-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OX0X8wgtJauenBhLgl8kSOU4fFWyU+e5i/zIxEbVVz8wGY5CGunNqqPscdGf44Hb 7zsB8Hdj9j/JcR5By07WxA== 0000950134-99-010178.txt : 19991117 0000950134-99-010178.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950134-99-010178 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRALINK CORP CENTRAL INDEX KEY: 0000894268 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 841141188 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28180 FILM NUMBER: 99755033 BUSINESS ADDRESS: STREET 1: 5755 CENTRAL AVENUE STREET 2: SUITE 202E CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3034405330 MAIL ADDRESS: STREET 1: 5755 CENTRAL AVENUE STREET 2: SUITE 202E CITY: BOULDER STATE: CO ZIP: 80301 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1999 1 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, 1999 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, 1999 there were outstanding 18,722,667 shares of SpectraLink Corporation Common Stock - par value $.01. 2 SPECTRALINK CORPORATION INDEX Part I Financial Information Page Item 1 Financial Statements Balance Sheets at September 30, 1999 (Unaudited) and December 31, 1998 3 Income Statements Three months and nine months ended September 30, 1999 and 1998 (Unaudited) 4 Statements of Cash Flows Nine months ended September 30, 1999 and 1998 (Unaudited) 5 Notes to 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 13 (a) Exhibits 27 Financial Data Schedule (b) Form 8-K None
2 3 SPECTRALINK CORPORATION BALANCE SHEETS (In thousands)
ASSETS September 30, December 31, 1999 1998 ------------ ------------ (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 5,838 $ 9,019 Short-term investments 10,917 13,903 Trade accounts receivable, net of allowance for doubtful accounts of $398 and $355, respectively 10,330 10,170 Inventory (Note 2) 5,222 5,123 Other 1,354 607 ------------ ------------ Total current assets 33,661 38,822 ------------ ------------ INVESTMENT IN GOVERNMENT SECURITIES 8,955 1,993 PROPERTY AND EQUIPMENT, at cost: Furniture and fixtures 1,282 1,330 Equipment 4,556 4,247 Leasehold improvements 718 638 ------------ ------------ 6,556 6,215 Less - Accumulated depreciation (4,091) (3,435) ------------ ------------ Net property and equipment 2,465 2,780 OTHER 778 121 ------------ ------------ TOTAL ASSETS $ 45,859 $ 43,716 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 387 $ 820 Accrued payroll, commissions, and employee benefits 1,585 1,345 Accrued sales and use taxes 345 332 Accrued warranty expenses 425 398 Other accrued expenses 191 262 Deferred revenue 1,925 1,871 ------------ ------------ Total current liabilities 4,858 5,028 LONG-TERM LIABILITIES 226 190 ------------ ------------ Total liabilities 5,084 5,218 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock 201 198 Additional paid-in capital 49,927 49,515 Accumulated deficit (4,661) (8,472) Treasury stock, at cost (Note 4) (4,692) (2,743) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 40,775 38,498 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,859 $ 43,716 ============ ============
The accompanying notes to financial statements are an integral part of these statements. 3 4 SPECTRALINK CORPORATION INCOME STATEMENTS (In thousands, Except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended ------------------ ----------------- September 30, September 30, September 30, September 30, ------------- ------------- ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- NET SALES $ 10,372 $ 9,567 $ 29,966 $ 25,125 COST OF SALES 3,852 4,159 11,016 10,948 ------------ ------------ ------------ ------------ Gross profit 6,520 5,408 18,950 14,177 OPERATING EXPENSES Research and development 1,000 967 3,110 2,801 Marketing and selling 3,585 3,505 10,971 10,132 General and administrative 621 516 1,882 1,546 ------------ ------------ ------------ ------------ Total operating expenses 5,206 4,988 15,963 14,479 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS 1,314 420 2,987 (302) INVESTMENT INCOME AND OTHER, net 375 356 1,025 1,121 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 1,689 776 4,012 819 INCOME TAX EXPENSE 84 47 201 49 ------------ ------------ ------------ ------------ NET INCOME $ 1,605 $ 729 $ 3,811 $ 770 ============ ============ ============ ============ BASIC EARNINGS PER SHARE $ 0.09 $ 0.04 $ 0.20 $ 0.04 ============ ============ ============ ============ BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 18,750 19,370 18,850 19,230 ============ ============ ============ ============ DILUTED EARNINGS PER SHARE $ 0.08 $ 0.04 $ 0.20 $ 0.04 ============ ============ ============ ============ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 19,640 19,680 19,340 19,720 ============ ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements. 4 5 SPECTRALINK CORPORATION STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine months ended Nine months ended September 30, 1999 September 30, 1998 ------------------ ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,811 $ 770 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 659 834 Changes in assets and liabilities: Increase in accounts receivable, net (160) (505) (Increase) decrease in inventory (99) 22 Increase in other assets (1,405) (159) (Decrease) increase in accounts payable (433) 800 Increase in other accrued liabilities 301 319 ------------ ------------ Net cash provided by operating activities 2,674 2,081 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (347) (1,181) Proceeds from disposal of property and equipment 4 5 Purchases of investments (17,976) (8,025) Maturity of investments 14,000 12,000 Purchases of treasury stock (1,949) (316) ------------ ------------ Net cash (used in) provided by investing activities (6,268) 2,482 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of incentive common stock options 153 175 Proceeds from sale of common stock 260 265 ------------ ------------ Net cash provided by financing activities 413 440 ------------ ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,181) 5,003 CASH AND CASH EQUIVALENTS, beginning of period 9,019 5,674 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 5,838 $ 10,677 ============ ============
The accompanying notes to financial statements are an integral part of these statements. 5 6 SPECTRALINK CORPORATION NOTES TO FINANCIAL STATEMENTS September 30, 1999 (Unaudited) 1. Basis of Presentation The accompanying financial statements as of September 30, 1999 and for the quarters and nine months ended September 30, 1999 and 1998 have been prepared from the books and records of SpectraLink Corporation, Inc. (the "Company") and are unaudited. In management's opinion, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. Interim results are not necessarily indicative of results for a full year. The financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 1998 presented in the Company's filings with the Securities and Exchange Commission. 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 Pronouncement In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments and hedging activity. SFAS No. 133 requires recognition of all derivative instruments on the balance sheet as either assets or liabilities and measurement at fair value. Changes in the derivative's fair value will be recognized currently in earnings unless specific hedge accounting criteria are met. Gains and losses on derivative hedging instruments must be recorded in either other comprehensive income or current earnings, depending on the nature of the instrument. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - An Amendment of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 137 delays the effective date of SFAS No. 133 to financial quarters and financial years beginning after June 15, 2000. The Company is currently assessing the effect of adopting SFAS No. 133 on its financial statements and plans to adopt the statement on January 1, 2001. 2. Inventories Inventories include the cost of raw materials, direct labor and manufacturing overhead, and are stated at the lower of cost (first-in, first-out) or market. Inventories at September 30, 1999 and December 31, 1998 consisted of the following:
1999 1998 ---------- ---------- (In Thousands) Raw materials $ 2,339 $ 2,715 Work in process 3 3 Finished goods 2,880 2,405 ---------- ---------- $ 5,222 $ 5,123 ========== ==========
3. Earnings Per Share Basic Earnings Per Share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Potential dilution of securities exercisable into common stock was computed using the treasury stock method based on the average fair market value of the stock. The following table sets forth a reconciliation of the earnings per share calculation. 6 7 SPECTRALINK CORPORATION NOTES TO FINANCIAL STATEMENTS September 30, 1999 (Unaudited)
Three months ended September 30, Nine months ended September 30, ------------------------------------------------------- --------------------------------------------------- 1999 1998 1999 1998 -------------------------- --------------------------- -------------------------- ------------------------ Income Shares Per Income Shares Per Income Shares Per Income Shares Per -------- ------- Share ------- -------- Share -------- -------- Share -------- -------- Share -------- --------- -------- ------ Basic EPS--- $ 1,605 18,750 $ 0.09 $ 729 19,370 $ 0.04 $ 3,811 18,850 $ 0.20 $ 770 19,230 $ 0.04 Effect of dilutive securities: Stock purchase plan 15 20 22 80 Stock options outstanding 875 290 468 410 -------- -------- -------- ------- -------- --------- -------- -------- -------- -------- -------- ------ Diluted EPS--- $ 1,605 19,640 $ 0.08 $ 729 19,680 $ 0.04 $ 3,811 19,340 $ 0.20 $ 770 19,720 $ 0.04 -------- -------- -------- ------- -------- --------- -------- -------- -------- -------- -------- ------
4. Stockholders' Equity In the third quarter of 1999, the Company repurchased 45,000 shares of Common Stock at a cost of $207,000 compared to zero shares in the third quarter of 1998. In the first nine months of 1999 the company repurchased 448,125 shares of Common Stock at a cost of $1,949,000 compared to 85,697 shares at a cost of $316,000, for the same period of the previous year. 7 8 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECTRALINK CORPORATION 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 including those risk factors specifically delineated and described in part 2 item 6 of the Company's 1998 Form 10-KSB, filed March 25, 1999 ("1998 Form 10-KSB"). The actual results that the Company achieves may differ materially from any forward looking statements due to such risks and uncertainties. The Company has identified by * bold face * various sentences within this Form 10-Q which 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. READINESS FOR THE YEAR 2000 Many existing computer systems, applications software, and other control devices, rely on only two digits to identify the year, without considering the impact of the upcoming change in the century. As a result, such systems and applications could fail or create erroneous results unless corrected so that they can process data related to the Year 2000 and beyond. The Company relies on information technology systems, applications and devices in operating and monitoring all major aspects of its business, including financial systems (such as general ledger, payroll and accounts payable modules), customer service, manufacturing, infrastructure, embedded computer chips, networks, telecommunications equipment and end products. The Company also relies, directly or indirectly, on the external systems, software and devices of business enterprises such as customers, suppliers, utilities, creditors, financial organizations, consultants, and governmental entities, both domestic and international, for accurate exchange of data. THE COMPANY BELIEVES THAT IT IS TAKING REASONABLE STEPS TO CATALOG AND ADDRESS THOSE MATTERS IN BOTH ITS INFORMATION TECHNOLOGY SYSTEMS AND IN OTHER EQUIPMENT WITH EMBEDDED MICROPROCESSORS THAT COULD CAUSE A SERIOUS BREACH IN ITS BUSINESS AND OPERATIONS DUE TO YEAR 2000 ISSUES. SPECIFICALLY, WITH RESPECT TO ITS INFORMATION TECHNOLOGY SYSTEMS, THE COMPANY HAS ASSESSED EACH ITEM OF SOFTWARE AND HAS COMPLETED 95% OF THE REMEDIATION NECESSARY FOR SUCH INFORMATION TECHNOLOGY SYSTEMS TO BE YEAR 2000 COMPLIANT. WITH RESPECT TO NON-INFORMATION TECHNOLOGY SYSTEMS (SUCH AS THE COMPANY'S TELEPHONE SYSTEMS AND SECURITY SYSTEM), THE COMPANY HAS ASSESSED EACH ITEM OF SOFTWARE AND HAS COMPLETED 100% OF THE REMEDIATION NECESSARY FOR SUCH NON-INFORMATION TECHNOLOGY SYSTEMS TO BE YEAR 2000 COMPLIANT. ALL TESTING IS EXPECTED TO BE COMPLETED BY NOVEMBER 30, 1999. AT THIS POINT, THE COMPANY BELIEVES THAT ALL OF ITS MISSION-CRITICAL INFORMATION TECHNOLOGY AND NON-INFORMATION TECHNOLOGY SYSTEMS WILL BE YEAR 2000 COMPLIANT ON TIME. HOWEVER, DELAYS IN THE IMPLEMENTATION OF REMEDIATION PROGRAMS FOR NON-COMPLIANT SYSTEMS OR A FAILURE BY THE COMPANY TO FULLY IDENTIFY ALL YEAR 2000 DEPENDENCIES IN THE COMPANY'S SYSTEMS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 8 9 SPECTRALINK CORPORATION Quarters and Nine months ended September 30, 1999 and 1998 The Company is also communicating with its major customers (including its distributors), suppliers and financial institutions to assess the potential impact on the Company's operations of such third parties failure to become Year 2000 compliant. This process has not been completed; based upon responses to date, it appears that many of the Company's customers and suppliers have indicated only that they have in place Year 2000 readiness programs, without specifically representing that they will be Year 2000 compliant in a timely manner. A failure by any of the Company's major customers or suppliers to be Year 2000 compliant, or a failure by the Company to fully identify its dependencies on the information technology systems of certain suppliers or customers could have a material adverse effect on the Company's business, financial condition and results of operations. FOR EXAMPLE, THE COMPANY WOULD EXPERIENCE A MATERIAL ADVERSE IMPACT ON ITS BUSINESS IF SIGNIFICANT SUPPLIERS OF ELECTRICAL COMPONENT PARTS, SEMI-CONDUCTORS, PRINTED CIRCUIT BOARDS, OTHER RAW MATERIALS OR TELECOMMUNICATIONS SYSTEMS FAIL TO PROVIDE THE COMPANY IN A TIMELY MANNER WITH NECESSARY INVENTORIES OR SERVICES DUE TO YEAR 2000 SYSTEMS FAILURES. LIKEWISE, IF THE COMPANY'S CUSTOMERS ARE UNABLE TO PROCESS PURCHASE ORDERS, PAYMENT CHECKS, OR OTHER MISSION CRITICAL PAPERWORK DUE TO YEAR 2000 PROBLEMS, SPECTRALINK'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. The Company's Year 2000 program includes developing contingency plans to protect its business and operations from Year 2000-related interruptions from third party non-compliance. The Company has completed its risk assessment and contingency plan. The plan includes back-up procedures, identification of alternate suppliers (where possible), and increases in back up inventory levels. BASED UPON ITS CURRENT ASSESSMENT OF ITS OWN INFORMATION AND NON-INFORMATION TECHNOLOGY SYSTEMS, THE COMPANY DOES NOT BELIEVE IT IS NECESSARY TO DEVELOP AN EXTENSIVE CONTINGENCY PLAN FOR THOSE SYSTEMS. THERE CAN BE NO ASSURANCES, HOWEVER, THAT ANY OF THE COMPANY'S CONTINGENCY PLANS WILL BE SUFFICIENT TO HANDLE ALL PROBLEMS OR ISSUES WHICH MAY ARISE. THE COSTS INCURRED BY THE COMPANY YEAR TO DATE ARE LESS THAN $10,000. BASED UPON CURRENT ESTIMATES, THE COMPANY DOES NOT BELIEVE THAT THE TOTAL COST OF PREPARING FOR YEAR 2000 PROGRAMS WILL HAVE A MATERIAL ADVERSE IMPACT ON THE COMPANY'S RESULTS OF OPERATIONS OR FINANCIAL CONDITION. THE STATEMENTS SET FORTH HEREIN CONCERNING YEAR 2000 ISSUES WHICH ARE NOT HISTORICAL FACTS, ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS. IN PARTICULAR, THE COSTS ASSOCIATED WITH THE COMPANY'S YEAR 2000 PROGRAMS AND THE TIME-FRAME IN WHICH THE COMPANY PLANS TO COMPLETE YEAR 2000 MODIFICATIONS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES. THESE ESTIMATES WERE DEVELOPED FROM INTERNAL ASSESSMENTS AND ASSUMPTIONS OF FUTURE EVENTS. THESE ESTIMATES MAY BE ADVERSELY AFFECTED BY THE SCARCITY OF PERSONNEL AND SYSTEM RESOURCES, AND BY THE FAILURE OF SIGNIFICANT THIRD PARTIES TO PROPERLY ADDRESS YEAR 2000 ISSUES. THEREFORE, THERE CAN BE NO GUARANTEE THAT ANY ESTIMATES, OR OTHER FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED, AND ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THOSE CONTEMPLATED. 9 10 SPECTRALINK CORPORATION Quarters and Nine months ended September 30, 1999 and 1998 RESULTS OF OPERATIONS The following table sets forth unaudited results of operations from the three month and nine month periods ended September 30, 1999 and September 30, 1998 as a percentage of sales in each of these periods. This data has been derived from unaudited financial statements. STATEMENT OF OPERATIONS DATA:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Sales 37.1% 43.5% 36.7% 43.6% Gross Profit 62.9% 56.5% 63.3% 56.4% Operating Expenses: Research and Development 9.6% 10.1% 10.4% 11.1% Marketing and Selling 34.6% 36.6% 36.6% 40.3% General and Administrative 6.0% 5.4% 6.3% 6.2% Total Operating Expenses 50.2% 52.1% 53.3% 57.6% Income (Loss) from Operations 12.7% 4.4% 10.0% (1.2%) Investment Income and Other, net 3.6% 3.7% 3.4% 4.5% Income Before Income Taxes 16.3% 8.1% 13.4% 3.3% Income Tax Expense 0.8% 0.5% 0.7% 0.2% Net Income 15.5% 7.6% 12.7% 3.1%
Net Sales. The Company derives its revenue principally from the sale, installation and service of wireless, on-premises telephone systems. Net sales for the three months ended September 30, 1999 increased by 8.4% to $10,372,000 from $9,567,000 for the comparable three months in 1998. Net sales for the nine months ended September 30, 1999 increased by 19.3% to $29,966,000 from $25,125,000 for the comparable nine months in 1998. The increase in sales was mainly due to (i) increased sales from dealers and distributors, (ii) increased service revenue from maintenance contracts, and (iii) increased penetration of the commercial markets. 10 11 SPECTRALINK CORPORATION Nine months ended September 30, 1999 and 1998 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 nine months ended September 30, 1999 and 1998. The following table details the sales to different customer types as a percentage of total net sales: Customer Mix Table (As a Percentage of Sales):
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1999 1998 1999 1998 --------- -------- -------- -------- Customer Type: Direct Sales 52.6% 63.8% 55.9% 71.1% Indirect Sales 30.0% 26.7% 28.2% 15.7% Service Sales 17.4% 9.5% 15.9% 13.2% --------- -------- -------- -------- Total 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 Sales):
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1999 1998 1999 1998 --------- -------- -------- -------- Customer Name: Customer A: 13.99% 31.10% (x) 22.5%
(x) Sales to this customer in this period were less than 10% of net sales. No other customers accounted for 10% or more of sales in any of these periods. Gross Profit. For the third quarter and first nine months of 1999 gross profit increased by 20.6% and 33.7% from the same periods last year. For the three months and nine months ended September 30, 1999 gross profit margin (gross profit as a percentage of net sales) increased to 62.9% from 56.5% and to 63.3% from 56.4%, respectively, in the same periods last year. The increase in gross profit margin as a percentage of sales was mainly due to (i) decreased material cost and (ii) lower average unit cost that is associated with volume orders. Research and Development. For the three months and nine months ended September 30, 1999 research and development increased by 3.4% and 11.0% from the same periods last year, representing 9.6% and 10.4%, respectively, of net sales. THE COMPANY EXPECTS TO MAINTAIN ITS CURRENT LEVEL OF SPENDING ON RESEARCH AND DEVELOPMENT AS A PERCENTAGE OF REVENUE. Research and development efforts for both years were concentrated on new product development, improvements to existing products, and manufacturing process improvements. 11 12 SPECTRALINK CORPORATION Nine months ended September 30, 1999 and 1998 Marketing and Selling. For the third quarter and first nine months of 1999 sales and marketing expenses increased by 2.3% and 8.3% from the same period last year, representing 34.6% and 36.6% versus 36.6% and 40.3% from the same period last year, respectively, of net sales. The increase in dollars spent was primarily the result of adding sales and marketing personnel to increase sales and market penetration. The decrease in marketing and sales costs as a percentage of sales was the result of economies of scale resulting from increased sales and the increased sales effort in utilizing our reseller channels. General and Administrative. For the three months and nine months ended September 30, 1999 general and administrative expenses increased by 20.3% and 21.7% from the same period last year, representing 6.0% and 6.3%, respectively, of net sales. The increase in expense was associated with an increase in other outside services, and accruals for executive bonuses. Investment Income and Other (Net). Investment income is the result of the Company's investments in money market securities, investment-grade debt securities, and government securities. Other income is generated primarily from purchase discounts. For the three months ended September 30, 1999 investment income and other increased by 5.3% to $375,000 from $356,000 for the same period last year, representing 3.6% and 3.7%, respectively, of net sales. For the first nine months of 1999 investment income and other decreased by 8.6% to $1,025,000 from $1,121,000 for the same period last year, representing 3.4% and 4.5%, respectively, of net sales. The decrease in investment income and other was primarily due to fewer funds available for investment due to the Company's stock repurchases. Income Tax. The Company's effective tax rate was approximately 5.0% for three and nine months periods ended September 30, 1999, respectively. This rate was determined based on the anticipated 1999 results of operations and the utilization of available tax loss carryforwards. As of December 31, 1998, the Company had deferred tax assets of approximately $3,522,000, which were reduced by a valuation allowance to $0. The realizability of net deferred tax assets is dependent upon the Company's ability to generate future taxable income. The Company's estimate of realizable deferred tax assets may change in the near future. Net Income. Diluted net income per share for the three months and nine months ended September 30, 1999 was $0.08 and $0.20, respectively. In 1998, diluted net income per share for the same periods was $0.04. Net income in 1999 increased over 1998 due to higher sales and an increase in operating profits as a percentage of net sales. EXPANSION RISK. 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. THE Y2K ISSUE COULD HAVE AN ADVERSE IMPACT ON SALES. 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. THE COMPANY IS CURRENTLY INTRODUCING A NEW PRODUCT. DURING THIS PRODUCT TRANSITION, THE COMPANY WILL EXPERIENCE DELAYS IN ORDERS AS CUSTOMERS WAIT FOR THE NEWER PRODUCT. ADDITIONALLY, THE SUCCESSFUL INTRODUCTION OF OUR NEW 802.11-COMPLIANT NETLINK WIRELESS TELEPHONE SYSTEM WILL BE DEPENDENT UPON OUR WIRELESS LAN PARTNERS PERFORMING DEVELOPMENT WORK TO IMPLEMENT SPECTRALINK VOICE PRIORITY (SVP). IN ADDITION, IT IS IMPORTANT THAT THE COMPANY ESTABLISH EFFECTIVE SALES DISTRIBUTION CHANNELS FOR THE PRODUCT. LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 1999 the Company generated $2,674,000 of cash from operating activities, generated $413,000 in proceeds from the sales of common stock and expended $1,949,000 to repurchase outstanding shares of common stock and $347,000 for capital equipment. Together these activities resulted in a net increase in cash, short-term investments and government securities of $795,000 to a nine month ending balance of $25,710,000. The Company's working capital decreased to $28,803,000 from $33,794,000 as of December 31, 1998 mainly due to the use of cash to repurchase common stock and investment classified as long term but with maturities between one and two years. 12 13 THE COMPANY BELIEVES THAT ITS CURRENT CASH, CASH EQUIVALENTS AND INVESTMENTS (INCLUDING INVESTMENTS IN GOVERNMENT SECURITIES WITH MATURITIES GREATER THAN ONE YEAR AND THEREFORE CLASSIFIED AS LONG TERM ASSETS), 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. 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. Historically and as of September 30, 1999, the company has not used derivative instruments or engaged in hedging activities. The Company invests excess funds in high-grade bonds and commercial paper on which the Company monitors interest rates frequently and as the investments mature. These funds have maturity dates of two years or less. The Company does not believe that reasonably possible near-term changes in interest rates will result in a material effect on future earnings, fair values or cash flows of the Company. SPECTRALINK CORPORATION PART II - OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. 13 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 10, 1999 By: /s/ NANCY K. HAMILTON -------------------------------------- Nancy K. Hamilton, Principal Financial and Accounting Officer and on behalf of the Registrant 14 15 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 5,838 10,917 10,330 398 5,222 33,661 6,556 4,091 45,859 4,858 0 0 0 201 40,574 45,859 10,372 10,372 3,852 3,852 5,206 0 0 1,689 84 1,605 0 0 0 1,605 0.09 0.08
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