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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission File Number: 0-28180
SPECTRALINK CORPORATION
(Name of Registrant as specified in its charter)
DELAWARE 84-1141188
(State or other (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization)
5755 CENTRAL AVENUE
BOULDER, COLORADO 80301
(303) 440-5330
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within the past 60 days prior to the date of filing: $481,539,800 as of March 8,
2000.
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 19,261,592 shares of common
stock, $.01 par value, were outstanding as of March 8, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13 of Part III of this Form 10-K are incorporated by
reference from the issuer's definitive proxy statement to be filed with the
Securities and Exchange Commission no later than 120 days after the end of the
issuer's fiscal year.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
SpectraLink Corporation ("SpectraLink" or the "Company") was incorporated in
Colorado in April 1990, and was reincorporated in Delaware in March 1996.
Effective December 23, 1999, the Company incorporated SpectraLink International
Corporation in Delaware as a wholly owned subsidiary of SpectraLink Corporation.
SpectraLink designs, manufactures and sells on-premises Wireless Telephone
Systems which complement existing telephone systems by providing mobile
communications in a building or campus environment. SpectraLink Wireless
Telephone Systems increase the efficiency of employees by enabling them to
remain in telephone contact while moving throughout the workplace. The Wireless
Telephone System uses a micro-cellular design and interfaces directly with a
PBX, Centrex, or key/hybrid system. It enables users to walk throughout a
facility and make and receive calls on SpectraLink Wireless Telephones. Because
all calls are routed through the corporate phone system, there are no airtime
charges incurred.
SpectraLink supports two Wireless Telephone System product lines. The Link
Wireless Telephone System (Link WTS) is for organizations that need only a
wireless telephone solution for their on-premises mobile workforce. It uses a
proprietary radio infrastructure in the 902-928 MHz radio band. The NetLink
Wireless Telephone System (NetLink WTS) operates over IEEE 802.11-compliant
wireless local area networks (LANs) in the 2400-2483 MHz frequency band. It is
for organizations that want both a wireless voice and wireless data solution on
a single network.
MARKET BACKGROUND
A growing number of business environments require certain employees to have a
high degree of mobility yet remain readily accessible by telephone to customers
or co-workers. Retailers seek competitive advantage by quickly responding to
customers' requests for information and service from employees dispersed
throughout the store. Healthcare workers in clinical settings can benefit from
real-time communications with mobile healthcare professionals in order to
deliver quality healthcare efficiently. Manufacturers and distributors seek to
operate more efficiently by enabling workers in the factory or distribution
center to solve problems or answer questions more rapidly. Service organizations
seek to decrease customer hold or response time by allowing immediate
communications with the person who can solve a problem or answer a question.
MIS, maintenance and other corporate office support personnel can work more
productively if they remain mobile in the workplace without losing
communications contact with other office workers who need their services.
Traditionally, businesses have attempted to maintain communications with mobile,
on-premises employees by using overhead paging systems and electronic pagers.
These indirect types of communication create delays because access to a wired
phone is still needed. Delays are exacerbated in high mobility environments,
such as hospitals, manufacturing facilities and distribution centers, where both
parties may be mobile and repeated pages are required. Additionally, overhead
paging can be difficult to understand and creates ambient noise, which can be
disruptive and stressful.
Alternatives to paging include the use of two-way radios, cordless phones and
traditional cellular phones, all of which have various shortcomings. Two-way
radios do not provide an adequate link to the wireline telephone system.
Cordless phones are typically single-cell systems and have a limited calling
range, and only a limited number of cordless phones can be deployed in a given
area without interfering with each other. Traditional cellular phones often
provide inconsistent indoor reception and, unless specifically designed for
on-premises use, cannot be directly interfaced with a company's PBX system and,
therefore, cannot offer the system's functionality. Furthermore, current monthly
usage fees and airtime charges make cellular phones prohibitively expensive in
many applications.
Products dedicated to unlicensed, on-premises voice applications first appeared
in the 1990s in the 902-928 MHz band in North America. These adjunct products
attach directly to business telephone systems and provide wireless phone
extensions that can be used on the premises. Because these systems are
unlicensed, they can be installed or relocated without prior approval from the
Federal Communications Commission ("FCC"). The 902-928 MHz band in North America
has been set aside for unlicensed products which employ either narrow-band or
spread-spectrum technology. Because systems in the 902-928 MHz band that employ
narrow band technology are required to operate at lower power levels than
spread-spectrum systems, they generally have inferior range and are more
susceptible to interference. Multi-cellular wireless business phone systems that
provide hand-off and systems that restrict wireless phones to a single base
station are available in the 902-928 MHz band. In 1994, the FCC allocated
additional spectrum in the 1900 MHz range for unlicensed on-premises wireless
voice applications. The products that have been introduced for this new spectrum
are commonly referred to as unlicensed personal communications systems (U-PCS).
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In 1997, the Institute of Electrical and Electronics Engineers ("IEEE") approved
its 802.11 specification for a wireless LAN standard operating in the 2400-2483
MHz band. The 802.11 standard specified an "over the air" interface between a
wireless client and a base station or access point, as well as among wireless
clients. The standard allows devices to share a single wireless LAN
infrastructure, including both voice devices developed by SpectraLink and data
devices, thus enabling organizations to provide mobile employees access to both
data and telephone applications over a single network.
SPECTRALINK PRODUCTS
The Link Wireless Telephone System (Link WTS) operates in the 902-928 MHz band
and uses a micro-cellular design consisting of three components: a Master
Control Unit (MCU), Base Stations and Wireless Telephones. The MCU is installed
near the PBX or key/hybrid system, or at the Centrex demarcation location. It
can either interface directly with the analog ports of the host telephone
switching system, or it can connect via a digital interface to certain PBX
systems and key/hybrid systems.
The MCU also connects to small radio transceivers called Base Stations via
twisted-pair telephone wiring. The Base Stations provide the link to the
Wireless Telephone, a six-ounce portable phone with an alphanumeric display. The
Wireless Telephone provides up to four hours of talk time or up to eighty hours
of standby time between battery recharges.
Each Base Station supports multiple users and covers a transmission area in
excess of 50,000 square feet depending on transmission obstructions present in
the building. A call is handed off from one Base Station to another as a user
walks throughout the coverage area. The Link WTS is designed to provide seamless
coverage, enabling real-time hand-off of an active telephone call as the user
walks about.
The NetLink Wireless Telephone System (NetLink WTS) operates in the 2400-2483
MHz band and is compatible with the IEEE 802.11 standard for use on an
802.11-compliant wireless LAN. By adding the NetLink WTS product to an existing
802.11-compliant network provided by a wireless LAN vendor, customers can use a
single network for both wireless voice and data applications. The NetLink WTS
consists of two components: a Telephony Gateway and Wireless Telephones. The
Telephony Gateway is installed near the PBX or key/hybrid system, or at the
Centrex demarcation location. It can either interface directly with the analog
ports of the host telephone switching system, or it can connect via a digital
interface to certain PBX systems and key/hybrid systems.
The Telephony Gateway also connects to the 802.11 wireless LAN through a
10Base-T Ethernet connection. The LAN's wireless radio transceivers, called
access points, receive voice packets in Internet Protocol (IP) form from NetLink
Wireless Telephones using the 802.11 standard, and forwards them to the NetLink
Telephony Gateway. SpectraLink has developed an 802.11-compatible voice
prioritization mechanism for the NetLink WTS that can also be implemented in
802.11 access points to improve voice quality by reducing packet-queuing delays.
A number of LAN access point providers have agreed to implement SpectraLink
Voice Priority ("SVP") technology, including: Aironet Wireless Communications,
BreezeCOM, Inc., Intermec Technologies Corp., Proxim, Inc., Telxon Corporation
and Teklogix International, Inc. As of February 25, 2000 these partners were in
various stages of completion of their SVP implementations.
The NetLink Wireless Telephones weigh six ounces and have an alphanumeric
display. When the NetLink WTS is connected to the phone system using analog
ports, the Wireless Telephone will provide many of the calling features of a
desk phone, including transfer, conference calling and hold. When the system is
digitally interfaced to the phone system, the Wireless Telephone will also
support the advanced features of the host phone system. The NetLink Wireless
Telephone is designed to provide seamless coverage, enabling real-time hand-off
of an active telephone call as the user walks about.
TECHNOLOGY
The Company devotes significant planning and resources to development and use of
advanced technology. This focus on technology is necessary to meet the
requirements for delivery of portability, indoor radio and system performance,
high reliability, low cost and manufacturability. All of SpectraLink's key
technologies are incorporated into the Company's Link and/or NetLink products,
including:
Spread Spectrum Technology. Spread spectrum is a radio frequency transmission
technique in which the transmitted information is spread over a relatively wide
bandwidth. The use of spread spectrum technology makes transmissions more immune
to interference, reduces the possibility of interference with others, provides
privacy against eavesdropping and improves the quality of voice transmission.
While there are many advantages to the spread spectrum technique, it is more
complex to implement than the more commonly used narrowband modulation
techniques. The Link Wireless Telephone System uses a form of spread spectrum
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transmission called frequency hopping, a technique that combines an information
signal with a radio carrier whose frequency assignment changes rapidly in a
pseudo-random manner at the transmitter. The signal resulting from frequency
hopping is decoded at the receiving end using the same pseudo-random frequency
pattern. The NetLink Wireless Telephone System can use either frequency hopping,
or direct sequence spread spectrum technology. Direct sequence spread spectrum
uses a technique whereby a signal is spread over the available band by mixing
the signal data with a much higher data-rate pseudo-random data stream. As with
frequency hopping spread spectrum, the resulting signal is decoded at the
receiving end. The Company believes that its NetLink Wireless Telephone System
is currently the only 802.11-compatible wireless telephone system that supports
both frequency hopping and direct sequence spread spectrum technology.
Radio Technology. SpectraLink has designed radio transceivers and digital
circuits to implement the complex spread spectrum technique at an economical
cost and in a small form factor. The Company's radio transceiver and digital
circuit architectures also minimize power consumption and enhance
manufacturability and reliability.
ASIC Design. SpectraLink's expertise in digital application specific integrated
circuit (ASIC) technology allows its systems to be miniaturized, power-efficient
and cost effective. ASICs are used in the Company's Wireless Telephone, Base
Station, MCU, and Telephony Gateway designs. The Company expects to develop
additional ASICs and to incorporate these devices into future systems.
Wireless Access Protocols. Combining spread spectrum with a micro-cellular
design presents unique challenges as compared to single-link spread spectrum
implementations, such as advanced home wireless telephones or traditional
cellular telephones. To this end, the Company has applied its software design
expertise to develop robust networking that allows multiple users to have
simultaneous telephone access in a spread spectrum radio environment without
interfering with each other. SpectraLink has implemented a sophisticated set of
software resources, including micro-coded software, digital signal processing
software, network architecture software, telephone switching software and user
application software to address many of the unique challenges of in-building
wireless environments, such as interference, multipath degradation, signal
absorption, near/far receiver desensitizing, security, busy hour capacity
demands, and shared operation with other radio systems.
Call Handoff. Critical to the acceptance of on-premises wireless systems by
users accustomed to high-quality telephone performance is a hand-off from cell
to cell which has virtually no disruptive effect on the call in progress.
SpectraLink has developed proprietary software to address the frequent and
unpredictable nature of on-premises inter-cell hand-offs due to interference,
multipath degradation and interior obstructions. Software resident in the
Wireless Telephones automatically selects the best cell among available Base
Stations. The unique digital implementation of the SpectraLink Link Wireless
Telephone results in a seamless hand-off.
Digital Integration. When a SpectraLink system is connected to the phone system
using analog ports, the Wireless Telephone will provide many of the calling
features of a desk phone, including transfer, conference calling and hold. When
the system is digitally interfaced to the phone system, the Wireless Telephone
will also support the advanced features of the host phone system such as calling
party identification or calling party name display. Currently, the Company
supports digital interfaces to the following manufacturers' telephone systems:
Comdial Corporation, Fujitsu Business Communication Systems, Inc., Inter-Tel
Inc., Lucent Technologies Inc., Mitel Corporation, NEC America, Inc., Nortel
Networks Corporation, Siemens AG and Toshiba America Information Systems, Inc.
Application Interface. The SpectraLink Open Application Interface (OAI) enables
SpectraLink Wireless Telephones to be used in conjunction with text messaging
applications. The OAI allows third-party applications to write to the Wireless
Telephone's alphanumeric display, set up calls, and receive user input from the
keypad. Applications have been developed for interfacing with email, in-house
paging systems, nurse-call systems, and industrial alarm and control systems.
