<PAGE> 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 June 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)
<TABLE>
<S> <C>
Delaware 84-1141188
(State or other jurisdiction of incorporation or organization) (IRS Employer
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)
</TABLE>
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 June 30, 1999 there were outstanding 18,744,348 shares of SpectraLink
Corporation Common Stock - par value $.01.
<PAGE> 2
SPECTRALINK CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Item 1 Financial Statements
Balance Sheets at
June 30, 1999 (Unaudited) and December 31, 1998 3
Statements of Operations
Three months and six months ended June 30, 1999 and 1998 (Unaudited) 4
Statements of Cash Flows
Six months ended June 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 4 Submission of Matters to a Vote of Security Holders 13
Item 6 Exhibits and Reports on Form 8-K 15
(a) Exhibits
27 Financial Data Schedule
(b) Form 8-K
None
</TABLE>
2
<PAGE> 3
SPECTRALINK CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,117 $ 9,019
Short-term investments 13,878 13,903
Trade accounts receivable, net of allowance for doubtful
accounts of $360 and $355, respectively 10,634 10,170
Inventory (Note 2) 5,494 5,123
Other 1,174 607
-------- --------
Total current assets 38,297 38,822
-------- --------
INVESTMENT IN GOVERNMENT SECURITIES 2,998 1,993
PROPERTY AND EQUIPMENT, at cost:
Furniture and fixtures 1,385 1,330
Equipment 4,578 4,247
Leasehold improvements 728 638
-------- --------
6,691 6,215
Less - Accumulated depreciation (4,030) (3,435)
-------- --------
Net property and equipment 2,661 2,780
OTHER 833 121
-------- --------
TOTAL ASSETS $ 44,789 $ 43,716
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 542 $ 820
Accrued payroll, commissions, and employee benefits 1,477 1,345
Accrued sales and use taxes 347 332
Accrued warranty expenses 450 398
Other accrued expenses 139 262
Deferred revenue 2,321 1,871
-------- --------
Total current liabilities 5,276 5,028
LONG-TERM LIABILITIES 216 190
-------- --------
Total liabilities 5,492 5,218
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 200 198
Additional paid-in capital 49,847 49,515
Accumulated deficit (6,265) (8,472)
Treasury stock, at cost (Note 4) (4,485) (2,743)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 39,297 38,498
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,789 $ 43,716
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
3
<PAGE> 4
SPECTRALINK CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 10,504 $ 8,442 $ 19,594 $ 15,559
COST OF SALES 3,531 4,041 7,164 6,789
-------- -------- -------- --------
Gross profit 6,973 4,401 12,430 8,770
OPERATING EXPENSES
Research and development 1,042 976 2,110 1,834
Marketing and selling 3,990 3,458 7,386 6,626
General and administrative 680 432 1,261 1,032
-------- -------- -------- --------
Total operating expenses 5,712 4,866 10,757 9,492
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 1,261 (465) 1,673 (722)
INVESTMENT INCOME AND OTHER, net 323 377 650 765
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 1,584 (88) 2,323 43
INCOME TAX EXPENSE (BENEFIT) 110 (4) 116 2
-------- -------- -------- --------
NET INCOME (LOSS) $ 1,474 $ (84) $ 2,207 $ 41
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE $ 0.08 $ (0.00) $ 0.12 $ 0.00
======== ======== ======== ========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 18,790 19,240 18,910 19,210
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.08 $ (0.00) $ 0.12 $ 0.00
======== ======== ======== ========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 19,080 19,240 19,170 19,740
======== ======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
4
<PAGE> 5
SPECTRALINK CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,207 $ 41
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 599 526
Changes in assets and liabilities
Increase in accounts receivable, net (464) (1,466)
(Increase) decrease in inventory (371) 508
(Increase) decrease in other assets (1,279) 23
(Decrease) increase in accounts payable (278) 186
Increase in other accrued liabilities 552 269
------- -------
Net cash provided by operating activities 966 87
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (484) (892)
Proceeds from disposal of property and equipment 4 4
Purchases of investments (9,980) (7,046)
Maturity of investments 9,000 7,000
Purchases of treasury stock (1,742) (316)
------- -------
Net cash used in investing activities (3,202) (1,250)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of incentive common stock options 74 170
Proceeds from sale of common stock 260 261
------- -------
Net cash provided by financing activities 334 431
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (1,902) (732)
CASH AND CASH EQUIVALENTS, beginning of period 9,019 5,674
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 7,117 $ 4,942
======= =======
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
5
<PAGE> 6
SPECTRALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. Basis of Presentation
The accompanying financial statements as of June 30, 1999 and December 31, 1998
and for the quarters and six months ended June 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, 2000.
