UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2003
or
| o |
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-28180
SPECTRALINK CORPORATION
| 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
(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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
Applicable only to corporate issuers:
As of October 31, 2003, there were 18,790,155 shares outstanding of SpectraLink Corporation’s Common Stock - par value $0.01.
SPECTRALINK CORPORATION AND SUBSIDIARY
INDEX
| Page | ||||||||
| Part I | Financial Information |
|||||||
| Item 1 | Condensed Consolidated Financial Statements |
|||||||
Condensed Consolidated Balance Sheets at
September 30, 2003 and December 31, 2002 (Unaudited) |
3 | |||||||
Condensed Consolidated Statements of Income for the
Three Months and Nine Months Ended September 30, 2003 and 2002 (Unaudited) |
4 | |||||||
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002 (Unaudited) |
5 | |||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) |
6 | |||||||
| Item 2 | Management’s Discussion and Analysis of Financial Condition and
Results of Operations |
10 | ||||||
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk |
15 | ||||||
| Item 4 | Controls and Procedures |
22 | ||||||
| Part II | Other Information |
|||||||
| Item 1 | Legal Proceedings |
23 | ||||||
| Item 6 | Exhibits and Reports on Form 8-K |
|||||||
(a) Exhibits |
24 | |||||||
(b) Form 8-K |
24 | |||||||
| Signatures | 25 | |||||||
| Certifications | 27 | |||||||
2
PART I - FINANCIAL INFORMATION
ITEM 1
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPECTRALINK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
| September 30, | December 31, | ||||||||||
| 2003 | 2002 | ||||||||||
| ASSETS | |||||||||||
CURRENT ASSETS: |
|||||||||||
Cash and cash equivalents |
$ | 50,002 | $ | 44,211 | |||||||
Trade accounts receivable, net of allowance of $341 and $311, respectively |
13,234 | 11,143 | |||||||||
Income taxes receivable |
1,192 | 105 | |||||||||
Inventory, net of allowance of $627 and $651, respectively |
7,473 | 7,449 | |||||||||
Other |
1,941 | 1,773 | |||||||||
Total current assets |
73,842 | 64,681 | |||||||||
PROPERTY AND EQUIPMENT, at cost: |
|||||||||||
Furniture and fixtures |
2,288 | 1,632 | |||||||||
Equipment |
8,862 | 7,240 | |||||||||
Leasehold improvements |
977 | 865 | |||||||||
| 12,127 | 9,737 | ||||||||||
Less – accumulated depreciation |
(8,086 | ) | (7,224 | ) | |||||||
Net property and equipment |
4,041 | 2,513 | |||||||||
OTHER |
502 | 397 | |||||||||
TOTAL ASSETS |
$ | 78,385 | $ | 67,591 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
CURRENT LIABILITIES: |
|||||||||||
Accounts payable |
$ | 1,487 | $ | 1,023 | |||||||
Accrued payroll, commissions and employee benefits |
2,617 | 2,069 | |||||||||
Accrued sales, use and property taxes |
640 | 512 | |||||||||
Accrued warranty expenses |
411 | 274 | |||||||||
Other accrued expenses and liabilities |
2,265 | 1,564 | |||||||||
Deferred revenue |
6,258 | 5,281 | |||||||||
Total current liabilities |
13,678 | 10,723 | |||||||||
LONG-TERM LIABILITIES |
266 | 178 | |||||||||
TOTAL LIABILITIES |
13,944 | 10,901 | |||||||||
STOCKHOLDERS’ EQUITY: |
|||||||||||
Preferred stock, 5,000 shares authorized, none issued and outstanding |
— | — | |||||||||
Common stock, $0.01 par value, 50,000 shares authorized, 22,697 and 22,130 shares
issued, respectively, and 18,768 and 18,648 shares outstanding, respectively |
226 | 221 | |||||||||
Additional paid-in capital |
69,564 | 63,763 | |||||||||
Retained earnings |
24,045 | 18,412 | |||||||||
Treasury stock, 3,929 shares and 3,482 shares, respectively, at cost |
(29,394 | ) | (25,706 | ) | |||||||
TOTAL STOCKHOLDERS’ EQUITY |
64,441 | 56,690 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 78,385 | $ | 67,591 | |||||||
The accompanying notes to condensed financial statements are an integral part of these condensed consolidated
statements.
