believes these
expenses, as a percentage of net sales, will increase for the year
ending December 31, 1999 over the prior year.*
Other Income, net. Other income includes interest income and
discounts of $228,000 for the three-month period ended March 31, 1999
versus $207,000 for the comparable period in 1998. The interest income
relates to interest earned on cash investments, short-term investments
and on the outstanding note receivable while discounts are earned on
early payment for products and services.
Net Income. Net income increased $288,000 or 47.8% to $891,000 in the
three-month period ended March 31, 1999, from $603,000 for the
comparable period in 1998. This increase was due to the reasons
discussed above.
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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash flow from
operations, proceeds from its initial public offering, venture capital
equity and debt financing, and borrowings under its revolving bank line
of credit.
Cash provided by operating activities during the three-month period
ended March 31, 1999, was $305,000. This was the result of $1,229,000
provided by operations including net income, depreciation and
amortization and other non-cash charges, offset by $924,000 of changes
in operating assets and liabilities. Cash provided by investing
activities for the three-month period ended March 31, 1999, was
$978,000, due primarily to a decrease in short-term investments of
$3,256,000 and $74,000 of principal payments received on the note
receivable. These amounts were offset by $1,500,000 used for the
acquisition of PhoneZone.com, Inc. and $852,000 used for purchases of
property and equipment. Cash used in financing activities during the
three-month period ended March 31, 1999, was $610,000, relating
primarily to $888,000 used for the purchase of treasury stock offset by
$278,000 raised though the issuance of Common Stock pursuant to the
Company's employee stock purchase and stock option plans.
Additions to equipment during the three-month period ended March 31,
1999 were $852,000 compared to $339,000 for the same period in the prior
year. The Company plans to expend between $3,000,000 and $4,000,000 for
capital equipment for the year ending December 31, 1999.*
In the quarter ended March 31, 1999, the Company used $888,000 for the
purchase of 111,000 shares of treasury stock at an average purchase
price of $8.00 a share pursuant to a stock repurchase program approved
by the Company's Board of Directors on October 7, 1998. The Board of
Directors authorized the repurchase of up to 1,000,000 shares of Common
Stock in the open market from time to time subject to market conditions
and other restrictions. Through March 31, 1999, the Company has
purchased 149,000 shares of Common Stock. The number of shares of
Common Stock eventually acquired by the Company will depend on
subsequent developments and corporate needs, and the repurchase program
may be interrupted or discontinued at any time. Any shares repurchased
would be available for re-issuance under the Company's employee stock
plans.
The Company believes that funds generated from operations, together with
available cash, 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 of $7,000,000 with a bank at
the bank's prime lending rate. At present, the Company has not directly
borrowed under this line, and as of March 31, 1999, the Company was not
contingently liable for any issued and open letters of credit.
Impact of the Year 2000 Issue
The Year 2000 issue results from computer programs written using a two-
digit date field, rather than four, to define the applicable year.
Certain computer programs utilizing a two-digit date field may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
potentially result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in other
similar normal business activities.
The Company's internal information systems include all hardware and
software used in its computer and phone systems. The Company has
completed an assessment of its internal information systems relative to
the Year 2000 issue. The assessment review was broken down between (a)
information systems scheduled for replacement or modification before the
year 2000 as part of the Company's ongoing technology review and
assessment process and (b) information systems that have not been
scheduled for replacement or modification. In connection with the
assessment of information systems scheduled for replacement or
modification, the Company has confirmed the hardware and software
replacing or modifying existing hardware and software is Year 2000
compliant. The scheduled replacement and modification of information
systems is expected to be complete no later than the third quarter of
1999.* However, if the information systems currently scheduled for
replacement or modification are not replaced or are not properly
modified, the Year 2000 issue could have a material effect on the
operations of the Company by impairing the Company's ability to process
transactions, send invoices and engage in normal business activities. In
the event the Company does not properly replace or upgrade key non-
compliant systems, the Company has determined that it can operate in a
manual mode, for a limited period, while appropriate corrective actions
are taken with respect to non-compliant systems.
In connection with systems not scheduled for replacement, the Company
has performed an accounting of these systems, contacted vendors and
documented its findings. The findings indicate that although some
information systems not scheduled for replacement are not compliant, the
cost of replacing or upgrading those systems will not have a material
effect on the operations of the Company.* To date, the Company has
expended approximately $70,000 on Year 2000 corrections, and total Year
2000 corrections are expected not to exceed $100,000.*
In addition, the Company has initiated formal communications with its
significant suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000
issues. The Company has received some assurances regarding these issues
from its vendors, but there are no guarantees that these third-party
systems will be compliant and that in the event of non-compliance it
would not have a material effect on the operations of the Company. For
example, if some of the Company's product vendors are not Year 2000
compliant, it could impact the Company's ability to obtain products from
those vendors on a timely basis.