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SALES, MARKETING AND CUSTOMER SUPPORT
Sales and Marketing
SpectraLink sells and supports its systems through direct, distributor and
dealer sales forces. This strategy is intended to reduce SpectraLink's
dependence on a single channel and to permit broad marketing of the SpectraLink
systems.
Direct Sales. As of February 25, 2000, the Company had 71 employees in its
direct sales organization. The Company has direct sales offices in the
metropolitan areas of Atlanta, Boston, Charlotte, Chicago, Cincinnati,
Cleveland, Dallas, Denver, Los Angeles, Milwaukee, New York, Philadelphia,
Phoenix, Sacramento, Portland, San Diego, San Francisco, Seattle, Tampa, and
Washington, D.C. Late in 1999 the Company also established a sales office in the
United Kingdom, in preparation for sales of the NetLink Wireless Telephone
System in Europe in the year 2000.
Distributors. SpectraLink distributes the Link WTS product line through a number
of telecommunications distributors in the United States and Canada, currently
including Alltel Communications, Inc., Alphanet Solutions, Inc., Anixter, ATS
Telephone and Data Systems, Inc., Bell Atlantic, BellSouth Communication
Systems, CCA Technologies, Comdial Corporation, Executone Information Systems,
Inc., Fujitsu Business Communication Systems, GTE Communication Systems, Indyme,
Inc., InteCom, Inc, Mitel Telecommunications Systems, Inc., Mobex
Communications, Inc., Norstan, Inc., Panasonic Telecommunications Systems
Company, SBC Communications, Inc., Siemens Information and Communications
Networks, Inc. and Tessco Technologies, Inc. The NetLink WTS product line is
distributed through Tech Data Corporation, Telxon Corporation (OEM
relationship), and Winncom Technologies, Inc. Each of these companies has a
non-exclusive distribution relationship with SpectraLink. The Company does not
restrict its distributors from selling in the same geographical areas.
Dealers. SpectraLink has established a dealer network primarily comprised of
local phone interconnect companies and two-way radio dealers. SpectraLink
dealers have a non-exclusive dealer relationship with SpectraLink. As of
February 25, 2000, the Company's dealer network currently was comprised of 129
dealers in 267 locations.
Other Partners. SpectraLink has developed an 802.11-compatible voice
prioritization mechanism for the NetLink WTS that can also be implemented in
802.11 access points to improve voice quality by reducing packet-queuing delays.
A number of wireless local area network vendors have agreed to implement
SpectraLink Voice Priority ("SVP") technology, including: Aironet Wireless
Communications, BreezeCOM, Inc., Intermec Technologies Corp., Proxim, Inc.,
Telxon Corporation and Teklogix, Inc. As of February 25, 2000 these partners
were in various stages of completion of their SVP implementations.
In 1999 the Company sold its Link WTS and NetLink WTS primarily in the United
States, Canada and Mexico. In the year 2000 SpectraLink will sell its NetLink
WTS in Europe, and may consider selling it in other areas of the world that
permit 802.11 spread spectrum networks in the 2400-2483 MHz band.
Customer Support
The Company has established a customer support department dedicated to planning,
installing and maintaining SpectraLink systems. Customer support personnel are
located at the Company's facilities in Boulder, Atlanta, Charlotte, Chicago and
Washington, D.C. Late in 1999, the Company also established a support office in
the United Kingdom, in preparation for sales and support of the NetLink Wireless
Telephone System in Europe in the year 2000. The customer support department is
involved with the customers during early customer contact, the system
configuration and installation phases, and the on-going warranty period.
The Wireless Telephones, Base Stations, MCUs, and Telephony Gateways are
warranted to be free of defects upon delivery. The Company provides standard
warranty coverage at no cost for a limited period of time. Thereafter, the
customer support department provides various levels of support, based on the
maintenance level selected by the customer.
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CUSTOMER DEPENDENCE
While the Company has a diverse customer base it considers its operations to be
conducted in one operating segment. SpectraLink derives its revenue principally
from the sale, installation, and service of wireless on-premises telephone
systems. The following table summarizes the sales to different customer types as
a percentage of total sales:
For the Years Ended
December 31,
---------------------------------------
Customer Type 1999 1998 1997
------------- ---- ---- ----
Direct Sales 53% 65% 67%
Indirect Sales 32% 23% 25%
Service Sales 15% 12% 8%
--------- --------- ---------
Total Sales 100% 100% 100%
========= ========= =========
SpectraLink's sales to major customers which individually comprised more than
10% of total net sales for the years ended December 31, 1998 and 1997 are
summarized in Footnote 7 in SpectraLink's accompanying notes to the financial
statements. During 1999, the Company did not have a customer that comprised more
than ten percent of sales.