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, | ||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
SALES: |
|||||||||||||||||||
Product Sales, net |
$ | 14,500 | $ | 11,958 | $ | 40,672 | $ | 35,349 | |||||||||||
Service Sales |
3,843 | 3,359 | 10,875 | 9,066 | |||||||||||||||
Net Sales |
18,343 | 15,317 | 51,547 | 44,415 | |||||||||||||||
COST OF SALES: |
|||||||||||||||||||
Cost of Product Sales |
4,164 | 3,491 | 11,644 | 10,836 | |||||||||||||||
Cost of Service Sales |
1,883 | 1,875 | 5,193 | 4,780 | |||||||||||||||
Total Cost of Sales |
6,047 | 5,366 | 16,837 | 15,616 | |||||||||||||||
Gross Profit |
12,296 | 9,951 | 34,710 | 28,799 | |||||||||||||||
OPERATING EXPENSES: |
|||||||||||||||||||
Research and Development |
1,908 | 1,622 | 5,912 | 4,764 | |||||||||||||||
Marketing and Selling |
5,775 | 5,098 | 16,879 | 15,586 | |||||||||||||||
General and Administrative |
1,009 | 917 | 3,066 | 2,874 | |||||||||||||||
Total Operating Expenses |
8,692 | 7,637 | 25,857 | 23,224 | |||||||||||||||
INCOME FROM OPERATIONS |
3,604 | 2,314 | 8,853 | 5,575 | |||||||||||||||
INVESTMENT INCOME AND OTHER: |
|||||||||||||||||||
Interest Income |
96 | 167 | 334 | 484 | |||||||||||||||
Other Income (Expense), net |
(29 | ) | (24 | ) | (102 | ) | (46 | ) | |||||||||||
Total Investment Income and Other |
67 | 143 | 232 | 438 | |||||||||||||||
INCOME BEFORE INCOME TAXES |
3,671 | 2,457 | 9,085 | 6,013 | |||||||||||||||
INCOME TAX EXPENSE |
1,395 | 934 | 3,452 | 2,285 | |||||||||||||||
NET INCOME |
$ | 2,276 | $ | 1,523 | $ | 5,633 | $ | 3,728 | |||||||||||
BASIC EARNINGS PER SHARE (Note 4) |
$ | 0.12 | $ | 0.08 | $ | 0.30 | $ | 0.20 | |||||||||||
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING |
18,530 | 18,910 | 18,490 | 19,050 | |||||||||||||||
DILUTED EARNINGS PER SHARE (Note 4) |
$ | 0.12 | $ | 0.08 | $ | 0.30 | $ | 0.19 | |||||||||||
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING |
19,500 | 19,110 | 19,020 | 19,340 | |||||||||||||||
The accompanying notes to condensed financial statements are an integral part of these condensed consolidated
statements.
