<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Soliciting Material Pursuant
[X] Definitive Proxy Statement to (S)240.14a-11(c) or 240.14a-12
[_] Definitive Additional Materials [_] Confidential, for Use of the Commission
Only
(as permitted by Rule 14a-6(e)(2))
Hello Direct, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
HELLO DIRECT, INC.
----------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held on April 28, 1999
TO THE STOCKHOLDERS:
Notice is hereby given that the Annual Meeting of Stockholders of Hello
Direct, Inc., a Delaware corporation (the "Company"), will be held on April 28,
1999 at 9:00 a.m., local time, at the Company's principal executive offices
located at 5893 Rue Ferrari, San Jose, CA 95138-1857, for the following
purposes:
1. To elect six (6) directors for the ensuing year and until their
successors are elected.
2. To approve an amendment to the Company's 1995 Director Option Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 75,000 shares.
3. To approve an amendment to the Company's 1995 Stock Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
225,000 shares for issuance to the Company's employees who are former
employees of PhoneZone.com.
4. To approve an amendment to the Company's 1995 Stock Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
525,000 shares for issuance to the Company's employees and consultants.
5. To ratify the appointment of KPMG LLP as independent auditors of the
Company for the fiscal year ending December 31, 1999.
6. To transact such other business as may properly come before the
meeting and any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on March 1, 1999 as
the record date for the determination of stockholders entitled to vote at this
meeting. Only stockholders of record at the close of business on March 1, 1999
are entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed proxy card as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any stockholder attending
the meeting may vote in person even if the stockholder has previously returned a
proxy.
By Order of the Board of Directors
Dean Witter III
Chief Financial Officer
and Secretary
San Jose, California
April 2, 1999
<PAGE>
HELLO DIRECT, INC.
----------------------------
PROXY STATEMENT FOR 1999
ANNUAL MEETING OF STOCKHOLDERS
----------------------------
PROCEDURAL MATTERS
General
The enclosed Proxy is solicited on behalf of Hello Direct, Inc., a Delaware
corporation (the "Company"), for use at the Annual Meeting of Stockholders (the
"Annual Meeting") to be held on April 28, 1999 at 9:00 a.m., local time, and at
any adjournment thereof, for the purposes set forth herein and in the
accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will
be held at the Company's principal executive offices located at 5893 Rue
Ferrari, San Jose, CA 95138-1857. The Company's telephone number at that
location is (408) 972-1990.
These proxy solicitation materials were mailed on or about April 5, 1999 to
all stockholders entitled to vote at the Annual Meeting.
Record Date and Principal Share Ownership
Only stockholders of record at the close of business on March 1, 1999 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting. The
Company has one class of Common Stock, $.001 par value. As of the Record Date,
5,209,360 shares of the Company's Common Stock were issued and outstanding and
held of record by 76 stockholders. See "Security Ownership of Certain
Beneficial Owners and Management" below for information regarding beneficial
owners of more than five percent of the Company's Common Stock.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time prior to its use by delivering to the Secretary of the
Company a written instrument revoking the proxy or a duly executed proxy bearing
a later date or by attending the Annual Meeting and voting in person.
Voting and Solicitation
Each stockholder voting for the election of directors may cumulate his or
her votes, by giving one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of shares which the stockholder
is entitled to vote, or by distributing the stockholder's votes under the same
principle among as many candidates as the stockholder chooses, provided that
votes may not be cast for more than six (6) candidates. However, no stockholder
shall be entitled to cumulate votes for any candidate unless the candidate's
name has been placed in nomination prior to the voting and the stockholder, or
any other stockholder, has given notice at the meeting prior to the voting of
the intention to cumulate votes. On all other matters, each share has one vote.
This solicitation of proxies is made by the Company, and all related costs
will be borne by the Company. The Company has retained Skinner and Co., Inc. to
aid in the solicitation of proxies from brokers,
<PAGE>
banks and other institutional nominees. The fees and expenses of such firm are
not expected to exceed $3,500. In addition, the Company may reimburse brokerage
firms and other persons representing beneficial owners of shares for their
expenses in forwarding solicitation material to such beneficial owners. Proxies
may also be solicited by certain of the Company's directors, officers and
regular employees, without additional compensation, personally or by telephone.
Quorum; Abstentions; Broker Non-Votes
The required quorum for the transaction of business at the Annual Meeting
is a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the Record Date. Shares that are voted "FOR,"
"AGAINST" or "WITHHELD FROM" a matter are treated as being present at the
meeting for purposes of establishing a quorum and are also treated as shares
entitled to vote at the Annual Meeting (the "Votes Cast") with respect to such
matter.
While there is no definitive statutory or case law authority in Delaware as
to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than the election of directors). In the
absence of a controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.
In a 1988 Delaware case, Berlin v. Emerald Partners, the Delaware Supreme
Court held that, while broker non-votes should be counted for purposes of
determining the presence or absence of a quorum for the transaction of business,
broker non-votes should not be counted for purposes of determining the number of
Votes Cast with respect to the particular proposal on which the broker has
expressly not voted. Accordingly, the Company intends to treat broker non-votes
in this manner. Thus, a broker non-vote will not have any effect on the outcome
of the voting on a proposal.
Deadline for Receipt of Stockholder Proposals
Stockholders are entitled to present proposals for action at a forthcoming
meeting if they comply with the requirements of the proxy rules promulgated by
the Securities and Exchange Commission. Proposals of stockholders of the
Company intended to be presented for consideration at the Company's 2000 Annual
Meeting of Stockholders must be received by the Company no later than December
30, 1999 in order to be considered for inclusion in the proxy statement and form
of proxy relating to that meeting.
In addition, the Company's Bylaws establish an advance notice procedure
with regard to certain matters, including nominations for director and
stockholder proposals not included in the Company's proxy statement, to be
brought before a meeting of stockholders. In general, nominations for the
election of directors or proposals of business to be brought before a meeting of
stockholders may be made by: (i) the Board of Directors or (ii) any stockholder
entitled to vote who has delivered written notice to the Secretary of the
Company not fewer than 90 days in advance of the stockholders meeting, which
notice must contain specified information concerning the nominees or proposals
and concerning the stockholder proposing such nominations or proposals. In the
event that less than 100 days notice or prior public disclosure of the date of
the meeting is given or made to stockholders, notice by the stockholders must be
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 thereof was made. A copy of the full text of the Bylaw provisions
discussed above may be obtained by writing to the Secretary of the Company.