The Company has evaluated its exposure to contingencies related to the
Year 2000 issues for products it has sold. Although the Company believes
that its products do not directly contain specific calendar year
functions, it is possible customers may use the Company's products in
conjunction with systems that perform non-compliant Year 2000 date
computations. Accordingly, there is a risk of litigation associated
with the possible use of the Company's products by customers, including
all the risks, costs and uncertainties associated with litigation.
The Company believes its exposure to the Year 2000 issue will come
mainly from third parties, either the result of these parties not being
prepared or other parties these third parties rely upon not being
prepared. Although there can be no assurance that unforeseen problems
will not be encountered, the Company expects that all critical internal
Year 2000 issues will be resolved as scheduled. *
ADDITIONAL FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
Hello Direct operates in a rapidly changing environment that involves a
number of uncertainties, some of which are beyond our control. In
addition to the uncertainties described elsewhere in this report, these
uncertainties include:
Our Future Operating Results are Uncertain.
We have grown rapidly and achieved profitability as a result of the
growth in net sales generated by our outbound telemarketing efforts and
our Internet site, and the success of our product offering, particularly
of our proprietary headset products. We may not be able to maintain
profitability on a quarterly or annual basis or continue to increase our
net sales. Our net sales will continue to grow only if we are able to,
among other things, increase sales to existing customers, grow our
customer base and expand our product offering. Our operating results
could be harmed if we were to experience lower than anticipated sales
from our outbound telemarketing efforts and our Internet site or higher
than anticipated product return rates. We may not be able to continue
to achieve growth in net sales, and any such growth may not offset
increases in operating expenses. Our operating results could also be
harmed 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."
Our Quarterly Operating Results are Likely to Fluctuate.
We have experienced and will experience quarterly variations in net
sales and net income as a result of many factors, including the
following:
- - 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 our and our competitors' new product
introductions.
We plan our operating expenditures based on sales forecasts. If our net
sales are below our expectations in any given quarter, our operating
results will suffer. Due to the foregoing factors, in some future
quarter our operating results may be below the expectations of public
market analysts and investors. In such event, the price of our Common
Stock would likely suffer.
We Need to Develop New Products Successfully.
The market for telecommunications products is generally characterized by
rapidly changing technology that can render existing products obsolete
and unmarketable. We believe our current and future success will depend
on our ability to identify, develop or source and successfully introduce
and market, in a timely manner, enhancements to our existing products
and new products that respond effectively to technological change. To
accomplish this, we intend to consult with our direct customer contacts
and use our product development capabilities. We have experienced
delays in the past in introducing certain of our products and could
encounter similar technical difficulties in the future that could result
in delayed product introductions or expensive recalls. We may not
successfully anticipate technological changes or select and develop new
and enhanced products on a timely basis. In addition, if we are able to
develop or source any products, these products may not gain market
acceptance.
We Depend on Headset Products.
We derived more than 50% of our net sales in the first quarter of 1999
from our proprietary telephone headset products. These products have
higher gross margins than our other products. We anticipate that these
headset products will continue to account for a significant portion of
our net sales and profits in the foreseeable future. * If sales of our
telephone headset products were to decline significantly, or the gross
margins on such products were to decrease significantly, as a result of
competitive pressures or technological obsolescence, our operating
results would be harmed.
We Rely on Sole or Limited Source Suppliers and Foreign
Manufacturing.
A relatively small number of manufacturers produce a substantial portion
of our proprietary products. Only three sources manufacture most of
these products, including all of our headset products. To date, we have
been able to obtain adequate supplies of these products, although on
occasion we have incurred additional delivery costs to air ship products
to obtain inventory in a timely manner. If we are unable in the future
to obtain sufficient quantities of sole or limited source products, or
to develop alternative sources, shortages of such products would occur.
This would harm our net sales and operating results.
Seo Won K-Tec, Inc., with operations in South Korea and the Philippines;
Sinoca Enterprises Co. Ltd., located in Taiwan; and Tru-Tech
Electronics, located in Malaysia, manufacture a substantial portion of
our proprietary products to our specifications. Each of these
manufacturers is also one of our substantial suppliers. Products
manufactured by these manufacturers represented more than 50% of our net
sales in the first quarter of 1999. We have contracts of varying terms
with these manufacturing sources, and we compete with other companies
for production facilities. Although we believe that we have established
close relationships with these foreign manufacturing sources, our future
success will depend in large measure upon our ability to maintain such
relationships.
