UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 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 July 30, 1999
----- -------------
Common Stock, Par Value $.001 5,197,489
<PAGE>
HELLO DIRECT, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. - Financial Statements
- Condensed Balance Sheets as of June 30, 1999 and December 31, 1998
- Condensed Statements of Operations for the Three and Six Months Ended
June 30, 1999 and 1998
- Condensed Statements of Cash Flows for the Three and Six Months Ended
June 30, 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
Items 1 through 3 and Item 5 are not applicable with respect to the
current reporting period.
Item 4 - Submission of matters to a vote of security holders
Item 6. - Exhibits and Reports on Form 8-K
Signatures
Part 1. Financial Information
Item 1. Financial Statements
HELLO DIRECT, INC.
CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $5,298 $5,745
Short-term investments 0 3,860
Trade accounts receivable, less allowance for
returns and doubtful accounts 7,151 5,491
Inventories 6,602 6,119
Deferred tax assets 894 847
Other current assets 2,444 2,474
------------- -------------
Total current assets 22,389 24,536
Notes receivable 4,078 4,239
Property and equipment, net 7,655 6,246
Goodwill, net 1,800 0
------------- -------------
Total assets $35,922 $35,021
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,069 $3,567
Accrued expenses 1,580 1,736
------------- -------------
Total current liabilities 4,649 5,303
Non-current liabilities 440 364
------------- -------------
Total liabilities 5,089 5,667
Stockholders' equity:
Common stock 5 5
Additional paid-in capital 28,712 28,319
Retained earnings 3,440 1,721
Less treasury stock, at cost (1,324) (691)
------------- -------------
Total stockholders' equity 30,833 29,354
------------- -------------
Total liabilities and stockholders' equity $35,922 $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 Ende Six Months Ended
June 30, June 30,
----------------- ------------------
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $19,282 $16,620 $38,732 $34,530
Cost of goods sold 8,734 7,670 17,667 15,989
-------- -------- --------- --------
Gross profit 10,548 8,950 21,065 18,541
Selling, general and administrative
expenses 8,696 7,866 17,345 16,076
Product development expenses 657 323 1,264 902
-------- -------- --------- --------
Operating income 1,195 761 2,456 1,563
Other income, net 186 204 410 407
-------- -------- --------- --------
Income before income taxes 1,381 965 2,866 1,970
Income taxes 553 386 1,147 788
-------- -------- --------- --------
Net income $828 $579 $1,719 $1,182
======== ======== ========= ========
Basic per share amounts:
Net income $0.16 $0.11 $0.33 $0.23
======== ======== ========= ========
Weighted average shares outstanding 5,105 5,111 5,132 5,100
======== ======== ========= ========
Diluted per share amounts:
Net income $0.16 $0.11 $0.32 $0.23
======== ======== ========= ========
Weighted average shares outstanding 5,291 5,242 5,323 5,211
======== ======== ========= ========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
HELLO DIRECT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,719 $1,182
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,225 800
Deferred income taxes (61) 257
Deferred rent 90 90
Provision for returns and doubtful accounts 16 (75)
Changes in items affecting operations: 0 0
Trade accounts receivable (1,664) (687)
Inventories (483) (974)
Other current assets 30 318
Accounts payable and accrued expenses (654) (1,308)
-------- --------
Net cash provided by (used in) operating activities 218 (397)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (2,434) (643)
Decrease (increase) in investments 3,860 (2,669)
Payments received on note receivable 149 138
Acquisition of company (1,500) 0
-------- --------
Net cash provided by (used in) investing activities 75 (3,174)
-------- --------
Cash flows from financing activities:
Sale of common stock, net 348 143
Purchase of treasury stock (1,088) 0
-------- --------
Net cash provided by (used in) financing activities (740) 143
-------- --------
Net decrease in cash and cash equivalents (447) (3,428)
Cash and cash equivalents at beginning of period 5,745 5,135
-------- --------
Cash and cash equivalents at end of period $5,298 $1,707
======== ========
Non-cash financing activities:
Issuance of treasury stock for acquisition 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 six-month period ended June 30, 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 Six months ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- -------- ---------
Basic weighted average shares outstandi 5,105 5,111 5,132 5,100
Common stock options utilizing
treasury stock method when dilutive 186 131 191 111
--------- --------- -------- ---------
Diluted weighted average shares outstan 5,291 5,242 5,323 5,211
========= ========= ======== =========
3. 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
Three Months Ended June 30, 1999 Compared to Three Months ended June 30, 1998
- -----------------------------------------------------------------------------
Net Sales. Net sales reflect total sales less a provision for returns. Net
sales increased $2,662,000, or 16.0%, to $19,282,000 in the three-month period
ended June 30, 1999, from $16,620,000 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 despite a 6.0% increase in the number of
catalogs distributed, to 7.1 million from 6.7 million. Average order size
increased 9.3% to $281 from $257.
Gross Profit. Cost of goods sold includes merchandise cost, freight and duty,
warranty expense, and packaging and shipping supplies. Gross profit increased
$1,598,000, or 17.9%, to $10,548,000 in the three-month period ended June 30,
1999, from $8,950,000 for the comparable period in 1998. The gross margin
percentage for the three-month period was 54.7% for 1999 versus 53.8% for
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $830,000, or 10.6%, to $8,696,000 in the
three-month period ended June 30, 1999, from $7,866,000 for the comparable
period in 1998. The dollar increase was associated with planned headcount
additions to the Company's administrative management and sales groups.
However, as a percentage of net sales, these expenses for the three-month
period declined to 45.1% in 1999, as compared to 47.3% 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
$334,000, or 103.4%, to $657,000 for the three-month period ended June 30,
1999, from $323,000 for the comparable period in 1998. As a percentage of net
sales, these expenses for the three-month period were 3.4% for 1999 versus
1.9% for the same three-month period in 1998. The increase 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 of $186,000 includes interest income and
discounts for the three-month period ended June 30, 1999 versus $204,000 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 $249,000, or 43.0% to $828,000 in the three-
month period ended June 30, 1999, from $579,000 for the comparable period in
1998. This increase was due to the reasons discussed above.
Six Months Ended June 30, 1999 Compared to Six Months ended June 30, 1998
- -------------------------------------------------------------------------
Net Sales. Net sales increased $4,202,000, or 12.2%, to $38,732,000 in the
six-month period ended June 30, 1999, from $34,530,000 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.
Gross Profit. Gross profit increased $2,524,000, or 13.6%, to $21,065,000 in
the six-month period ended June 30, 1999, from $18,541,000 for the comparable
period in 1998. The gross margin percentage for the six-month period was
54.4% for 1999 versus 53.7% for 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,269,000, or 7.9%, to $17,345,000 in the
six-month period ended June 30, 1999, from $16,076,000 for the comparable
period in 1998. The dollar increase was associated with planned headcount
additions to the Company's administrative management and the sales groups. As
a percentage of net sales, these expenses for the six-month period declined to
44.8% in 1999, as compared to 46.6% for the same six-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
$362,000, or 40.1%, to $1,264,000 for the six month period ended June 30,
1999, from $902,000 for the comparable period in 1998. As a percentage of net
sales, these expenses for the six-month period were 3.3% for 1999 versus 2.6%
for the same six-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 product development 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 of $410,000 includes interest income and
discounts for the six-month period ended June 30, 1999 versus $407,000 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 $537,000 or 45.4% to $1,719,000 in the six-
month period ended June 30, 1999, from $1,182,000 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 six-month period ended June
30, 1999, was $218,000. This was the result of $2,989,000 provided by
operations including net income, depreciation and amortization and other non-
cash charges, offset by $2,771,000 of changes in operating assets and
liabilities. Cash provided by investing activities for the six-month period
ended June 30, 1999, was $75,000, due primarily to a decrease in short-term
investments of $3,860,000 and $149,000 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 $2,434,000 used for purchases of
property and equipment. Cash used in financing activities during the six-
month period ended June 30, 1999, was $740,000, relating primarily to
$1,088,000 used for the purchase of treasury stock offset by $348,000 raised
through the issuance of Common Stock pursuant to the Company's employee stock
purchase and stock option plans.
Additions to equipment during the six-month period ended June 30, 1999 were
$2,434,000 compared to $643,000 for the same period in the prior year. The
asset purchases include tooling for proprietary products, hardware for
infrastructure upgrades, and capitalized costs associated with the Company's
call management and contact management software upgrades. The Company plans
to expend between $3,500,000 and $4,500,000 for capital equipment for the year
ending December 31, 1999.*
In the six months ended June 30, 1999, the Company used $1,088,000 for the
purchase of 136,000 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
June 30, 1999, the Company has purchased 174,000 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 June 30, 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 $80,000 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 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 second 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 second 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 through 3 and Item 5 are not applicable with respect to the current
reporting period.
Item 4. - Submission of matters to a vote of security holders
At the Annual Meeting of Stockholders of the Company, held on April 28, 1999,
in San Jose, California, the stockholders elected six directors to serve until
the next Annual Meeting of Stockholders; ratified and approved an amendment to
the Company's 1995 Director Option Plan to increase the shares of Common Stock
reserved for issuance thereunder by 75,000 shares; ratified and approved 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; did not
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; and
ratified the appointment of KPMG LLP as independent auditors of the Company
for the fiscal year ending December 31, 1999.
Results of the Stockholder vote:
Item For Withheld
- ------ --- --------
Election of Directors
- ----------------------
Gerald L. Beckwith 4,102,061 726,047
John W. Combs 4,102,061 726,047
E. Alexander Glover 4,102,061 726,047
John B. Mumford 4,098,754 729,354
William P. Sousa 4,102,061 726,047
Charles E. Volwiler 4,102,061 726,047
Item For Against Abstain Not Voted
- ------ --- ------- ------- ---------
Approve amendment to Director Option Plan
- -----------------------------------------
1,634,670 460,496 11,256 2,721,686
Approve amendment to 1995 Stock Plan for the former employees of PhoneZone.com
- ------------------------------------------------------------------------------
1,583,797 449,094 6,691 2,788,526
Approve amendment to 1995 Stock Plan for employees and consultants
- -------------------------------------------------------------------
757,711 1,269,83 12,041 2,788,526
Ratify the appointment of KPMG LLP
- -----------------------------------
4,815,163 8,138 4,807 -
Item 6. - Exhibits and Reports on Form 8-K:
a. Exhibits
3.1 Amended and Restated Bylaws
10.1 1995 Stock Plan (1)
10.2 Director Option Plan (1)
27.1 Financial Data Schedule
a. Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and Exchange Commission
during the quarter ended June 30, 1999.
(1) Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form S-8 filed with the Securities and Exchange
Commission on July 22, 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)
August 10, 1999
- ---------------
Date /s/ Dean Witter III
---------------------
Dean Witter III
Chief Financial Officer
and Secretary
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