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<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of the Record Date as to (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director and each nominee for
director of the Company, (iii) each of the executive officers named in the
Summary Compensation Table in "Compensation of Executive Officers" below and
(iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of Percentage
Shares of Shares
Five Percent Stockholders, Beneficially Beneficially
Directors and Executive Officers Owned(1) Owned (%)
- -------------------------------------------------------------------------------- --------------- ------------------
<S> <C> <C>
Dimensional Fund Advisors, Inc. (2)
1299 Ocean Ave., 11th Floor
Santa Monica, CA 90401.................................................... 359,100 6.9%
Wynnefield Partners (3)
One Penn Plaza, Suite 4720
New York, NY 10119........................................................ 281,000 5.4
John B. Mumford (4)........................................................... 210,080 4.0
E. Alexander Glover (5)....................................................... 158,750 3.0
Charles E. Volwiler (6)....................................................... 140,208 2.7
Ronald J. Becht, Jr. (7)...................................................... 68,868 1.3
William P. Sousa (8).......................................................... 53,588 1.0
Dennis P. Waldera (9)......................................................... 52,881 1.0
Raymond E. Nystrom (10)....................................................... 32,500 *
John W. Combs (11)............................................................ 16,750 *
Gerald L. Beckwith............................................................ -- --
All executive officers and directors as a group (11 persons) (12)............. 705,125 12.7
</TABLE>
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* Less than 1%
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934 and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to
options currently exercisable or exercisable within 60 days of the Record
Date are deemed outstanding for computing the percentage of the person
holding such options, but are not outstanding for computing the percentage
of any other person. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
(2) Based on a Schedule 13G, dated February 11, 1999, filed by Dimensional Fund
Advisors, Inc. ("Dimensional"). Dimensional has sole voting power with
respect to 359,100 shares and sole dispositive power with respect to
359,100 shares.
(3) As reported by www.nasdaq-online.com as of the Record Date.
(4) Includes 148,469 shares by the Mumford Family Trust, 19,261 shares held by
the Crosspoint Retirement Plan for the benefit of Mr. Mumford (the
"Retirement Plan"), 29,600 shares held in an individual retirement account
(the "IRA") for the benefit of Mr. Mumford and 12,750 shares issuable upon
exercise of stock options exercisable within 60 days of the Record Date.
Mr. Mumford is also a trustee of the Mumford Family Trust.
-3-
<PAGE>
Mr. Mumford retains the right to direct the voting and disposition of the
shares held by the Mumford Family Trust. Accordingly, Mr. Mumford may be
deemed to be a beneficial owner of these shares. Mr. Mumford disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein. This number does not include 66,572 shares held by
various trusts for the benefit of children of Mr. Mumford. Mr. Mumford
disclaims beneficial ownership of such shares.
(5) Includes 153,750 shares issuable upon the exercise of stock options
exercisable within 60 days of the Record Date.
(6) Includes 27,033 shares issuable upon the exercise of stock options
exercisable within 60 days of the Record Date.
(7) Includes 46,251 shares issuable upon the exercise of stock options
exercisable within 60 days of the Record Date.
(8) Includes 19,815 shares issuable upon the exercise of stock options
exercisable within 60 days of the Record Date.
(9) Consists of 52,881 shares issuable upon the exercise of stock options
exercisable within 60 days of the Record Date.
(10) Includes 12,500 shares issuable upon the exercise of stock options
exercisable within 60 days of the Record Date. Mr. Nystrom resigned as an
Officer of the Company in February 1999.
(11) Includes 12,750 shares issuable upon the exercise of stock options
exercisable within 60 days of the Record Date.
(12) Includes 325,230 shares issuable upon the exercise of stock options
exercisable within 60 days of the Record Date.
-4-
<PAGE>
PROPOSAL ONE
ELECTION OF DIRECTORS
A board of six (6) directors is to be elected at the Annual Meeting of
Stockholders. Unless otherwise instructed, the proxy holders will vote the
proxies received by them for the Company's six (6) nominees named below, all of
whom are presently directors of the Company. In the event that any nominee of
the Company is unable or declines to serve as a director at the time of the
Annual Meeting of Stockholders, the proxies will be voted for any nominee who
shall be designated by the present Board of Directors to fill the vacancy. The
Company is not aware of any nominee who will be unable or will decline to serve
as a director. In the event that additional persons are nominated for election
as directors, the proxy holders intend to vote all proxies received by them in
such a manner and in accordance with cumulative voting as will assure the
election of as many of the nominees listed below as possible, and in such event
the specific nominees to be voted for will be determined by the proxy holders.
The term of office for each person elected as a director will continue until the
next Annual Meeting of Stockholders or until a successor has been elected and
qualified.
Vote Required; Election of Directors
If a quorum is present and voting, the six (6) nominees receiving the
highest number of votes will be elected to the Board of Directors. Votes
withheld from any nominee, abstentions and broker non-votes will be counted for
purposes of determining the presence or absence of a quorum.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH OF THE
NOMINEES LISTED BELOW.
Nominees
The names of the nominees and certain information about them as of the
Record Date are set forth below:
<TABLE>
<CAPTION>
Director
Name of Nominee Age Positions with the Company Since
- -------------------------------------------- --- ------------------------------------------------------- ---------------
<S> <C> <C> <C>
John B. Mumford (1)(2).................... 55 Chairman of the Board 1987
Gerald L. Beckwith (1).................... 50 Director 1998
John W. Combs (2)......................... 51 Director 1996
E. Alexander Glover....................... 55 President, Chief Executive Officer and Director 1997
William P. Sousa (1)...................... 64 Director 1987
Charles E. Volwiler....................... 43 Director 1997
</TABLE>
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(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mr. Mumford is a co-founder of the Company and has served as Chairman of
the Board since the Company's inception. Mr. Mumford has served as President of
Crosspoint Corporation since 1972 and as Managing General Partner of Crosspoint
Venture Partners since 1982. Mr. Mumford currently serves as a director of a
number of private companies primarily in the information technology area. Mr.
Mumford was a director of Office Depot, a public company, from 1986 through
April 1997. Mr. Mumford was a founding director of Inmac Corp. and served in
such capacity until its merger with Micro Warehouse in 1996. Mr. Mumford holds
a B.S. from Arizona State University and an M.B.A. from Stanford University.
-5-
<PAGE>
Mr. Beckwith has been employed by QUALCOMM since 1987 and is currently a
senior vice president and the president of QUALCOMM's Wireless Systems Division.
He previously held managerial and engineering positions with M/A-COM Linkabit,
Mostek Corporation, National Micronetics and General Dynamics. He holds both
Masters and Bachelor degrees in Electrical Engineering from San Diego State
University.
Mr. Combs has been employed by Nextel Communications since 1993 and is
currently President of the Southwest Area. From 1991 to 1993, he served as
Executive Vice President of Sales, Marketing and Customer Care of L.A. Cellular.
Mr. Combs was President of Mitel, Inc. from 1988 to 1991 and was Executive Vice
President and General Manager - Direct Sales Division for Fujitsu Business
Communications from 1977 to 1988. Mr. Combs is a director of Digital Microwave,
a public company. Mr. Combs earned a Bachelor of Science degree from California
Polytechnic State University.
Mr. Glover was appointed President in June 1997 and Chief Executive Officer
of the Company in December 1997. Mr. Glover joined the Company in 1995 as
Executive Vice President. 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 a Bachelor degree from
Harvard College and an M.B.A. from Stanford University.
Mr. Sousa currently serves as a consultant to technology companies. Mr.
Sousa served as the President and Chief Executive Officer of Air Communications,
Inc., a high-technology marketing development company specializing in wireless
data and general communications products, from 1993 to 1994. From 1991 to 1993,
Mr. Sousa served as President and Chief Executive Officer of Insite Peripherals,
Inc. ("Insite"), a high-technology marketing and development company
specializing in high-capacity floptical disk drives. Prior to working at
Insite, he was Executive Vice President of Inmac Corp., a direct marketer of
computer hardware and software products.
