All HELO investors (if there are any left here!) should read the full text of the letter below, taken from an SEC filing of 9/3/98.
Book value = $5.47
P/E = 10
Cash = $2.42/share
Stock price as of 9/18/98 = $4.88
Something's got to give sooner or later, it would seem. By any measure, this stock seems ludicrously undervalued.
* * * * *
August 31, 1998
The Members of the Board of Directors
Hello Direct Inc.
5893 Rue Ferrari
San Jose, CA 95138
Gentlemen,
The purpose of this letter is to express publicly our displeasure with the company's capital structure and reluctance to engage in a share re-purchase and, ultimately, to suggest that a public company format may be inappropriate for Hello Direct Inc.
HELO came public in April 1995 at $11.50 a share and has yet to invest the proceeds from the IPO. The company has a debt-free balance sheet, with cash and equivalents of $2.42 a share. The company produces cash and sells at a discount to book value. We believe that the company sells at a substantial discount to its private market value.
Within this context---an undervalued security, excessively capitalized---we believe that a share re-purchase would have made eminent sense under any condition. However, taken in light of the current market conditions and the 2 1/2 mm shares recently distributed by the two large venture capital funds, it's baffling that the company hasn't explored this venue.
Hello Direct has a fine management, a fine business niche, and an exciting business model. We are fully cognizant of the great strides senior management has made to turn around the prosperity of HELO. We applaud these initiatives and look forward to future growth and improvement in profitability.
That said, it's premature to be taking any victory laps. Hello Direct's operating margin, return on assets, and return on equity are woeful, and the company has yet to realize the operating leverage off a large and growing infrastructure. Management has stated its intention to make fold-in acquisitions and has stated its belief that there is managerial and infrastructure capacity to handle an increase in revenues to perhaps $200mm. The fact remains, however, that management has not executed a single acquisition within HELO.
While the public shareholders have not seen the benefits from the company's behavior, the same isn't true of other Hello Direct constituents. Management has built a large staff and last year moved to a comparatively opulent facility given its line of business. Stock options have been granted to management and employees, and, recently, two board members did a great injustice to the public shareholders by distributing shares in their private investment vehicles in such
a way as to triple the public float of the company, creating a sloppy overhang that has contributed to the stock declining from $13 to its present price of $5 1/4 a share.
The company appears to have little reason to be public. There are no analysts following the company, and the company has no immediate need for capital. The firm has done little to defend its currency--its stock price-- to facilitate future use of the currency for acquisitions, joint venture purposes, or to attract and retain management.
The board of directors owns little stock directly, following the two recent distributions. We urge you to demonstrate the same fiduciary duty to the public shareholders as you have done for yourselves and your two funds. We believe that this company could be sold in a single transaction at a substantial premium to its current stock price and we urge this consideration. If the company is to remain as a public company, it's time to start acting like one.
In going public, a company establishes a bond with the equity marketplace. Hello Direct Inc.'s board has acknowledged this in previous discussion by publicly stating that it will not engage in such dastardly behavior as re-pricing of options. What the board may be over-looking, by not buying back shares, is the ultimate effect this refusal will have on the workforce who are shareholders and ultimately on the valuation. For when the dark clouds of 1998 have passed, prospective investors will assess which companies defended their currencies and which permitted their stocks to erode to absurd levels.
Respectfully submitted,
Bobby Melnick
General Partner
Wynnefield Capital Inc. |