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 June 30, 1999 and December 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
(Unaudited) (Audited)
(In Thousands)
<S> <C> <C>
Raw materials $ 2,397 $ 2,715
Work in process 29 3
Finished goods 3,068 2,405
------- -------
$ 5,494 $ 5,123
======= =======
</TABLE>
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.
6
<PAGE> 7
SPECTRALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------------------------------- ----------------------------------------------------
1999 1998 1999 1998
------------------------- ----------------------- ------------------------- -----------------------
Per Per Per Per
Income Shares Share Loss Shares Share Income Shares Share Income Shares Share
------ ------ ----- ---- ------ ----- ------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS--- $1,474 18,790 $0.08 $ (84) 19,240 $0.00 $ 2,207 18,910 $0.12 $ 41 19,210 $0.00
Effect of dilutive
securities:
Stock purchase plan 67 -- -- 55
Stock options
outstanding 223 -- 260 475
------- ------ ----- ----- ------ ----- ------- ------ ----- ---- ------ -----
Diluted EPS--- $ 1,474 19,080 $0.08 $ (84) 19,240 $0.00 $ 2,207 19,170 $0.12 $ 41 19,740 $0.00
------- ------ ----- ----- ------ ----- ------- ------ ----- ---- ------ -----
</TABLE>
Assumed conversions of approximately 635,000 shares were not included in the
calculation for diluted EPS in the three months ending June 30, 1998 as they
would have been anti-dilutive due to the net loss for that period.
4. Stockholders' Equity
In the second quarter of 1999, the Company repurchased 236,245 shares of Common
Stock at a cost of $1,026,000 compared to 38,697 shares at a cost of $139,000 in
the second quarter of 1998. The 38,697 shares purchased in the second quarter of
1998, included 15,630 unvested shares of restricted stock purchased from a
former director of the company pursuant to a pre-existing agreement, and 23,067
shares purchased from a broker and were related to a cashless exercise of stock
options by a former executive officer.
7
<PAGE> 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 80% 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 90% OF THE
REMEDIATION NECESSARY FOR SUCH NON-INFORMATION TECHNOLOGY SYSTEMS TO BE YEAR
2000 COMPLIANT. ALL TESTING IS EXPECTED TO BE COMPLETED BY SEPTEMBER 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
<PAGE> 9
SPECTRALINK CORPORATION
Quarters and Six months ended June 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 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 TO DATE
RELATED TO ITS YEAR 2000 ACTIVITIES HAVE NOT BEEN MATERIAL TO THE COMPANY. 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
<PAGE> 10
SPECTRALINK CORPORATION
Quarters and Six months ended June 30, 1999 and 1998
RESULTS OF OPERATIONS
The following table sets forth unaudited results of operations from the three
month and six month periods ended June 30, 1999 and June 30, 1998 as a
percentage of sales in each of these periods. This data has been derived from
unaudited consolidated financial statements.
Statement of Operations Data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 33.6% 47.9% 36.6% 43.6%
Gross Profit 66.4% 52.1% 63.4% 56.4%
Operating Expenses:
Research and Development 9.9% 11.6% 10.8% 11.8%
Marketing and Selling 38.0% 41.0% 37.7% 42.6%
General and Administrative 6.5% 5.1% 6.4% 6.6%
------ ------ ------ ------
Total Operating Expenses 54.4% 57.6% 54.9% 61.0%
------ ------ ------ ------
Income (Loss) from Operations 12.0% (5.5%) 8.5% (4.6%)
Investment Income and Other, net 3.1% 4.5% 3.3% 4.9%
Income (Loss) Before Income Taxes 15.1% (1.0%) 11.8% 0.3%
Income Tax Expense (Benefit) 1.1% (0.0%) 0.6% 0.0%
Net Income (Loss) 14.0% (1.0%) 11.2% 0.3%
</TABLE>
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 June 30, 1999 increased by 24.4% to $10,504,000 from
$8,442,000 for the comparable three months in 1998. Net sales for the six months
ended June 30, 1999 increased by 25.9% to $19,594,000 from $15,559,000 for the
comparable six months in 1998. During the second quarter of 1999, the Company
shipped its first 802.11 compliant NetLink Wireless Telephone System. 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
<PAGE> 11
SPECTRALINK CORPORATION
Six months ended June 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 three
months and six months ended June 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):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Customer Type:
- -------------
Direct Sales 56.9% 72.6% 57.7% 71.1%
Indirect Sales 27.0% 15.7% 27.3% 15.7%
Service Sales 16.1% 11.7% 15.0% 13.2%
------ ------ ------ ------
Total Sales 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
The following table summarizes sales to major customers:
Sales to Major Customers
(As a Percentage of Sales):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Customer Name:
- --------------
Customer A: 11.9% (x) (x) (x)
Customer B: (x) 27.1% (x) 17.3%
</TABLE>
(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 second quarter and first six months of 1999 gross profit
increased by 58.4% and 41.7% from the same periods last year. For the three
months and six months ended June 30, 1999 gross profit margin (gross profit as a
percentage of net sales) increased to 66.4% from 52.1% and to 63.4% from 56.4%,
respectively, in the same periods last year. The increase in gross profit was
primarily due to the increased revenue. 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 six months ended June 30,
1999 research and development increased by 6.8% and 15.0% from the same periods
last year, representing 9.9% and 10.8%, 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
<PAGE> 12
SPECTRALINK CORPORATION
Six months ended June 30, 1999 and 1998
Marketing and Selling. For the second quarter and first six months of 1999 sales
and marketing expenses increased by 15.4% and 11.5% from the same period last
year, representing 38.0% and 37.7% versus 41.0% and 42.6% 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 six months ended June 30,
1999 general and administrative expenses increased by 57.4% and 22.2% from the
same period last year, representing 6.5% and 6.4%, respectively, of net sales.
The increase in expense was associated with an increase in bad debts, 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 June 30, 1999 investment income
and other decreased by 14.3% to $323,000 from $377,000 for the same period last
year, representing 3.1% and 4.5%, respectively, of net sales. For the first six
months of 1999 investment income and other decreased by 15.0% to $650,000 from
$765,000 for the same period last year, representing 3.3% and 4.9%,
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 6.9% and 5.0% for
three and six months periods ended June 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. Basic net income per share for the three months and six months ended
June 30, 1999 was $0.08 and $0.12, respectively. In 1998, basic net income per
share for the same periods was $0.00. 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. 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 MAY 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 six months of 1999 the Company generated $966,000 of cash from
operating activities, generated $74,000 in proceeds from the sales of common
stock and expended $1,742,000 to repurchase outstanding shares of common stock
and $484,000 for capital equipment. Together these activities resulted in a net
decrease in cash, short-term investments and government securities of $922,000
to a six month ending balance of $23,993,000. The Company's working capital
decreased to $33,021,000 from $33,794,000 as of December 31, 1998 mainly due to
the use of cash to repurchase common stock.
12
<PAGE> 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 June 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. 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 4. Submission of matters to a Vote of Security Holders
At SpectraLink's Annual Meeting of Stockholders held on May 11, 1999, the
following proposals were adopted by the margins indicated.
1. To elect a Board of Directors to serve until the next Annual Meeting of
Stockholders and until their successors are elected and qualified.
<TABLE>
<CAPTION>
Number of Shares
-----------------------------
Voted For Withheld
---------- --------
<S> <C> <C>
Bruce M. Holland 14,865,666 22,495
Carl D. Carman 14,868,166 19,995
Anthony V. Carollo, Jr. 14,862,566 25,595
Burton J. McMurtry 14,868,166 19,995
F. Gibson Myers, Jr. 14,867,966 20,195
</TABLE>
2. To ratify the selection of Arthur Andersen LLP, independent public
accountants, as auditors for the Company for the fiscal year ending
December 31, 1999. Number of shares voted: For 14,868,729; against 6,425;
Abstained 13,007; broker non-votes 0.
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
<PAGE> 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: August 12, 1999 By: /s/ NANCY K. HAMILTON
----------------------------------
Nancy K. Hamilton,
Principal Financial and
Accounting Officer
and on behalf of the Registrant
14
<PAGE> 15
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FIANANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,117
<SECURITIES> 13,878
<RECEIVABLES> 10,994
<ALLOWANCES> 360
<INVENTORY> 5,494
<CURRENT-ASSETS> 38,297
<PP&E> 6,691
<DEPRECIATION> 4,030
<TOTAL-ASSETS> 44,789
<CURRENT-LIABILITIES> 5,276
<BONDS> 0
0
0
<COMMON> 200
<OTHER-SE> 39,097
<TOTAL-LIABILITY-AND-EQUITY> 44,789
<SALES> 10,504
<TOTAL-REVENUES> 10,504
<CGS> 3,531
<TOTAL-COSTS> 3,531
<OTHER-EXPENSES> 5,712
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,584
<INCOME-TAX> (110)
<INCOME-CONTINUING> 1,474
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,474
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