Mr. Volwiler co-founded the Company in 1987 and is currently a consultant
to the Company. He served as Vice President from 1987 through January 1999.
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 Bachelor of Science degree in Commerce from
Santa Clara University.
Board Meetings and Committees
The Board of Directors of the Company held a total of five (5) meetings
during fiscal 1998. The Board of Directors has a Compensation Committee and an
Audit Committee. The Board of Directors has no nominating committee or any
committee performing such functions.
The Compensation Committee, which consisted of directors John B. Mumford
and William P. Sousa during fiscal year 1998, met six (6) times by written
consent during the fiscal year. John B. Mumford, Gerald L. Beckwith, and
William P. Sousa have been appointed to the Compensation Committee for fiscal
1999. This Committee is responsible for determining salaries, incentives and
other forms of compensation for directors and officers of the Company and
administers various incentive compensation and benefit plans.
-6-
<PAGE>
The Audit Committee, which consisted of directors John B. Mumford and
Deepak Kamra, a former director, met one (1) time during fiscal 1998. John B.
Mumford and John W. Combs have been appointed to the Audit Committee for fiscal
1999. This Committee is responsible for overseeing actions taken by the
Company's independent auditors and reviews the Company's internal financial
controls.
No director attended fewer than 75% of the aggregate of the meetings of the
Board of Directors and committees thereof, if any, upon which such director
served during the period for which he has been a director or committee member.
Compensation of Directors
In fiscal year 1998, the Company's outside directors received cash
compensation of $500 for each regular Board meeting attended and were reimbursed
for reasonable expenses incurred in connection with attendance at Board and
committee meetings. The Company plans to continue these payments in fiscal year
1999.
In fiscal year 1998, each of the outside directors received on January 1,
1998, a nonstatutory option grant for the purchase of 3,000 shares of the
Company's Common Stock having an exercise price of $6.625 per share and vesting
25% quarterly during the fiscal year. On January 1, 1999, each of the outside
directors received a nonstatutory option grant for 3,000 shares of Common Stock
at an exercise price of $9.25 and vesting 25% quarterly during the fiscal year.
-7-
<PAGE>
PROPOSAL TWO
APPROVAL OF AMENDMENT TO
THE 1995 DIRECTOR OPTION PLAN
Proposed Amendment
The 1995 Director Option Plan (the "Director Plan") was adopted by the
Board in February 1995 and approved by the stockholders in March 1995 with an
aggregate of 75,000 shares reserved for issuance thereunder. In January 1999
the Board approved a proposal to amend the Director Plan to reserve an
additional 75,000 shares of Common Stock for issuance thereunder, bringing the
total number of shares of Common Stock reserved for issuance thereunder to
150,000. At the Annual Meeting, the stockholders are being requested to ratify
and approve this amendment.
Reasons for the Amendment
The Board of Directors believes it is in the Company's best interests to
increase the shares reserved for issuance under the Director Plan so that the
Company may continue to attract and retain the services of qualified directors
by providing such directors an opportunity to purchase the Company's Common
Stock through option grants.
Activity Under the Director Plan
As of December 31, 1998, no shares of Common Stock had been issued upon
exercise of stock options; options to purchase an aggregate of 57,000 shares of
the Company's Common Stock at a weighted average exercise price of $9.10 per
share were outstanding under the Director Plan, and 18,000 shares remained
available for future issuance under the Director Plan.
Vote Required
The affirmative vote of the holders of a majority of the Votes Cast will be
required to approve the amendment of the Director Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
Summary of the Director Plan
General. The purpose of the Director Plan is to attract and retain the
best available personnel for positions for service as outside directors of the
Company, to provide additional incentive to the outside directors of the Company
and to encourage their continued service on the Board of Directors.
Administration. The Director Plan provides for the automatic grant of a
nonstatutory stock option to each outside director (i) covering 9,000 shares to
those persons serving as a director of the Company for the first time on the
date such person first becomes an outside director (the "First Option") and (ii)
covering 3,000 shares on January 1 of each subsequent year, provided that he or
she has served as an outside director for at least six months (the "Subsequent
Option").
-8-
<PAGE>
Eligibility; Limitations. Only outside directors of the Company and any
parent or subsidiary of the Company are eligible to receive stock options
pursuant to the Director Plan.
Terms and Conditions of Options. Each option is evidenced by an option
agreement between the Company and the optionee and is subject to the following
additional terms and conditions:
(a) Exercise Price. The exercise price of options granted under the
Director Plan is 100% of the fair market value per share of the Common Stock on
the date the option is granted.
(b) Vesting of Option
(i) The shares subject to the First Option shall vest as to one-third
of the shares subject to the option on December 31 of each year, provided the
person continues to serve as a director on such date and such director has been
an outside director since June 30 of the same year.
(ii) The shares subject to any Subsequent Option shall vest as to 25%
of the optioned stock in quarterly installments.
(c) Exercise of Option; Form of Consideration. The Director Plan permits
payment to be made by cash, check, other shares of Common Stock of the Company
(with some restrictions), cashless exercises or any combination thereof. An
option shall be deemed exercised when written notice of such exercise has been
given to the Company and full payment has been made.
(d) Term of Option. The term the option shall be ten (10) years from the
date of grant. No option may be exercised after the expiration of its term.
(e) Termination of Continuous Status as Director. To the extent the option
is exercisable at the time of termination of an optionee's status as a director,
the optionee may exercise all or part of the portion of his or her option that
is exercisable within three months following the date of termination. To the
extent the optionee was not entitled to exercise the option or does not exercise
his or her option within three months after termination, the option shall
terminate.
(f) Death or Disability. If an optionee's status as a director terminates
as a result of death or disability, then all options held by such optionee
under the Director Plan expire on the earlier of (i) 12 months from the date of
such termination or (ii) the respective expiration dates of such options. The
optionee (or the optionee's estate or the person who acquires the right to
exercise the option by bequest or inheritance), may exercise all or part of the
option at any time before such expiration to the extent that the option was
exercisable at the time of such termination.
(g) Nontransferability of Options. Options granted under the Director Plan
are not transferable other than by will or the laws of descent and distribution
and may be exercised during the optionee's lifetime only by the optionee.
(h) Other Provisions. The director option agreement may contain other
terms, provisions and conditions not inconsistent with the Director Plan as may
be determined by the Administrator.
Adjustments Upon Changes in Capitalization. In the event that the capital
stock of the Company changes by reason of any stock split, reverse stock split,
stock dividend, combination, reclassification or other similar change in the
capital structure of the Company effected without the receipt of consideration,
-9-
<PAGE>
appropriate adjustments shall be made in the number and class of shares of stock
subject to the Director Plan, the number and class of shares of stock subject to
any option outstanding under the Director Plan, and the exercise price of any
such outstanding option.
In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each option shall become fully vested as of the
effective date of such merger or sale and exercisable for a period of 90 days
therefrom and shall be assumed by the successor corporation.
Federal Income Tax Consequences
An optionee does not recognize any taxable income at the time he or she is
granted a nonstatutory stock option. Upon exercise, the optionee recognizes
taxable income generally measured by the excess of the then fair market value of
the shares over the exercise price. Any taxable income recognized in connection
with an option exercise by an employee of the Company is subject to tax
withholding by the Company. The Company is entitled to a deduction in the same
amount as the ordinary income recognized by the optionee. Upon a disposition of
such shares by the optionee, any difference between the sale price and the
optionee's exercise price, to the extent not recognized as taxable income as
provided above, is treated as long-term or short-term capital gain or loss,
depending on the holding period.
The foregoing is only a summary of the effect of federal income taxation
upon optionees and the Company with respect to the grant and exercise of options
under the Director Plan. It does not purport to be complete and does not
discuss the tax consequences of a director's death or the provisions of the
income tax laws of any municipality, state or foreign country in which a
director may reside.
Participation in the Director Plan
The following table sets forth information with respect to options granted
under the Director Plan during the fiscal year ended December 31, 1998 to (i)
each current director, and (ii) current directors as a group:
<TABLE>
<CAPTION>
Weighted
Shares Average
Subject to Exercise
Options Price Per
Name of Individual or Identity of Group Granted Share
- ---------------------------------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
John B. Mumford................................................................ 3,000 $6.625
Gerald L. Beckwith............................................................. 9,000 6.688
John W. Combs.................................................................. 3,000 6.625
E. Alexander Glover............................................................ -- --
William P. Sousa............................................................... 3,000 6.625
Charles E. Volwiler............................................................ -- --
All Current Directors................................................... 18,000 6.657
</TABLE>
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<PAGE>
PROPOSAL THREE
APPROVAL OF AMENDMENT TO
THE 1995 STOCK PLAN
Proposed Amendment
The 1995 Stock Plan (the "Stock Plan") was originally adopted by the Board
of Directors in February 1995 and approved by the stockholders in March 1995.
In January 1999, the Board approved a proposal to amend the Stock Plan to add
225,000 shares for issuance to the Company's employees who are former employees
of PhoneZone.com, which was acquired by the Company in January 1999.
Reasons for the Amendment
In connection with the Company's acquisition of PhoneZone.com, the Company
entered into employment agreements with several key former employees of
PhoneZone.com pursuant to which the Company is obligated to grant options to
purchase 225,000 shares of Common Stock pursuant to the Stock Plan. The Board
of Directors believes it is in the Company's best interests to increase the
shares reserved for issuance under the Stock Plan so that the Company not only
fulfills its obligations pursuant to the employment agreements, but also
successfully integrates and retains the services of the key former PhoneZone.com
employees.
Activity Under the Stock Plan
From time to time, the Company reviews the number of shares available for
issuance under the Stock Plan and, based on the Company's estimates of the
number of shares expected to be issued under the Stock Plan, management presents
to the Board of Directors a recommendation for the reservation of additional
shares for issuance. The Board reviews such recommendation and if the Board
approves it, the Board presents a proposal for the stockholders' approval.
As of December 31, 1998, 3,702 shares of Common Stock had been issued upon
the exercise of stock options; options to purchase an aggregate of 702,565
shares were outstanding, at a weighted average exercise price of $6.61 per
share; and 193,733 shares remained available for future issuance under the Stock
Plan.
Vote Required for Approval of Amendment
The affirmative vote of a majority of the Votes Cast will be required to
approve the amendment to the Stock Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT OF THE STOCK PLAN.
-11-
<PAGE>
Summary of the Stock Plan
The essential features of the Stock Plan are outlined below.
Purpose. The purposes of the Stock Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to the employees and consultants of the Company, and to
promote the success of the Company's business.
Administration. The Stock Plan may be administered by the Board, a
committee of the Board or, with respect to grants to certain persons, by
different bodies as permitted by law (the "Administrator"). Subject to the
other provisions of the Stock Plan, the Administrator has the power to determine
the terms and conditions of any options and stock purchase rights granted,
including, but not limited to, the persons to whom an option or stock purchase
right may be granted, the exercise price, the number of shares subject to the
option or stock purchase right and the exercisability thereof. The Stock Plan
is currently administered by the Compensation Committee of the Board of
Directors.
Eligibility and Terms of Options. The Stock Plan provides that incentive
stock options may be granted only to employees. Nonstatutory stock options and
stock purchase rights may be granted to employees and consultants. An optionee
who has been granted an option may, if otherwise eligible, be granted additional
options or stock purchase rights. With respect to any optionee who owns stock
with more than 10% of the voting power of all classes of stock of the Company (a
"10% Stockholder"), the exercise price of any incentive stock option granted
must equal at least 110% of the fair market value of the stock on the grant
date, and the maximum term of the option cannot exceed five years. The term
of all other options under the Stock Plan may not exceed ten years. The
Administrator selects the optionees and determines the number of shares subject
to each option, but in no case may an employee be granted options to purchase
more than 100,000 shares in any fiscal year. In making such determination, the
Administrator takes into account the duties and responsibilities of the
employee, director or consultant, the value of his or her services, his or her
present and potential contribution to the success of the Company, the
anticipated number of years of future service and other relevant factors.
Conditions of Options. Each option granted under the Stock Plan is
evidenced by a written stock option agreement between the optionee and the
Company and is subject to the following conditions:
(a) Exercise Price. The Administrator determines the exercise price of
options to purchase shares of Common Stock. However, the exercise price of an
incentive stock option must not be less than 100% (110%, if issued to a 10%
Stockholder) of the fair market value of the Common Stock on the date the option
is granted. For so long as the Company's Common Stock is traded on the Nasdaq
National Market, the fair market value of a share of Common Stock shall be the
closing sale price for such stock (or the closing bid if no sales were reported)
as quoted on the Nasdaq National Market for the last market trading day prior to
the date of grant or, if the market is closed on such date, the immediately
preceding trading date.
(b) Value Limitation. If the aggregate fair market value of all shares of
Common Stock subject to an optionee's incentive stock option(s) exercisable for
the first time during any calendar year exceeds $100,000, the excess options
shall be treated as nonstatutory options.
(c) Form of Consideration. The consideration to be paid for the shares of
Common Stock issued upon exercise of an option shall be determined by the
Administrator. In the case of incentive stock options, the form of consideration
to be paid shall be determined at the time of grant. Such form of consideration
-12-
<PAGE>
may vary for each option and may consist entirely of cash, check, promissory
note, shares of the Company's Common Stock meeting certain criteria, any
combination thereof, or any other legally permissible form of consideration as
may be provided in the Stock Plan or the option agreement.
(d) Exercise of the Option. Each stock option agreement will specify the
term of the option and the date when the option is to become exercisable. The
term of such vesting is determined by the Administrator. Options granted under
the Stock Plan have a ten-year term (five years, if issued to a 10% Stockholder)
and generally become exercisable over four years at a rate of one-fourth of the
shares subject to the options at the end of twelve months from the date of grant
and one forty-eighth of the shares every month for thirty-six months thereafter,
subject to continuation of employment or service, as the case may be. An option
is exercised by giving written notice of exercise to the Company and tendering
full payment of the purchase price to the Company.
(e) Termination of Employment. In the event an optionee ceases to be an
employee, director or consultant, other than upon the optionee's death or
disability, the optionee may exercise his or her options within such period of
time as determined by the Administrator (not to exceed three months in the case
of an incentive stock option) from the date of such termination (and in no event
later than the expiration of the term of such options as set forth in the option
agreement) to the extent that the optionee was entitled to exercise them at the
date of such termination. In the absence of a specified time in the option
agreement, the optionee may exercise his or her options within ninety days
following the date of such termination. Options granted under the Stock Plan to
date have generally provided that optionees may exercise their options within
ninety days from the date of termination of employment for reasons other than
the optionee's death or disability.
(f) Disability. In the event an optionee ceases to be an employee,
director or consultant as a result of permanent and total disability (as defined
in Section 22(e)(3) of the Code), the optionee may exercise his or her options
at any time within twelve months from the date of such termination, but only to
the extent that the optionee was entitled to exercise them at the date of such
termination, (and in no event later than the expiration of the term of such
options as set forth in the option agreement).
(g) Death. In the event an optionee dies while he or she is an employee,
director or consultant, within twelve months following the date of death (but in
no event later than the expiration of the term of such options as set forth in
the notice of grant), the optionee's estate or the person who acquires the right
to exercise the options by bequest or inheritance may exercise said options, but
only to the extent that the optionee was entitled to exercise them at the date
of death.
(h) Termination of Options. Excluding incentive stock options issued to
10% Stockholders, options granted under the Stock Plan expire on the date set
forth in the option agreement (not to exceed ten years from the date of grant).
Incentive stock options granted to 10% Stockholders expire five years from the
date of grant (or such shorter period set forth in the option agreement). No
option may be exercised by any person after the expiration of its term.
(i) Nontransferability of Options and Stock Purchase Rights. Unless
determined otherwise by the Administrator, an option or stock purchase right may
not be sold, pledged, assigned, hypothecated, transferred or disposed of in any
manner, other than by will or by the laws of descent and distribution and may be
exercised during the lifetime of the optionee only by the optionee.
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<PAGE>
Terms and Conditions of Stock Purchase Rights. Each stock purchase right
granted under the Stock Plan shall be evidenced by a written offer which sets
forth the terms, conditions and restrictions related to the offer, including the
number of shares that the offeree shall be entitled to purchase, the price to be
paid, and the time within which the offeree must accept such offer, which in no
case shall exceed six months. The offer shall be accepted by execution of a
restricted stock purchase agreement in such form as determined by the
Administrator. Once the stock purchase right is exercised, the purchaser shall
have the rights equivalent to those of a stockholder. Unless the Administrator
determines otherwise, the restricted stock purchase agreement shall grant the
Company a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's service with the Company for any reason
(including death or disability). The purchase price for shares repurchased
pursuant to such repurchase right shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The Administrator shall determine the rate at which the
repurchase option lapses.
Adjustment Upon Changes in Capitalization. Subject to any required action
by the stockholders of the Company, the number of shares of Common Stock covered
by each outstanding option or stock purchase right, and the number of shares of
Common Stock (a) authorized for issuance under the Stock Plan but as to which
no options or stock purchase rights have yet been granted or (b) which have been
returned to the Stock Plan upon cancellation or expiration of an option or stock
purchase right, as well as the price per share of Common Stock covered by each
such outstanding option or stock purchase right shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without
consideration. Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an option or stock purchase right.
Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, to the extent it has not been previously exercised,
an option or stock purchase right will terminate immediately prior to the
consummation of such proposed action. The Board in its discretion may provide an
optionee the right to exercise his or her option as to all of the stock covered
thereby, including shares as to which the option would not otherwise be
exercisable. In addition, the Board may provide that a Company repurchase
option applicable to shares purchased upon exercise of an option or stock
purchase right shall lapse as to all such shares.
Merger or Asset Sale. In the event of a merger of the Company with or into
another corporation, or the sale of substantially all of the assets of the
Company, each outstanding option or stock purchase right may be assumed, or an
equivalent option or right substituted, by the successor corporation or a parent
or subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option or stock purchase
right, the optionee shall fully vest in and have the right to exercise the
option or stock purchase right as to all or a portion of the optioned stock,
including shares that would not otherwise be exercisable. If an option or stock
purchase right becomes fully vested and exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the administrator shall
notify the optionee that the option or stock purchase right has become fully
exercisable for a period of fifteen (15) days from the date of such notice, and
the option or stock purchase right will terminate upon the expiration of such
period.
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<PAGE>
Amendment and Termination of the Stock Plan. The Board may at any time
amend, alter, suspend or terminate the Stock Plan. The Company shall obtain
stockholder approval of any Stock Plan amendment to the extent necessary and
desirable to comply with applicable laws. No amendment, alteration, suspension
or termination of the Stock Plan shall impair the rights of any optionee, unless
mutually agreed otherwise between the optionee and the Administrator, which
agreement must be in writing and signed by the optionee and the Company.
Federal Tax Information
Options granted under the Stock Plan may be either incentive stock options,
as defined in Section 422 of the Code, or nonstatutory options.
An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the optionee to the alternative minimum tax.
Upon the disposition of shares purchased pursuant to the terms of an incentive
stock option more than two years after grant of the option and more than one
year after exercising the option, any gain or loss will be treated as long-term
capital gain or loss. If these holding periods are not satisfied, the optionee
will recognize ordinary income at the time of disposition equal to the
difference between the exercise price and the lower of (i) the fair market value
of the shares at the date of the option exercise or (ii) the sale price of the
shares. A different rule for measuring ordinary income upon such a premature
disposition may apply if the optionee is an officer, director, or 10%
Stockholder of the Company. The Company is entitled to a tax deduction in the
same amount as any ordinary income recognized by the optionee. Any gain or loss
recognized on such a premature disposition of the shares in excess of the amount
treated as ordinary income will be characterized as long-term, or short-term
capital gain or loss, depending on the holding period.
All of the Options which do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any taxable
income at the time a nonstatutory option is granted. However, upon its
exercise, the optionee will recognize taxable income generally measured as the
excess of the then fair market value of the shares purchased over the exercise
price. Any taxable income recognized in connection with an option exercise by
an optionee who is also an employee of the Company will be subject to tax
withholding by the Company. Upon disposition of such shares by the optionee,
any difference between the sales price and the optionee's purchase price, to the
extent not recognized as taxable income as described above, will be treated as
long-term or short-term capital gain or loss, depending on the holding period.
The Company will be entitled to a tax deduction in an amount equal to any
ordinary income recognized by the optionee with respect to shares acquired upon
exercise of a nonstatutory option.
The foregoing is only a summary of the effect of federal income taxation
upon the participant and the Company with respect to the shares purchased under
the Stock Plan, does not purport to be complete, and reference should be made to
the applicable provisions of the tax code. In addition, this summary does not
discuss the tax consequences of a participant's death or the income tax laws of
any municipality, state or foreign country in which the participant may reside.
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<PAGE>
PROPOSAL FOUR
APPROVAL OF AMENDMENT TO
THE 1995 STOCK PLAN
Proposed Amendment
In January 1999, in addition to the action described in Proposal Three, the
Board approved a proposal to amend the Stock Plan to add 525,000 shares for
issuance to the Company's employees and consultants, bringing the total number
of shares reserved for issuance under the Stock Plan pursuant to Proposal Three
and Proposal Four to 1,650,000.
Reasons for the Amendment
The Company relies upon the Stock Plan as one of the benefits necessary to
attract and retain skilled personnel. The Company competes for high caliber,
high quality personnel with many other technology companies which as part of
their incentive packages offer option grants to their employees. The Board has
determined it is essential to offer an appropriate level of option grants to
attract and retain employees to remain competitive with other hiring companies
in the area. Accordingly, the Board of Directors believes it is in the
Company's best interests to increase the shares reserved for issuance under the
Stock Plan so that the Company may continue to attract and retain the services
of qualified employees by providing employees an opportunity to purchase the
Company's Common Stock through option grants.
Activity Under the Stock Plan
From time to time, the Company reviews the number of shares available for
issuance under the Stock Plan and, based on the Company's estimates of the
number of shares expected to be issued under the Stock Plan, management presents
to the Board of Directors a recommendation for the reservation of additional
shares for issuance. The Board reviews such recommendation and if the Board
approves it, the Board presents a proposal for the stockholders' approval.
As of December 31, 1998, 3,702 shares of Common Stock had been issued upon
the exercise of stock options; options to purchase an aggregate of 702,565
shares were outstanding, at a weighted average exercise price of $6.61 per
share; and 193,733 shares remained available for future issuance under the Stock
Plan. See Proposal Three for a more detailed description of the Stock Plan.
Vote Required for Approval of Amendment
The affirmative vote of a majority of the Votes Cast will be required to
approve the amendment to the Stock Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT OF THE STOCK PLAN.
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<PAGE>
PROPOSAL FIVE
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected KPMG LLP, independent auditors, to
audit the financial statements of the Company for the fiscal year ending
December 31, 1999, and recommends that stockholders vote for ratification of
such appointment. In the event of a negative vote on ratification, the Board of
Directors will reconsider its selection.
KPMG LLP has audited the Company's financial statements annually since
1988. Representatives of KPMG LLP are expected to be present at the meeting
with the opportunity to make a statement if they desire to do so and are
expected to be available to respond to appropriate questions.
Required Vote; Ratification of Appointment of Independent Auditors
The affirmative vote of the holders of a majority of the Votes Cast is
required to approve the appointment of the independent auditors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
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<PAGE>
ADDITIONAL INFORMATION RELATING TO
DIRECTORS AND OFFICERS OF THE COMPANY
Compensation of Executive Officers
The following table sets forth the compensation earned by (i) the Company's
Chief Executive Officer, (ii) each of the Company's three other most highly
compensated executive officers in 1998 who were serving as executive officers at
the end of 1998 and whose salary and bonus for 1998 exceeded $100,000
(collectively, the "Named Executive Officers") for services rendered in all
capacities to the Company during the years ended December 31, 1996, 1997 and
1998:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Awards
----------
Annual Compensation Securities All Other
---------------------------- Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($)(1) Options(#) ($)(2)
- ----------------------------------------------- ------ ------------ -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
E. Alexander Glover 1998 $300,000 $150,000 50,000 $8,739
President, Chief Executive Officer 1997 300,000 130,000 30,000 8,180
and Director................................... 1996 250,000 -- 30,000 7,980
Ronald J. Becht, Jr. 1998 175,000 87,500 20,000 3,626
Vice President of Product 1997 150,000 66,250 20,000 2,711
Marketing...................................... 1996 140,000 -- -- 1,995
Raymond E. Nystrom (3) 1998 175,000 87,500 20,000 6,590
Vice President of Operations and Chief 1997 167,500 72,813 -- 5,527
Financial Officer............................. 1996 26,667 -- 45,000 --
Dennis P. Waldera (4) 1998 175,000 87,500 20,000 4,930
Vice President of Direct 1997 162,500 70,938 20,000 4,008
Marketing...................................... 1996 106,800 -- 50,000 3,788
</TABLE>
- -----------------------
(1) The Company establishes each year a Management Bonus Plan for which senior
management is eligible. The amount of a particular employee's bonus varies
depending on salary level, position with the Company and the operating
results of the Company.
(2) Represents premiums for long-term disability benefits.
(3) Mr. Nystrom was hired in November 1996 and resigned in February 1999.
(4) Mr. Waldera was hired in April 1996.
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<PAGE>
Option Grants in Fiscal 1998
The following table provides information with respect to stock option
grants in 1998 to the Named Executive Officers.
<TABLE>
<CAPTION>
Individual Grants(1)
--------------------------------------------------------------------- Potential Realizable Value
Number of at Assumed Annual Rates of
Securities % of Total Stock Price Appreciation
Underlying Options Granted for Option Terms($)(4)
Options to Employees in Exercise Expiration ---------------------------
Name Granted Fiscal Year (1) Price($)(2) Date(3) 5% 10%
- ------------------------------- ------------- ------------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
E. Alexander Glover.......... 50,000 16.9% $6.25 01/28/08 $196,530 $498,045
Ronald J. Becht, Jr.......... 20,000 6.8 6.25 01/28/08 78,612 199,218
Raymond E. Nystrom........... 20,000 6.8 6.25 01/28/08 78,612 199,218
Dennis P. Waldera............ 20,000 6.8 6.25 01/28/08 78,612 199,218
</TABLE>
- ------------------------------
(1) The Company granted options to purchase 295,000 shares of Company Stock to
employees during 1998.
(2) The exercise price may be paid in cash, check, promissory note, shares of
the Company's Common Stock (subject to approval of the Board of Directors)
or any combination of such methods.
(3) Options may terminate before their expiration date if the optionee's status
as an employee is terminated or upon the optionee's death or disability.
(4) The 5% and 10% assumed annual compound rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future prices of its
Common Stock.
Aggregated Option Exercises and Fiscal Year-End Option Values
The following table sets forth information concerning options held on
December 31, 1998 with respect to each Named Executive Officer. No options were
exercised by such persons during 1998.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Options at
Options at FY-End FY-End ($)(1)
------------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
E. Alexander Glover.................................... 126,875 83,125 $318,306 $318,674
Ronald J. Becht, Jr.................................... 46,201 34,166 188,252 137,774
Raymond E. Nystrom..................................... 22,500 42,500 133,493 209,753
Dennis P. Waldera...................................... 41,666 48,334 126,581 176,589
</TABLE>
- -------------------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option and the exercise price of the option.
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<PAGE>
Benefit Plans
The following is a brief summary of plans in effect during the fiscal year
ended December 31, 1998 under which executive officers and directors of the
Company received benefits:
1992 Stock Option Plan. As of December 31, 1998, options to purchase an
aggregate of 19,452 shares of the Company's Common Stock were outstanding
pursuant to the 1992 Stock Option Plan (the "Old Plan"). No new stock option
grants can be issued under the Old Plan. Stock options outstanding pursuant to
the Old Plan vest over two to four years from the grant date and expire ten
years from the grant date.
1995 Stock Plan. The Company relies upon the Stock Plan to attract and
retain skilled employees, consultants and quality management. As of December
31, 1998, 3,702 shares of Common Stock had been issued upon exercise of stock
options, options to purchase an aggregate of 702,565 shares were outstanding at
a weighted average exercise price of $6.61 per share, and 193,733 shares were
available for future issuance under the Stock Plan. Proposals Three and Four
herein seek to increase the number of shares reserved for issuance under the
Stock Plan by 750,000 shares to a total of 1,650,000 shares.
1995 Employee Stock Purchase Plan. As of December 31, 1998, a total of
177,097 shares of Common Stock were reserved for future issuance, and a total of
127,903 shares has been issued pursuant to the 1995 Employee Stock Purchase
Plan (the "ESPP"). The ESPP is administered by the Compensation Committee of
the Board of Directors. The ESPP permits eligible employees, as defined, to
purchase Common Stock through payroll deductions, which may not exceed 15% of
the employees base compensation. No employee may purchase more than $25,000
worth of stock in any calendar year. The ESPP is implemented by offering
periods lasting for six (6) months, with a new offering period commencing every
six months. The price of shares purchased under the ESPP 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 Director Plan was adopted by the Company's
Board of Directors in February 1995 and approved by the stockholders in March
1995. The Director Plan provides for the grant of non-statutory stock options to
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 director. A total of 75,000 shares of the Company's Common Stock is
reserved for issuance under the Director Plan. As of December 31, 1998, no
shares have been issued under the Director Plan; options to purchase 57,000
shares were outstanding at a weighted average exercise price of $9.10 per share;
and 18,000 shares were available for future issuance under the Director Plan.
Proposal Two herein seeks to increase the number of shares reserved for issuance
under the Director Plan by 75,000 shares to a total of 150,000 shares.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and directors and persons who own more
than ten percent of a registered class of the Company's equity securities to
file reports of ownership on Form 3 and changes in ownership on Form 4 and Form
5 with the Securities and Exchange Commission ("SEC"). Executive officers,
directors and greater than ten percent stockholders are required by SEC
regulation to furnish the Company with copies of all
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<PAGE>
Section 16(a) forms they file. Based solely in its review of the copies of such
forms received by it, or written representations from certain reporting persons,
the Company believes that, during fiscal 1998, all filing requirements
applicable to its executive officers, directors and 10% stockholders were
complied with.
Compensation Committee Report on Executive Compensation
The following is the Report of the Compensation Committee of the Company
describing the compensation policies and rationale applicable to the Company's
executive officers with respect to the compensation paid to such executive
officers for the year ended December 31, 1998. The information contained in the
report shall not be deemed to be "soliciting material" or to be "filed" with the
SEC, and such information shall not be incorporated by reference into any future
filing under the Securities Act of 1933, as amended, or the Exchange Act except
to the extent that the Company specifically incorporates it by reference into
such filing.
During the fiscal year ended December 31, 1998, the Compensation Committee
of the Board of Directors was comprised of two non-employee directors. The
Compensation Committee is responsible for setting compensation levels for the
Company's executive officers and for overseeing the administration of certain of
the Company's stock option plans. All decisions by the Compensation Committee
are reviewed by the entire Board of Directors.
In making compensation decisions, it has been the practice of the
Compensation Committee to meet with the Company's chief executive officer, as
appropriate. For fiscal 1998, the Compensation Committee reviewed compensation
surveys prepared by outside compensation consultants. Such surveys were
utilized to establish compensation packages that are within the range of those
persons holding comparably responsible positions at companies similar to the
Company in age, number of employees, revenues and overall growth rate.
The Compensation Committee believes that executive officer compensation
should be closely aligned with the performance of the Company on both a short-
term and long-term basis and that such compensation should assist the Company in
attracting and retaining key executives critical to its long-term success. To
that end, the Compensation Committee's policy is that the compensation package
for executive officers should consist of three components: (i) an annual base
salary; (ii) the potential to earn incentive bonuses each fiscal year, the
amount of which is dependent on the Company's overall performance; and (iii)
stock option awards designed to align management interests with those of
stockholders by providing long-term incentives for the Company's key employees.
In fiscal 1998, the Compensation Committee reviewed and used comparable-company
data as the basis for setting executive compensation within the framework
described above.
Base salary is (i) based upon the responsibilities of the particular
executive officers, (ii) targeted at the median of comparable companies and
reviewed on an annual basis. Base salaries for fiscal year 1999 for Mr. Glover,
Mr. Becht, Mr. Waldera, Ms. Grouell and Mr. Young $300,000, $175,000, $175,000,
$135,000 and $160,000, respectively, were determined by the Compensation
Committee and approved by the full Board.
Incentive bonuses represent an opportunity for each executive officer to
earn additional annual cash compensation in an amount tied to a percentage of
the officer's base salary. These percentages are generally established by the
Compensation Committee at the end of each fiscal year for the following fiscal
year. The fiscal 1998 guidelines for the Company's executive officers ranged up
to 75% of base salary. Incentive
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<PAGE>
bonus payments of $150,000 $87,500, $87,500 and $12,000 were made to Mr. Glover,
Mr. Becht, Mr. Waldera and Mr. Volwiler, respectively, for fiscal 1998. For
fiscal 1999, bonus guidelines are up to 75% of base salary.
The long-term-performance-based compensation of executive officers takes
the form of option awards under the Company's 1995 Stock Plan. The Compensation
Committee believes that equity-based compensation ensures that the Company's
executive officers have a continuing stake in the long-term success of the
Company. All options granted by the Company have been granted with an exercise
price equal to the market price of the Company's Common Stock on the date of
grant and, accordingly, have value only if the Company's stock price increases
after such date. In granting options under the 1995 Stock Plan, the Committee
takes into account each executive's responsibilities, relative position in the
Company, and past grants. Individual grants may vary within the range to
reflect individual performance and potential. The option program also utilizes
vesting periods to encourage retention of key employees.
Specific information regarding compensation of the executive officers is
contained in the accompanying table.
Tax Policy
Section 162(m) of the Internal Revenue Code of 1986, as amended, limits
deductions for certain executive compensation in excess of $1 million. The
Company endeavors to structure its compensation plans to achieve maximum
deductibility under Section 162(m) with minimal sacrifices in flexibility and
corporate objectives. With respect to non-equity compensation arrangements, the
Compensation Committee has reviewed the terms of those arrangements most likely
to be subject to Section 162(m).
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consisted of John B. Mumford and William P.
Sousa during fiscal 1998. The Compensation Committee makes recommendations to
the Board of Directors concerning salaries and incentive compensation for
directors and officers of the Company. Mr. Glover, President and Chief Executive
Officer of the Company, although not a voting member of the Compensation
Committee, participates in all discussions and decisions regarding salaries and
incentive compensation for all employees of and consultants to the Company,
except that Mr. Glover is excluded from discussions and decisions regarding his
own salary and incentive compensation.
John B. Mumford
William P. Sousa
-22-
<PAGE>
Employment Contracts and Change of Control Arrangements
Mr. Glover, the Company's President and Chief Executive Officer, entered
into an employment agreement with the Company on March 24, 1995, subsequently
amended effective July 1, 1997. Under the terms of Mr. Glover's employment
agreement, his annual base salary is not to be less than $300,000; he is
eligible for a bonus of up to 50% of his base salary provided the Company meets
certain targeted financial criteria; and he is to receive an annual stock option
grant for a minimum of 50,000 shares of Common Stock at the fair market value on
the date of grant, provided however that the exercise price of the additional
options may be limited to $500,000. The agreement expires on March 24, 2001.
In the event Mr. Glover is terminated prior to the expiration of the agreement,
he will be entitled to severance equal to twelve months' base salary.
Mr. Glover, Mr. Becht and Mr. Waldera entered into employee severance
agreements with the Company during 1998. The severance agreements provide that,
in the event of a Change of Control, all of the executive officer's rights to
purchase stock shall be automatically vested in their entirety immediately
preceding the first of (i) a Change of Control in which the rights are not
assumed by the successor corporation or will be terminated or canceled, (ii) if
the executive officer will not receive identical securities received by other
stockholders upon exercise of such executive officer's rights or (iii) an
involuntary termination of the executive officer. In the event Mr. Glover, Mr.
Becht or Mr. Waldera are terminated within one year following a Change of
Control, they shall receive continued salary for up to 12 months, 9 months and 9
months, respectively, and continued employee benefits, any accrued management
bonus and several other immaterial benefits.
Mr. Waldera, the Company's Vice President of Direct Marketing has an
agreement with the Company providing that in the event he is terminated without
cause, he will be entitled to receive his base salary and benefits for nine
months following the termination, his accrued management bonus, his outstanding
stock options shall become fully vested and exercisable within three months from
the date of termination and he will have the option of continuing to be covered
by the Executive Disability Plan at his own expense.
-23-
<PAGE>
Performance Graph
Set forth below is a line graph comparing the cumulative return to the
stockholders of the Company's Common Stock with the cumulative return of (i) the
Nasdaq U.S. Index and (ii) a peer group consisting of the publicly traded
catalog sales companies identified in Note 1 below for the period commencing
April 7, 1995 (the date of the Company's initial public offering) and ending on
December 31, 1998. The information contained in the performance graph shall not
be deemed to be "soliciting material" or to be "filed" with the Securities and
Exchange Commission, and such information shall not be incorporated by reference
into any future filing under the Securities Act or Exchange Act, except to the
extent that the Company specifically incorporates it by reference into such
filing.
COMPARISON OF TOTAL RETURN
Among Hello Directy, Inc., the NASDAQ Stock Market - US Index and a Peer Group
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
4/7/95 12/31/95 12/31/96 12/31/97 12/31/98
<S> <C> <C> <C> <C> <C>
HD 100 59 41 58 88
Peer 100 108 119 109 98
NASDAQ 100 130 160 197 276
</TABLE>
Note (1). The Peer Group consists of the following companies: Blair
Corporation; Concepts Direct, Inc.; CDW Computer Centers Inc.; Corporate
Express, Inc.; DM Management Co.; Damark International Inc.; Fingerhut
Companies, Inc.; Geerlinjs & Wade, Inc.; Global DirectMail, Corp.; Sport Supply
Group, Inc.; Hanover Direct, Inc.; Initio Inc.; Lands' End Inc.; Lillian Vernon
Corporation; Creative Computers, Inc.; Micro Warehouse, Inc.; New England
Business Service, Inc.; Insight Enterprises Inc.; US Office Products Company;
The Right Start Inc.; Spiegel, Inc.; and Trend-Lines, Inc.
-24-
<PAGE>
Transaction of Other Business
The Board of Directors of the Company knows of no other matters to be
submitted at the meeting. If any other matters come before the meeting, it is
the intention of the persons named in the accompanying form of proxy to vote the
shares they represent as the Board of Directors may recommend.
By Order of the Board of Directors
Dean Witter III
Chief Financial Officer and Secretary
San Jose, California
April 2, 1999
-25-
<PAGE>
PROXY
HELLO DIRECT, INC.
5893 Rue Ferrari
San Jose, CA 95138-1857
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Revoking any such prior appointment, the undersigned hereby appoints E.
Alexander Glover and Dean Witter III and each of them attorneys and agents, with
power of substitution to vote as Proxy for the undersigned, as herein stated, at
the annual meeting of stockholders of Hello Direct, Inc., to be held at the
Company's principal executive offices located at 5893 Rue Ferrari, San Jose,
California 95138, on Wednesday, April 28, 1999 at 9:00 a.m., and at any
adjournments thereof, with respect to the number of shares the undersigned would
be entitled to vote if personally present.
This proxy, when properly executed, will be voted (1) for the election of
Directors, (2) for the ratification and approval of an amendment to the
Company's 1995 Director Option Plan increasing shares thereunder by 75,000, (3)
for ratification and approval of an amendment to the Company's 1995 Stock Plan
increasing shares thereunder by 225,000, (4) for ratification and approval of an
amendment to the Company's 1995 Stock Plan increasing shares thereunder by
525,000, and (5) for the ratification and appointment of independent public
accountants, if no instructions to the contrary are indicated in Items (1), (2),
(3), (4) and (5), and in the discretion of the named attorneys and agents on
such matters as may properly come before the meeting.
The undersigned hereby acknowledges receipt of a copy of the Proxy
Statement relating to such annual meeting.
----------- -----------
See Reverse See Reverse
Side CONTINUED AND TO BE SIGNED ON REVERSE SIDE Side
----------- -----------
<PAGE>
- ------------------------
X Please markvotes
as in this example
- ------------------------
1. Election of Directors:
Nominees: Gerald L. Beckwith, John W. Combs, E. Alexander Glover, John B.
Mumford, William P. Sousa and Charles E. Volwiler
[_] For
--------------------------------------------
[_] Withheld For all nominees except as noted above
2. Proposal to ratify and approve an amendment to the Company's 1995 Director
Option Plan to increase the number of shares of Common Stock reserved for
issuance thereunder by 75,000 shares.
[_] For [_] Against [_] Abstain
3. Proposal to ratify and approve an amendment to the Company's 1995 Stock Plan
to increase the number of shares of Common Stock reserved for issuance
thereunder by 225,000 shares for issuance to the Company's employees who are
former employees of PhoneZone.com.
[_] For [_] Against [_] Abstain
4. Proposal to ratify and approve an amendment to the Company's 1995 Stock Plan
to increase the number of shares of Common Stock reserved for issuance
thereunder by 525,000 shares for issuance to the Company's employees and
consultants.
[_] For [_] Against [_] Abstain
5. Proposal to ratify the appointment of KPMG LLP as independent auditors of
the Company for the fiscal year ending December 31, 1999.
[_] For [_] Against [_] Abstain
6. In their discretion, the Proxies are authorized to vote upon such other
matter or matters which may properly come before the meeting or any
adjournment or adjournments thereof.
[_] Mark here if you plan to attend the meeting
[_] Mark here for address change and note below
SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
(Signatures should conform exactly to name(s) shown on this proxy. Executors,
administrators, guardians, trustees, attorneys, and officers signing for
corporations should give full title.)
Signature: ______________________________________ Date: ____________________
Signature: ______________________________________ Date: ____________________