In addition, we face a number of risks inherent in doing business in
international markets, including, among others:
- - unexpected changes in regulatory requirements,
- - potentially adverse tax consequences,
- - tariffs and other trade barriers,
- - fluctuations in currency exchange rates,
- - political unrest,
- - disruptions or delays in shipments, and
- - changes in economic conditions in countries in which our
manufacturing sources are located.
We cannot predict the effect that such factors will have on our business
arrangements with foreign manufacturing sources. If any of these
factors were to render the conduct of business in a particular country
undesirable or impractical, or if our current foreign manufacturing
sources were to cease doing business with us for any reason, our
business and operating results could suffer.
Our Business is Highly Competitive.
The market for customer premise telecommunications products is highly
competitive. We compete 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 harm our ability to compete, including:
- - the functions, performance, price and reliability of the products
offered by us and our competitors,
- - the timing and success of our and our competitors' new product
development efforts, and
- - the effectiveness of our and our competitors' marketing efforts.
Certain of our competitors have greater financial, technical, sales and
marketing and other resources than we have. We may not be able to
compete effectively against existing competitors or against new
competitors that may enter the market. In addition, while we currently
do not know of any competitor specializing in distributing a broad line
of telecommunications products directly to business end-users via
catalog, outbound telemarketing and the Internet, we may not be able to
compete successfully in the future in these direct marketing channels,
which may attract new market entrants, or in other channels that we may
enter or that may be developed for the sale of telecommunications
products.
Potential Acquisitions Involve Risks.
We have acquired complementary technologies or businesses in the past
and may or may not do so in the future. Future acquisitions may involve
potentially dilutive issuances of stock, the incurrence of additional
debt and contingent liabilities or amortization expenses related to
goodwill and other intangible assets. Any of these factors could harm
our results of operations or stock price. Acquisitions involve numerous
risks, including:
- - difficulties in assimilating the operations, products, technology,
information systems and personnel of the acquired company,
- - diverting management's attention from other business concerns,
- - impairing relationships with our customers,
- - being unable to maintain uniform standards, controls, procedures
and policies,
- - entering markets in which we have no direct prior experience, and
- - losing key employees of the acquired company.
In January 1999, we acquired PhoneZone.com, Inc., an Internet publisher
of a buyer's guide covering telecommunications and networking products
and services. As a result of this acquisition, we entered into
employment contracts with three key employees. We may not be able to
successfully integrate the business and personnel we acquired from
PhoneZone.com or any other businesses, technologies or personnel that we
acquire in the future.
Our Internet Sales Rely on the Continued Growth In Electronic
Commerce and Internet Infrastructure Development.
Sales of telecommunications products using the Internet do not currently
represent a significant portion of overall telecommunications products
sales. However, our future growth may depend on the growing use and
acceptance of the Internet as an effective medium of commerce by end
users. Rapid growth in the use of and interest in the Internet and
other online services is a recent development. No one can be certain
that acceptance and use of the Internet and other online services will
continue to develop or that a sufficiently broad base of consumers will
adopt, and continue to use, the Internet and other online services as a
medium of commerce. We will be able to achieve increased sales over the
Internet only if purchasers of telecommunications products who have
historically used traditional means of commerce to purchase these
products view the Internet as a preferred alternative. If our Internet
efforts are to be successful, these purchasers must accept and use the
Internet as a means of purchasing telecommunications products, and we
cannot predict the rate at which purchasers will do so.
The Internet may fail as a commercial marketplace for a number of
reasons, including potentially inadequate development of the necessary
network infrastructure or delayed development of enabling technologies
and performance improvements. If the number of Internet users or their
use of Internet resources continues to grow, it may overwhelm the
existing Internet infrastructure. Delays in the development or adoption
of new standards and protocols required to handle increased levels of
Internet activity or increased governmental regulation could also have a
similar effect. In addition, growth in Internet usage that is not
matched by comparable growth in the infrastructure supporting Internet
usage could result in slower response times or adversely affect usage of
the Internet.
Costs of Catalog Mailing, Paper and Printing May Increase.
Increases in postal rates and paper and printing costs increase the cost
of our catalog mailings. An increase in postal rates or higher than
anticipated paper and printing costs could harm our financial position
and results of operations to the extent that we are 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."
We Face Risks Associated with Managing a Growing Business.
We have experienced significant growth in our operations that has placed
significant demands on our administrative, operational and financial
resources. The growth in our customer base and changes in our product
offering have placed, and we expect will continue to place, a
significant strain on our management and operations, including on our
product development, sales, customer service and finance and
administration staffs. Our future performance will depend in part on
our ability to successfully implement enhancements to our management
information systems and to adapt those systems, as necessary, to respond
to changes in our business. If we are unable to successfully integrate
and train new hires, or if we are unable to respond to and manage
changing business conditions, our business could suffer.
We Rely on a Single Facility.
We house our telemarketing, customer service and distribution functions
in a single facility in San Jose, California. We have taken precautions
to protect ourselves from events that could interrupt order fulfillment
and customer service, such as storing computer backup data offsite and
implementing backup power sources. Notwithstanding these precautions, a
fire, flood, earthquake or other disaster affecting our facility may
disable these functions. Any significant damage to this facility would
harm our business.
We Rely on Key Personnel.
Our future success depends to a significant extent on the efforts of our
key management personnel. The loss of the services of any of these
individuals could harm our business. Competition for employees with
technical, management, sales, customer service and other skills is
intense. Our failure to retain and attract additional qualified
employees could harm our business.
We Face Risks Relating to State Sales Tax Collection.
We presently collect 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 residents of those states. 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, which we have
no reason to expect, the imposition of a tax collection obligation on us
by states into which we ship products may result in additional
administrative expenses to us and price increases to the customer, which
could harm our business.
We Face Government Regulations Relating to Mailing Lists.
We are seeking to expand our in-house list of customers and potential
customers by continually renting appropriate mailing lists and sending
our 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, we may be unable to enhance
and expand our customer list. In such event, we could also experience
increased costs in complying with potentially burdensome regulations
concerning the solicitation of consents to keep or add customer names to
our mailing lists.
We Face Risks Associated With Intellectual Property Rights.
We rely on a combination of patent, copyright, trademark and trade
secret laws and contractual provisions to protect our proprietary rights
in our products. As part of our confidentiality procedures, we
generally enter into non-disclosure agreements with our employees,
distributors and corporate partners, and limit access to and
distribution of our software, documentation and other proprietary
information. Despite these precautions, a third party may possibly copy
or otherwise obtain and use our products or technology independently.
In addition, effective protection of intellectual property rights may be
unavailable or limited in certain foreign countries.
No material claims are currently pending regarding the infringement of
the proprietary rights of third parties by our products, trademarks or
other proprietary rights. However, we may receive, in the future,
communications from third parties asserting that our products infringe,
or may infringe, the proprietary rights of third parties. In the event
of litigation to determine the validity of any third-party claims, such
litigation, whether or not determined in our favor, could result in
significant expense to us and divert the efforts of our technical and
management personnel from productive tasks. In the event of an adverse
ruling in such litigation, we 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.
We may not be able to obtain a license for the disputed third-party
technology on reasonable commercial terms or at all. If someone asserts
a successful claim against us and we are unable to develop or license a
substitute technology, our business would suffer.
We May Face Product Liability Claims.
Our sale of proprietary and other products entails the risk of product
liability claims, although we have not experienced any material claims
to date. While we believe that our product liability insurance coverage
is currently adequate, this coverage is limited. We may be unable to
maintain this insurance in the future at a reasonable cost or in amounts
sufficient to protect us against losses due to liability. A successful
product liability claim brought against us in excess of present
insurance coverage could harm our business.
Our Stock Price is Volatile.
The market price of our common stock has been volatile and may be
significantly affected by a number of factors, including:
- - actual or anticipated fluctuations in our operating results,
- - announcements of technological innovations or new products by us
or our 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 recommendations by securities
analysts, and
- - general market conditions.
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 harm the market price of our Common Stock.
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section herein and in Form 10-K entitled
"Additional Factors Affecting Operating Results and Market Price of Company
Stock" for a discussion of factors that could affect future performance.
PART II -- OTHER INFORMATION
Item 1 and Items 3 through 5 are not applicable with respect to the
current reporting period.
Item 2. - Changes in Securities and Use of Proceeds.
On January 20, 1999, the Company issued an aggregate of 50,000
shares of Common Stock to the former shareholders of
PhoneZone.com, Inc. No underwriters were used in connection with
this issuance. This issuance was deemed exempt from registration
under the Securities Act of 1933, as amended, pursuant to Rule
506, of Regulation D thereunder.
Item 6. -- Exhibits and Reports on Form 8-K:
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be
signed by on its behalf by the undersigned thereunto duly authorized.
HELLO DIRECT, INC.
(Registrant)
April 19, 1999 /s/ Dean Witter III
----------------------------
Dean Witter III
Chief Financial Officer
and Secretary
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<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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THE CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED
MARCH 31, 1999.
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