4
SPECTRALINK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended | ||||||||||
| September 30, | ||||||||||
| 2003 | 2002 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||
Net income |
$ | 5,633 | $ | 3,728 | ||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||
Depreciation and amortization |
862 | 826 | ||||||||
Income tax benefit from the exercise of stock options |
1,374 | 184 | ||||||||
Provision for bad debts |
34 | 209 | ||||||||
Provision for excess and obsolete inventory |
474 | 163 | ||||||||
Amortization of premium on investments in marketable securities |
— | 4 | ||||||||
Changes in assets and liabilities - |
||||||||||
(Increase) decrease in trade accounts receivable |
(2,125 | ) | 1,952 | |||||||
Increase in inventory |
(498 | ) | (208 | ) | ||||||
(Increase) decrease in other assets and income taxes receivable |
(1,360 | ) | 1,755 | |||||||
Increase in accounts payable |
464 | 11 | ||||||||
Increase in accrued liabilities, income taxes payable and
deferred revenue |
2,462 | 1,363 | ||||||||
Net cash provided by operating activities |
7,320 | 9,987 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||
Purchases of property and equipment |
(2,262 | ) | (673 | ) | ||||||
Maturity of investments in marketable securities |
— | 1,000 | ||||||||
Net cash (used in) provided by investing activities |
(2,262 | ) | 327 | |||||||
CASH FLOWS FROM
FINANCING ACTIVITIES: |
||||||||||
Principal payments under long-term obligation |
(11 | ) | — | |||||||
Proceeds from exercises of common stock options |
4,135 | 920 | ||||||||
Proceeds from issuances of common stock |
297 | 311 | ||||||||
Purchases of treasury stock |
(3,688 | ) | (6,619 | ) | ||||||
Net cash provided by (used in) financing activities |
733 | (5,388 | ) | |||||||
INCREASE IN CASH AND CASH EQUIVALENTS |
5,791 | 4,926 | ||||||||
CASH AND CASH EQUIVALENTS, beginning of period |
44,211 | 37,242 | ||||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 50,002 | $ | 42,168 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||||
Cash paid for income taxes |
$ | 3,171 | $ | 113 | ||||||
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING
ACTIVITIES: |
||||||||||
Assets acquired under long-term obligation |
$ | 128 | $ | — | ||||||
The accompanying notes to condensed financial statements are an integral part of these condensed consolidated
statements.
5
SPECTRALINK CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements as of September 30, 2003 and December 31, 2002, and for the three and nine months ended September 30, 2003 and 2002, have been prepared from the books and records of SpectraLink Corporation and SpectraLink International Corporation (together “SpectraLink” or “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 SpectraLink’s financial position, results of operations and cash flows for the periods presented. The results of operations for the periods ended September 30, 2003, are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2003.
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, 2002, which are included in SpectraLink’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 SpectraLink’s annual financial statements.
2. Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion (APB) No. 25 (APB No. 25), “Accounting for Stock Issued to Employees”. Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation” defines a fair value based method of accounting for stock options and similar equity instruments. As allowed by SFAS 123, the Company has continued to apply APB No. 25 to account for its employee stock based compensation plans and has adopted the disclosure requirements of SFAS 123 and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, an amendment of SFAS 123. Had the Company determined compensation expense for its stock-based compensation plans based on fair value at the date of grant under SFAS 123, the Company’s consolidated net income, and basic and diluted earnings per share, would have been the pro forma amounts as follows:
| Three months ended | Nine months ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
| (in thousands, except per | (in thousands, except per | |||||||||||||||||
| share amounts) | share amounts) | |||||||||||||||||
Net Income, as reported |
$ | 2,276 | $ | 1,523 | $ | 5,633 | $ | 3,728 | ||||||||||
Deduct stock based employee compensation
expense under the fair value based method,
net of related tax effect: |
||||||||||||||||||
Compensation expense for stock options |
(579 | ) | (741 | ) | (1,748 | ) | (2,291 | ) | ||||||||||
Compensation expense for the stock
purchase plan |
(41 | ) | (43 | ) | (122 | ) | (139 | ) | ||||||||||
Net Income, pro forma |
$ | 1,656 | $ | 739 | $ | 3,763 | $ | 1,298 | ||||||||||
Earnings Per Share: |
||||||||||||||||||
Basic – as reported |
$ | 0.12 | $ | 0.08 | $ | 0.30 | $ | 0.20 | ||||||||||
Basic – pro forma |
$ | 0.09 | $ | 0.04 | $ | 0.20 | $ | 0.07 | ||||||||||
Diluted – as reported |
$ | 0.12 | $ | 0.08 | $ | 0.30 | $ | 0.19 | ||||||||||
Diluted – pro forma |
$ | 0.09 | $ | 0.04 | $ | 0.20 | $ | 0.07 | ||||||||||
6
3. 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, 2003 and December 31, 2002, consisted of the following: