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, 2000
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 August 10, 2000
----- -------------
Common Stock, Par Value $.001 5,295,124
<PAGE>
HELLO DIRECT, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. -- Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. -- Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Liquidity and Capital Resources
Additional Factors Affecting Operating Results and Market
Price of Stock
Part II - Other Information
Item 2. - Changes in Securities and Use of Proceeds
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. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $295 $7,292
Trade accounts receivable, less allowance
for returns and doubtful accounts 10,240 9,186
Inventories 9,526 7,753
Deferred tax assets 970 874
Other current assets 5,791 1,904
------------- -------------
Total current assets 26,822 27,009
Notes receivable 3,739 3,912
Property and equipment, net 12,841 10,055
Goodwill, net 1,400 1,600
------------- -------------
Total assets $44,802 $42,576
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowing $3,005 $ --
Accounts payable 3,480 6,340
Accrued expenses 1,607 2,553
------------- -------------
Total current liabilities 8,092 8,893
Non-current liabilities 676 472
------------- -------------
Total liabilities 8,768 9,365
Stockholders' equity:
Common stock 5 5
Additional paid-in capital 30,166 29,668
Notes receivable from stock sales (742) (742)
Retained earnings 7,928 5,603
Less treasury stock, at cost (1,323) (1,323)
------------- -------------
Total stockholders' equity 36,034 33,211
------------- -------------
Total liabilities and stockholders' equity $44,802 $42,576
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
HELLO DIRECT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $22,561 $19,282 $46,239 $38,732
Cost of goods sold 10,519 8,734 21,457 17,667
--------- --------- --------- ---------
Gross profit 12,042 10,548 24,782 21,065
Selling, general and
administrative expenses 9,738 8,696 19,779 17,345
Product development expenses 876 657 1,738 1,264
--------- --------- --------- ---------
Operating income 1,428 1,195 3,265 2,456
Other income, net 365 186 610 410
--------- --------- --------- ---------
Income before income taxes 1,793 1,381 3,875 2,866
Provision for income taxes 718 553 1,550 1,147
--------- --------- --------- ---------
Net income $1,075 $828 $2,325 $1,719
========= ========= ========= =========
Basic per share amounts:
Net income $0.20 $0.16 $0.44 $0.33
========= ========= ========= =========
Weighted average common shares
outstanding 5,285 5,105 5,263 5,132
========= ========= ========= =========
Diluted per share amounts:
Net income $0.20 $0.16 $0.42 $0.32
========= ========= ========= =========
Weighted average common shares
outstanding 5,505 5,291 5,525 5,323
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
HELLO DIRECT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $2,325 $1,719
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,731 1,225
Deferred income taxes 18 (61)
Deferred rent 90 90
Provision for returns and doubtful accounts 95 16
Changes in items affecting operations:
Trade accounts receivable (1,149) (1,664)
Inventories (1,773) (483)
Other assets (3,887) 30
Accounts payable and accrued expenses (3,806) (654)
-------- --------
Net cash (used in) provided by operating activities (6,356) 218
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (4,317) (2,434)
Decrease in investments -- 3,860
Payments received on note receivable 173 149
Acquisition of company -- (1,500)
-------- --------
Net cash (used in) provided by investing activities (4,144) 75
-------- --------
Cash flows from financing activities:
Short-term bank borrowing 3,005 --
Sale of common stock, net 498 348
Purchase of treasury stock -- (1,088)
-------- --------
Net cash provided by (used in) financing activities 3,503 (740)
-------- --------
Net decrease in cash and cash equivalents (6,997) (447)
Cash and cash equivalents at beginning of period 7,292 5,745
-------- --------
Cash and cash equivalents at end of period $295 $5,298
======== ========
Non-cash financing activities:
Issuance of treasury stock for aquisition of company $ -- $500
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
HELLO DIRECT, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
In the opinion of the management of Hello Direct, Inc. and Subsidiary
(the "Company"), the accompanying unaudited condensed consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments necessary to present fairly the financial
information set forth therein.
The condensed consolidated 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 consolidated 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, 1999.
Results of operations for the six-month period ended June 30, 2000 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,
--------------------- ---------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Basic weighted average common
shares outstanding 5,285,000 5,105,000 5,263,000 5,132,000
Common stock options utilizing
treasury stock method
when dilutive 220,000 186,000 262,000 191,000
---------- ---------- ---------- ----------
Diluted weighted average common
shares outstanding 5,505,000 5,291,000 5,525,000 5,323,000
========== ========== ========== ==========
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, 1999 (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.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared to Three Months ended June 30,
1999
Net Sales. Net sales reflect total sales less a provision for returns.
Net sales increased $3,279,000, or 17.0%, to $22,561,000 in the three-
month period ended June 30, 2000, from $19,282,000 for the comparable
period in 1999. This increase was primarily attributable to an increase
in both outbound telemarketing and Internet sales offset by a decrease in
catalog sales. The decrease in catalog sales resulted in part from an 6%
decrease in the number of catalogs distributed, to 6.7 million from 7.1
million. Average order size increased 22.8% to $345 from $281.
Gross Profit. Cost of goods sold includes merchandise cost, freight
and duty, warranty expense, and packaging and shipping supplies. Gross
profit increased $1,494,000, or 14.2%, to $12,042,000 in the three-month
period ended June 30, 2000, from $10,548,000 for the comparable period in
1999. The gross margin percentage for the three-month period was 53.4%
for 2000 versus 54.7% for 1999. The decrease in gross margin relates to
the increase in nationally branded product sales as a percentage of total
product sales. National branded products are purchased by the Company
and resold to end-users, unlike proprietary products which are designed
by the Company and are manufactured to the Company's specifications.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,042,000, or 12.0%, to $9,738,000 in
the three-month period ended June 30, 2000, from $8,696,000 for the
comparable period in 1999. The dollar increase was associated with
planned headcount additions to the Company's sales and product support
groups. However, as a percentage of net sales, these expenses for the
three-month period declined to 43.2% in 2000, as compared to 45.1% for
the same three-month period in 1999. A substantial 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
$219,000, or 33.3%, to $876,000 for the three-month period ended June 30,
2000, from $657,000 for the comparable period in 1999. As a percentage
of net sales, these expenses for the three-month period were 3.9% for
2000 versus 3.4% for the same three-month period in 1999. 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, 2000 over the prior year.
Other Income, net. Other income, which includes interest income and
discounts was $365,000 for the three-month period ended June 30, 2000
versus $186,000 for the comparable period in 1999. 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 $247,000, or 29.8% to $1,075,000 in the
three-month period ended June 30, 2000, from $828,000 for the comparable
period in 1999. This increase was due to the reasons discussed above.
Six Months Ended June 30, 2000 Compared to Six Months ended June 30, 1999
Net Sales. Net sales increased $7,507,000, or 19.4%, to $46,239,000 in
the six-month period ended June 30, 2000, from $38,732,000 for the
comparable period in 1999. This increase was primarily attributable to
an increase in both outbound telemarketing and Internet sales offset by a
decrease in catalog sales.
Gross Profit. Gross profit increased $3,717,000, or 17.6%, to
$24,782,000 in the six-month period ended June 30, 2000, from $21,065,000
for the comparable period in 1999. The gross margin percentage for the
six-month period was 53.6% for 2000 versus 54.4% for 1999. The decrease
in gross margin relates to the increase in nationally branded product
sales as a percentage of total product sales. National branded products
are purchased by the Company and resold to end-users, unlike proprietary
products which are designed by the Company and are manufactured to the
Company's specifications.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2,434,000, or 14.0%, to $19,779,000 in
the six-month period ended June 30, 2000, from $17,345,000 for the
comparable period in 1999. The dollar increase was associated with
planned headcount additions to the Company's sales and product support
groups. As a percentage of net sales, these expenses for the six-month
period declined to 42.8% in 2000, as compared to 44.8% for the same six-
month period in 1999. 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
$474,000, or 37.5%, to $1,738,000 for the six month period ended June 30,
2000, from $1,264,000 for the comparable period in 1999. As a percentage
of net sales, these expenses for the six-month period were 3.8% for 2000
versus 3.3% for the same six-month period in 1999. 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 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,
2000 over the prior year.
Other Income, net. Other income, which includes interest income and
discounts was $610,000 for the six-month period ended June 30, 2000
versus $410,000 for the comparable period in 1999. 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 $606,000 or 35.3% to $2,325,000 in the
six-month period ended June 30, 2000, from $1,719,000 for the comparable
period in 1999. 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, debt financing, and borrowings under its revolving bank line
of credit.
Cash used in operating activities during the six-month period ended June
30, 2000, was $6,356,000. This was the result of $4,259,000 provided by
operations including net income, adjusted for depreciation and
amortization and other non-cash charges, offset by $10,615,000 of changes
in operating assets and liabilities which included a substantial
prepayment to secure favorable pricing for inventory. Cash used in
investing activities for the six-month period ended June 30, 2000, was
$4,144,000, due primarily to purchases of property and equipment of
$4,317,000, offset by $173,000 collected on the note receivable. Cash
provided by financing activities during the six-month period ended June
30, 2000, was $3,503,000, which includes $3,005,000 of short-term bank
borrowing and $498,000 of funds raised through the issuance of Common
Stock pursuant to the Company's employee stock purchase and stock option
plans.
For 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, 2000, 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 and the use of its credit facility will be sufficient to
fund its working capital needs for the foreseeable future. The Company
has a $10,000,000 unsecured line of credit with a bank at the bank's
prime lending rate.
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:
o the number and timing of catalog mailings,
o catalog response rates,
o product mix,
o the level of selling, general and administrative expenses,
o the timing and level of product development expenses, and
o the timing and success of our and our competitors' new product
introductions.
We plan our operating expenditures based on sales forecasts. If our net
sales are below our expectations in any given quarter, our operating
results will suffer. Due to the foregoing factors, in some future
quarter our operating results may be below the expectations of public
market analysts and investors. In such event, the price of our Common
Stock would likely suffer.
We Need to Develop New Products Successfully.
The market for telecommunications products is characterized generally 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 almost 45% of our net sales in the second quarter of 2000 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. 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;
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 made by
these manufacturers represented almost 45% of our net sales in the second
quarter of 2000. 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:
o unexpected changes in regulatory requirements,
o potentially adverse tax consequences,
o tariffs and other trade barriers,
o fluctuations in currency exchange rates,
o political unrest,
o disruptions or delays in shipments, and
o 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:
o the functions, performance, price and reliability of the products
offered by us and our competitors,
o the timing and success of our and our competitors' new product
development efforts, and
o 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:
o difficulties in assimilating the operations, products, technology,
information systems and personnel of the acquired company,
o diverting management's attention from other business concerns,
o impairing relationships with our customers,
o being unable to maintain uniform standards, controls, procedures
and policies,
o entering markets in which we have no direct prior experience, and
o 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 from 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, consultants,
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:
o actual or anticipated fluctuations in our operating results,
o announcements of technological innovations or new products by us or
our competitors,
o developments with respect to intellectual property and proprietary
rights,
o conditions and trends in the telecommunications and telephone
headset industries,
o changes in earnings estimates or recommendations by securities
analysts, and
o 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.
PART II -- OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds
d. Recent Sales Of Unregistered Securities. On April 27, 2000 the
Company issued a warrant to Dean Witter III, in connection with
the hiring of Mr. Witter as the Chief Financial Officer of the
Company. The warrant allows Mr. Witter to purchase 10,000 shares
of Common Stock, at an exercise price of $12.00 per share. The
foregoing transaction did not involve any underwriters, underwriting
discounts or commissions, or any public offering. The issuance of
the warrant was exempt from registration under the Securites Act
pursuant to Section 4(2) thereof on the basis that the transaction
did not involve a public offering. In connection with this
transaction Mr. Witter represented his intention to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution, and appropriate legends were
affixed to the instruments in this transaction.
Item 4. - Submission of matters to a vote of security holders
At the Annual Meeting of Stockholders of the Company, held on April 27,
2000, in San Jose, California, the stockholders elected seven directors
to serve until the next Annual Meeting of Stockholders; ratified and
approved an amendment to the Company's 1995 Stock Plan to increase the
shares of Common Stock reserved for issuance thereunder by 250,000 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, 2000.
Results of the Stockholder vote:
Item For Withheld
------- ----------- --------
Election of Directors
---------------------------------------------
Gerald L. Beckwith 4,547,951 6,020
John W. Combs 4,549,951 4,020
E. Alexander Glover 4,549,951 4,020
Steven J. Gomo 4,547,951 6,020
John B. Mumford 4,549,951 4,020
William P. Sousa 4,549,251 4,720
Charles E. Volwiler 4,549,751 4,220
For Against Abstain
----------- -------- --------
Approve Amendment to 1995 Stock Purchase
Plan for current employees and consultants
---------------------------------------------
3,945,481 603,798 4,692
Approve KPMG Peat Marwick LLP
---------------------------------------------
4,547,871 5,188 912
Item 6. - Exhibits and Reports on Form 8-K:
a. Exhibits
27.1 Financial Data Schedule (available in electronically filed format only)
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 11, 2000
Date /s/ Dean Witter III
--------------------------------
Dean Witter III
Chief Financial Officer
and Secretary
