10-Q 1 d91751e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 or [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to --------- --------- Commission file number 0-28180 ------- SPECTRALINK CORPORATION (Exact name of registrant as specified in charter) Delaware 84-1141188 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 5755 Central Avenue, Boulder, Colorado 80301-2848 (Address of principal executive office) (Zip code) 303-440-5330 (Issuer's telephone number) (Former name, former address and former fiscal year, if changed from last report) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Applicable only to corporate issuers: As of September 30, 2001, there were 18,994,698, shares of SpectraLink Corporation's Common Stock - par value $.01. SPECTRALINK CORPORATION AND SUBSIDIARY INDEX
Page Part I Financial Information Item 1 Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at September 30, 2001 (Unaudited) and December 31, 2000 3 Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2001 and 2000 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3 Quantitative and Qualitative Disclosures about Market Risk 13 Part II Other Information Item 6 Exhibits and Reports on Form 8-K (a) Exhibits None (b) Form 8-K None
2 SPECTRALINK CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 30, December 31, 2001 2000 -------------- -------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 33,048 $ 20,793 Short-term investments in marketable securities 2,006 10,976 Trade accounts receivable, net of allowance of $365 and $308, respectively 14,874 14,481 Inventory, net of allowance of $383 and $283, respectively 8,175 9,029 Deferred income taxes-current portion 1,336 1,336 Other 590 1,037 -------------- -------------- Total current assets 60,029 57,652 PROPERTY AND EQUIPMENT, at cost: Furniture and fixtures 1,555 1,461 Equipment 6,061 5,173 Leasehold improvements 849 805 -------------- -------------- 8,465 7,439 Less - Accumulated depreciation (6,219) (5,420) -------------- -------------- Net Property and equipment 2,246 2,019 DEFERRED INCOME TAXES - NON CURRENT 236 236 OTHER 200 163 -------------- -------------- TOTAL ASSETS $ 62,711 $ 60,070 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 867 $ 1,549 Accrued payroll, commissions and employee benefits 2,251 2,519 Income taxes payable 460 62 Accrued sales, use and property taxes 224 266 Accrued warranty expenses 211 290 Other accrued expenses 663 695 Deferred revenue 2,916 2,932 -------------- -------------- Total current liabilities 7,592 8,313 LONG-TERM LIABILITIES 236 263 -------------- -------------- TOTAL LIABILITIES 7,828 8,576 -------------- -------------- STOCKHOLDERS' EQUITY: Preferred stock, 5,000 shares authorized, none issued and outstanding -- -- Common stock, $0.01 par value, 50,000 shares authorized, 21,243 and 20,775 shares 212 207 issued, respectively, and 18,995 and 19,059 shares outstanding, respectively Additional paid-in capital 56,934 53,855 Retained earnings 11,992 5,996 Treasury stock, 2,248 shares and 1,716 shares, respectively, at cost (14,255) (8,564) -------------- -------------- TOTAL STOCKHOLDERS' EQUITY 54,883 51,494 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 62,711 $ 60,070 ============== ==============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 3 SPECTRALINK CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ SALES: Product Sales, net $ 12,678 $ 11,953 $ 38,455 $ 32,752 Service Sales 2,531 2,162 7,379 5,733 ------------ ------------ ------------ ------------ Net Sales 15,209 14,115 45,834 38,485 COST OF SALES: Cost of Product Sales 3,602 3,723 11,000 10,964 Cost of Service Sales 1,177 1,095 3,860 2,795 ------------ ------------ ------------ ------------ Total Cost of Sales 4,779 4,818 14,860 13,759 ------------ ------------ ------------ ------------ Gross Profit 10,430 9,297 30,974 24,726 OPERATING EXPENSES: Research and Development 1,428 1,160 4,030 3,356 Marketing and Selling 5,151 4,671 16,032 13,854 General and Administrative 823 753 2,523 2,179 ------------ ------------ ------------ ------------ Total Operating Expenses 7,402 6,584 22,585 19,389 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 3,028 2,713 8,389 5,337 INVESTMENT INCOME AND OTHER, net 404 512 1,204 1,412 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 3,432 3,225 9,593 6,749 INCOME TAX EXPENSE (1,287) (1,209) (3,597) (2,531) ------------ ------------ ------------ ------------ NET INCOME $ 2,145 $ 2,016 $ 5,996 $ 4,218 ============ ============ ============ ============ BASIC EARNINGS PER SHARE (Note 3) $ 0.11 $ 0.10 $ 0.32 $ 0.22 ============ ============ ============ ============ BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 18,960 19,230 18,990 19,220 ============ ============ ============ ============ DILUTED EARNINGS PER SHARE (Note 3) $ 0.11 $ 0.10 $ 0.30 $ 0.21 ============ ============ ============ ============ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 20,100 20,310 19,960 20,470 ============ ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 4 SPECTRALINK CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine Months Ended September 30, ---------------------------- 2001 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,996 $ 4,218 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 799 818 Income tax benefit from the exercise of stock options 980 530 Provision for bad debts 57 21 Provision for excess and obsolete inventory 100 93 Amortization of discount on investments in marketable securities (46) (100) Changes in assets and liabilities - Increase in trade accounts receivable (450) (2,309) Decrease (increase) in inventory 754 (3,652) Decrease in other assets 410 737 Increase (decrease) in accounts payable (682) 98 Increase (decrease) in accrued liabilities, income taxes payable and deferred revenue (66) 1,131 ------------ ------------ Net cash provided by operating activities 7,852 1,585 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (1,026) (493) Purchases of investments in marketable securities (3,484) (1,976) Maturity of investments in marketable securities 12,500 9,000 ------------ ------------ Net cash provided by investing activities 7,990 6,531 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercises of common stock options 1,809 901 Proceeds from issuances of common stock 295 299 Purchases of treasury stock (5,691) (2,589) ------------ ------------ Net cash used in financing activities (3,587) (1,389) ------------ ------------ INCREASE IN CASH AND CASH EQUIVALENTS 12,255 6,727 CASH AND CASH EQUIVALENTS, beginning of period 20,793 9,604 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 33,048 $ 16,331 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $ 2,226 $ 1,141 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 5 SPECTRALINK CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) 1. Basis of Presentation The accompanying condensed consolidated financial statements as of September 30, 2001, and for the three and nine months ended September 30, 2001 and 2000, have been prepared from the books and records of SpectraLink Corporation and SpectraLink International Corporation (together the "Company") and are unaudited. In management's opinion, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the Company's financial position, results of operations and cash flows for the periods presented. The results of operations for the period ended September 30, 2001, are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2001. The financial statements should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended December 31, 2000, which are included in the Company's Annual Report on Form 10-K. The accounting policies utilized in the preparation of the financial statements herein presented are the same as set forth in the Company's annual financial statements. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." These statements prohibit pooling-of-interests accounting for transactions initiated after June 30, 2001, require the use of the purchase method of accounting for all combinations after June 30, 2001 and establish a new accounting standard for goodwill acquired in a business combination. It continues to require recognition of goodwill as an asset, but does not permit amortization of goodwill as previously required by APB Opinion No. 17 "Intangible Assets". Furthermore, certain intangible assets that are not separable from goodwill will also not be amortized. However, goodwill and other intangible assets will be subject to periodic (at least annual) tests for impairment and recognition of impairment losses in the future could be required based on a new methodology for measuring impairments prescribed by these pronouncements. The revised standards include transition rules and requirements for identification, valuation and recognition of a much broader list of intangibles as part of business combinations than prior practice, most of which will continue to be amortized. The potential prospective impact of these pronouncements on the Company's financial statements will depend on whether or not the Company enters into business combination transactions in the future. If so, the Company expects that the amount and timing of non-cash charges related to intangibles acquired in business combinations will change significantly from prior practice. In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. It requires an entity to recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate can be made. The Company is required to adopt this statement in its fiscal year 2003. The Company does not believe that this statement will materially impact its results of operations. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for segments to be disposed of. This statement applies to recognized long-lived assets of an entity to be held and used or to be disposed of. This statement does not apply to goodwill, intangible assets not being amortized, financial instruments, and deferred tax assets. This statement requires an impairment loss to be recorded for assets to be held and used when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. An asset that is classified as held for sale shall be recorded at the lower of its carrying amount or fair value less cost to sell. The Company is required to adopt this statement for the first quarter of 2002. The Company does not believe that this statement will materially impact its results of operations. 6 Reclassifications Certain prior year balances have been reclassified to conform to the current year presentation. 2. Inventory Inventory includes the cost of raw materials, direct labor and manufacturing overhead, and is stated at the lower of cost (first-in, first-out) or market. Inventory as of September 30, 2001 and December 31, 2000, consisted of the following:
September 30, December 31, 2001 2000 -------------- -------------- (Unaudited) (In Thousands) Raw materials $ 3,596 $ 5,544 Work in progress 33 1 Finished goods 4,546 3,484 -------------- -------------- $ 8,175 $ 9,029 ============== ==============
The reserve for inventory was $383,000 and $283,000 as of September 30, 2001 and December 31, 2000, respectively. 3. Earnings Per Share Basic earnings per share is computed by dividing the net income by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is determined by dividing the net income by the sum of the weighted average number of common shares outstanding and if not anti-dilutive, the effect of outstanding stock options and/or other common stock equivalents determined utilizing the treasury stock method. Potentially dilutive common stock options excluded from the calculation of dilutive income per share because they were anti-dilutive, totaled 47,836 and 107,927 for the three months ended September 30, 2001 and 2000, respectively, and 88,950 and 58,302 shares for the nine months ended September 30, 2001 and 2000, respectively. A reconciliation of the numerators and denominators used in computing earnings per share is as follows:
Three months ended September 30, (In thousands, except per share amounts) ---------------------------------------------------------------- 2001 2000 ------------------------------- ------------------------------- Income Shares Per Share Income Shares Per Share Basic EPS--- $ 2,145 18,960 $ 0.11 $ 2,016 19,230 $ 0.10 Effect of dilutive securities: Stock purchase plan -- 8 -- -- 11 -- Stock options outstanding -- 1,132 -- -- 1,069 -- -------- -------- -------- -------- -------- -------- Diluted EPS--- $ 2,145 20,100 $ 0.11 $ 2,016 20,310 $ 0.10 ======== ======== ======== ======== ======== ========
Nine months ended September 30, (In thousands, except per share amounts) --------------------------------------------- ------------------- 2001 2000 ------------------------------- ------------------------------- Income Shares Per Share Income Shares Per Share Basic EPS--- $ 5,996 18,990 $ 0.32 $ 4,218 19,220 $ 0.22 Effect of dilutive securities: Stock purchase plan -- 3 -- -- 32 -- Stock options outstanding -- 967 (.02) -- 1,218 (.01) -------- -------- -------- -------- -------- -------- Diluted EPS--- $ 5,996 19,960 $ 0.30 $ 4,218 20,470 $ 0.21 ======== ======== ======== ======== ======== ========
7 4. Stockholders' Equity In the third quarter of 2001, the Company repurchased 142,500 shares of outstanding common stock (now classified as treasury stock) at a cost of $2,136,000 and during the third quarter of 2000, 184,000 shares were repurchased at a cost of $2,174,000. PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECTRALINK CORPORATION AND SUBSIDIARY This Form 10-Q contains forward looking statements within the context of section 21E of the Securities Exchange Act of 1934, as amended. Each and every forward looking statement involves a number of risks and uncertainties which are either described in this report or in those risk factors specifically delineated and described in Part 2 Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, which was filed with the U.S. Securities and Exchange Commission on March 20, 2001 ("2000 Form 10-K"). The actual results that the Company achieves may differ materially from those described in any forward looking statement due to such risks and uncertainties. The Company has identified by * BOLD FACE * various sentences within this Form 10-Q which are believed to contain forward looking statements. Additionally, words such as "believes", "anticipates", "expects", "intends", and similar expressions are intended to identify forward looking statements, but are not the exclusive means of identifying such statements. The Company undertakes no obligation to revise any forward looking statements in order to reflect events or circumstances that may arise after the date of this report. BUSINESS DESCRIPTION The Company commenced operations in April 1990 to design, manufacture and sell unlicensed digital wireless telephone communication systems for businesses. The Company's primary sales efforts are currently focused on home improvement and other retail store chains, hospitals, nursing homes, distribution centers, manufacturing facilities, corporate offices and education facilities. The Company sells its systems in the United States, Canada, Mexico and Europe through its direct sales force, telecommunications equipment distributors, and certain specialty dealers. Effective December 23, 1999, the Company incorporated SpectraLink International Corporation in Delaware, as a wholly owned subsidiary of the Company. Since inception, the Company has expended considerable effort and resources developing its wireless telephone systems, building its direct and indirect channels of distribution, and managing the effects of rapid growth. This rapid growth has required the Company to significantly increase the scale of its operations, including the hiring of additional personnel in all functional areas, and has resulted in significantly higher operating expenses. THE COMPANY ANTICIPATES THAT ITS OPERATING EXPENSES WILL CONTINUE TO INCREASE. EXPANSION OF THE COMPANY'S OPERATIONS MAY CAUSE A SIGNIFICANT STRAIN ON THE COMPANY'S MANAGEMENT, FINANCIAL AND OTHER RESOURCES. THE INABILITY OF THE COMPANY TO MANAGE ADDITIONAL GROWTH, SHOULD IT OCCUR, COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 8 RESULTS OF OPERATIONS The following table sets forth unaudited results of operations for the three month and nine month periods ended September 30, 2001 and 2000, as a percentage of net sales in each of these periods. This data has been derived from unaudited consolidated financial statements. Statement of Operations Data:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ----------------------- 2001 2000 2001 2000 ------- ------- ------- ------ Product Sales, net 83.4% 84.7% 83.9% 85.1% Service Sales 16.6% 15.3% 16.1% 14.9% Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Product Sales 23.7% 26.4% 24.0% 28.5% Cost of Service Sales 7.7% 7.7% 8.4% 7.3% Total Cost of Sales 31.4% 34.1% 32.4% 35.8% Gross Profit 68.6% 65.9% 67.6% 64.2% Operating Expenses: Research and Development 9.4% 8.2% 8.8% 8.7% Marketing and Selling 33.9% 33.1% 35.0% 36.0% General and Administrative 5.4% 5.3% 5.5% 5.7% Total Operating Expenses 48.7% 46.6% 49.3% 50.4% Income from Operations 19.9% 19.3% 18.3% 13.8% Investment Income and Other, net 2.7% 3.6% 2.6% 3.7% Income Before Income Taxes 22.6% 22.9% 20.9% 17.5% Income Tax Expense 8.5% 8.6% 7.8% 6.5% Net Income 14.1% 14.3% 13.1% 11.0%
9 SPECTRALINK CORPORATION AND SUBSIDIARY THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 Product Sales, net. The Company derives its product revenue principally from the sale of wireless, on-premises telephone systems. Product sales for the three months ended September 30, 2001, increased by 6.1% to $12,678,000 from $11,953,000 for the same period last year. Product sales for the nine months ended September 30, 2001 increased by 17.4% to $38,455,000 from $32,752,000 for the same period last year. The increase in sales was mainly due to increased product sales through dealers and distributors, and increased penetration of the education, healthcare and commercial markets. Service Sales. The Company derives its service revenue principally from the installation and service of wireless, on-premises telephone systems. Service sales for the three months ended September 30, 2001, increased by 17.1% to $2,531,000 from $2,162,000 for the same period last year. Service sales for the nine months ended September 30, 2001 increased by 28.7% to $7,379,000 from $5,733,000 for the same period last year. The increase in service sales was mainly due to increased revenue from maintenance contracts and installations. The customer mix shows a relatively equal increase in the percentage of indirect sales compared to the decrease in the percentage of direct sales for the three months and nine months ended September 30, 2001 and 2000. The following table details the sales to different customer types as a percentage of total net sales:
Customer Mix Table (As a Percentage of Net Sales) ---------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Customer Type: Indirect Sales 52.5% 49.9% 56.7% 51.3% Direct Sales 30.9% 34.8% 27.2% 33.8% Service Sales 16.6% 15.3% 16.1% 14.9% ---------- ---------- ---------- ---------- Total Net Sales 100.0% 100.0% 100.0% 100.0% ========== ========== ========== ==========
The following table summarizes sales to major customers:
Sales to Major Customers (As a Percentage of Net Sales) ---------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Customer Name: Customer A: 9.7% 9.3% 12.4% 10.3% Customer B: 9.4% 12.1% 7.2% 9.4% Customer C: 8.9% 11.5% 8.4% 9.0%
Gross Profit. The Company's cost of sales consists primarily of direct material, direct labor, service expenses, and manufacturing overhead. Gross profit increased by 12.2% to $10,430,000 for the three months ended September 30, 2001, from $9,297,000 for the same period last year. Gross profit increased by 25.3% to $30,974,000 for the nine months ended September 30, 2001 from $24,726,000 for the same period last year. For the three months and nine months ended September 30, 2001, gross profit margin (gross profit as a percentage of net sales) increased to 68.6% from 65.9% and to 67.6% from 64.2%, respectively. The increase in gross profit margin as a percentage of sales was mainly due to the increase in sales, lower material cost and a product mix favoring large systems and sales to the commercial market. 10 Research and Development. Research and development expenses consist primarily of employee costs, professional services and supplies necessary to develop, enhance and reduce the cost of the Company's systems. Research and development expenses increased by 23.1% to $1,428,000 for the three months ended September 30, 2001, from $1,160,000 for the same period last year, representing 9.4% and 8.2%, respectively, of net sales. Research and development increased by 20.1% to $4,030,000 from $3,356,000 for the same period last year, representing 8.8% and 8.7% of net sales for the nine months ended September 30, 2001 and 2000, respectively. THE COMPANY EXPECTS TO MAINTAIN ITS CURRENT LEVEL OF SPENDING ON RESEARCH AND DEVELOPMENT AS A PERCENTAGE OF REVENUE. Research and development expenses in both periods were associated with new product development, improvements to existing products, and manufacturing process improvements. The increase in the percent of sales was due to an increase in headcount, which resulted from hiring additional research and development personnel and the corresponding recruiting costs to hire these personnel. Marketing and Selling. Marketing and selling expenses consist primarily of salaries and other expenses for personnel, commissions, travel, advertising, trade shows and market research. Sales and marketing expenses increased by 10.3% to $5,151,000 for the three months ended September 30, 2001, from $4,671,000 for the same period last year, representing 33.9% and 33.1%, respectively, of net sales. Marketing and selling expenses increased by 15.7% to $16,032,000 for the nine months ended September 30, 2001 from $13,854,000 for the same period last year representing 35.0% and 36.0%, respectively, of net sales. The increase in dollars spent was primarily due to the continuing development of the education market as well as costs associated with penetrating new markets. General and Administrative. General and administrative expenses consist primarily of salaries and other expenses for management, finance, accounting, contract administration, order processing, investor relations, and human resources, as well as legal and other professional services. General and administrative expenses increased by 9.3% to $823,000 for the three months ended September 30, 2001, from $753,000 for the same period last year, representing 5.4% and 5.3%, respectively, of net sales. General and administrative expenses increased by 15.8% to $2,523,000 for the nine months ended September 30, 2001 from $2,179,000 for the same period last year, representing 5.5% and 5.7%, respectively, of net sales. The increase in dollars spent was primarily a result of increasing the Company's infrastructure to support a higher volume of sales and future growth, which resulted in increased salaries, and general business matters. The decrease in percent of sales was due to economies of scale resulting from increased sales. Investment Income and Other (Net). Investment income is the result of the Company's investments in money market, investment-grade debt securities, government securities, and corporate bonds. Investment income and other decreased by 21.1% to $404,000 for the three months ended September 30, 2001, from $512,000 for the same period last year, representing 2.7% and 3.6%, respectively, of net sales. Investment income and other decreased by 14.7% to $1,204,000 for the nine months ended September 30, 2001 from $1,412,000 for the same period last year, representing 2.6% and 3.7%, respectively, of net sales. The decrease in investment income and other was primarily due to a decrease in interest rates in 2001. Income Tax. The Company's income tax expense was $1,287,000 for the three months ended September 30, 2001, compared to $1,209,000 for the same period last year and $3,597,000 for the nine months ended September 30, 2001 compared to $2,531,000 for the same period last year. The increase was primarily related to increased sales and income from operations of the Company. The Company's operating expenses are based in part on its expectations of future sales, and the Company's expense levels are generally determined in advance of sales. THE COMPANY CURRENTLY PLANS TO CONTINUE TO EXPAND AND INCREASE ITS OPERATING EXPENSES IN AN EFFORT TO GENERATE AND SUPPORT ADDITIONAL FUTURE REVENUE. If sales do not materialize in a quarter as expected, the Company's results of operations for that quarter would be adversely affected. Net income may be disproportionately affected by a reduction of revenues because only a small portion of the Company's expenses varies with its revenue. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has funded its operations with cash provided by operations, supplemented by equity financing and leases on capital equipment. As of September 30, 2001, the Company had $35,054,000 of cash, cash equivalents and investments in marketable securities. For the nine months ended September 30, 2001, the Company generated cash from operations of $7,852,000, which was a direct result of net income of $5,996,000 and an income tax benefit from the exercise of stock options, reduced principally by increases in accounts receivable and decreases in accounts payable. Investing activities provided cash of 11 $7,990,000 consisting primarily of maturities of investments in marketable securities, net of reinvestments and purchases of property and equipment of $1,026,000. The Company used $3,587,000 of cash in financing activities during the nine months ended September 30, 2001, which was a direct result of purchases of 532,500 shares of its outstanding common stock (now classified as treasury stock) at a cost of $5,691,000. The use of cash to repurchase common stock was offset by proceeds of $2,104,000 received from stock option exercise and shares issued from the employee stock purchase plan. As of September 30, 2001, the Company had working capital of $52,437,000 compared to $49,339,000 at December 31, 2000. The increase in working capital occurred primarily from cash flows from operations. As of September 30, 2001, the Company's current ratio (ratio of current assets to current liabilities) was 7.9:1, compared with a current ratio of 6.9:1 as of December 31, 2000. THE COMPANY BELIEVES THAT ITS CURRENT CASH, CASH EQUIVALENTS AND INVESTMENTS IN MARKETABLE SECURITIES, AND CASH GENERATED FROM OPERATIONS WILL BE SUFFICIENT, BASED ON THE COMPANY'S PRESENTLY ANTICIPATED NEEDS TO FUND NECESSARY CAPITAL EXPENDITURES, TO PROVIDE ADEQUATE WORKING CAPITAL, AND TO FINANCE THE COMPANY'S EXPANSION FOR THE FORESEEABLE FUTURE. THERE CAN BE NO ASSURANCE THAT ANY ADDITIONAL FINANCING WILL BE AVAILABLE TO THE COMPANY ON ACCEPTABLE TERMS, OR AT ALL, WHEN REQUIRED BY THE COMPANY. IF EQUITY SECURITIES ARE ISSUED TO RAISE ADDITIONAL FUNDS, FURTHER DILUTION TO THE EXISTING STOCKHOLDERS WILL RESULT. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". These statements prohibit pooling-of-interests accounting for transactions initiated after June 30, 2001, require the use of the purchase method of accounting for all combinations after June 30, 2001 and establish a new accounting standard for goodwill acquired in a business combination. It continues to require recognition of goodwill as an asset, but does not permit amortization of goodwill as previously required by APB Opinion No. 17 "Intangible Assets". Furthermore, certain intangible assets that are not separable from goodwill will also not be amortized. However, goodwill and other intangible assets will be subject to periodic (at least annual) tests for impairment and recognition of impairment losses in the future could be required based on a new methodology for measuring impairments prescribed by these pronouncements. The revised standards include transition rules and requirements for identification, valuation and recognition of a much broader list of intangibles as part of business combinations than prior practice, most of which will continue to be amortized. The potential prospective impact of these pronouncements on the Company's financial statements will depend on whether or not the Company enters into business combination transactions in the future. If so, the Company expects that the amount and timing of non-cash charges related to intangibles acquired in business combinations will change significantly from prior practice. The Company does not believe that these statements will currently have an impact. In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. It requires an entity to recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate can be made. The Company is required to adopt this statement in its fiscal year 2003. The Company does not believe that this statement will materially impact its results of operations. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for segments to be disposed of. This statement applies to recognized long-lived assets of an entity to be held and used or to be disposed of. This statement does not apply to goodwill, intangible assets not being amortized, financial instruments, and deferred tax assets. This statement requires an impairment loss to be recorded for assets to be held and used when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. An asset that is classified as held for sale shall be recorded at the lower of its carrying amount or fair value less cost to sell. The Company is required to adopt this statement for the first quarter of 2002. The Company does not believe that this statement will materially impact its results of operations. 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Company due to adverse changes in financial and commodity market prices and rates. The Company is exposed to market risk in the areas of changes in United States interest rates. These exposures are directly related to its normal operating and funding activities. As of September 30, 2001, the Company has not used derivative instruments or engaged in hedging activities. INTEREST RATE RISK As part of the Company's cash management strategy, at September 30, 2001, the Company had short-term investments of $2,006,000 consisting mainly of U.S. Treasury and government agency securities and corporate debt securities. The Company has the intent and the ability to hold these investments to maturity and thus have classified these investments, which are stated at amortized cost as "held-to-maturity." The Company has completed a market risk sensitivity analysis of these investments based on an assumed 1% increase in interest rates. If market interest rates had increased 1% during the three months and nine months ended September 30, 2001, the Company would have experienced an unrealized loss of approximately $9,000 and $49,000, respectively, on these investments. This is only an estimate. Any actual loss due to an increase in interest rates could differ from this estimate. 13 SPECTRALINK CORPORATION Part II Other Information Item 6 Exhibits and Reports on Form 8-K (a) Exhibits No exhibits are filed with this Report. Exhibits filed with the Company's 2000 Form 10-K constitute those exhibits currently required to be on file. The reader should refer to the 2000 Form 10-K under Part IV, Item 14, for a list of those exhibits. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. 14 SPECTRALINK CORPORATION SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SPECTRALINK CORPORATION Date: November 5, 2001 By: /s/ Nancy K. Hamilton Nancy K. Hamilton, Principal Financial and Accounting Officer and on behalf of the Registrant 15