BACKLOG
The Company generally ships its systems promptly upon the receipt of an order.
The Company's backlog of orders is generally less than 30 days at any given
time. Some of the Company's distributors and larger customers place orders for
systems in advance of the scheduled delivery date; however, these orders are
subject to rescheduling or cancellation. As a result, the Company currently does
not consider backlog to be a meaningful indicator of future sales.
COMPETITION
The on-premises wireless telephone system industry is competitive and influenced
by the introduction of new products. The competitive factors affecting the
market for the Company's systems include product functionality and features,
frequency band of operation, ease-of-use, quality of support, product quality
and performance, price and the effectiveness of marketing and sales efforts.
Most of the Company's competitors have significantly greater financial,
technical, research and development, and marketing resources than the Company.
As a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion, sale and support of their products than
the Company. In addition, some purchasers may prefer to buy their wireless
telephone systems from a single source provider, of telephone systems such as
Lucent Technologies, Nortel Networks, or NEC America, all of whom manufacture
and sell PBX or key/hybrid systems. Other purchasers may prefer to buy their
802.11 wireless telephone systems from a single source provider of wireless
LANs, such as Symbol Technologies, who provides 802.11 wireless application
devices, such as bar code scanners, as well as wireless telephones. Because the
Company focuses on wireless on-premises telephone communications, it cannot
serve as the sole source for a complete telephone or data communications system.
There can be no assurance that the Company will be able to compete successfully
in the future.
The Company's product competition falls into four general categories: multi-user
cordless telephone products, unlicensed multi-cell systems, licensed multi-cell
systems, and wireless LAN-based systems. Single-user cordless telephones are not
considered as competing products because of their low user capacity, limited
range, and consumer-grade handset design. The Company also does not regard
public cellular or PCS services as competitors because of their lack of
integration with enterprise telephone systems, inadequate indoor coverage, and
usage-based cost structure. Multi-user cordless telephone systems allow multiple
handsets to operate in the same area without interference on shared or unique
base stations. Some of these systems offer limited hand-off capability to a
secondary base station for additional coverage. Available products include the
Lucent Technologies TransTalk, Siemens Gigaset, and Mobicel Systems DCTS-900.
Unlicensed multi-cell systems are products that offer similar capacity and
functionality as SpectraLink's Link WTS. They operate on unlicensed radio
spectrum with no airtime charges or licensing requirements. Some of these
products are integrated into the host PBX system, allowing the wireless system
to share some of the PBX common equipment and administration. Unlicensed
multi-cell systems are available from Alcatel, ECI Telecom (formerly Tadiran),
Lucent Technologies, NEC America, and Nortel Networks. Licensed multi-cell
systems operate on licensed cellular or PCS frequencies, allowing handsets to be
used on both the in-building wireless system and the public cellular or PCS
network. The in-building network uses low-power base stations connected to the
local PBX to allow handsets to operate as local extensions. Licensed systems are
available from AG Communication Systems (a subsidiary of Lucent Technologies),
Ericsson, and Hughes Network Systems. These systems are marketed in conjunction
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with the cellular or PCS service provider, and are currently being offered by
AT&T Wireless Services, Cellular One Group, and Rogers Cantel. Wireless
LAN-based telephone systems use voice-over-IP (VoIP) technology to carry
packetized voice information over a standards-based wireless LAN. The Company
believes that SpectraLink and Symbol Technologies are the only providers of
wireless LAN-based telephone products. In addition, Texlon Corporation provides
a hand-held wireless device, the PTC-1800, that is a telephone and bar coding
terminal for telephony, messaging, and transaction processing.
The Company considers the existing technologies of overhead and electronic
paging, two-way radios and cordless telephones to be competitive factors as
well. To the extent such a system is already in use, a potential customer may
not be willing or able to make the investment necessary to replace such a system
with a SpectraLink Wireless Telephone System. In addition, there may be
potential customers who choose one of these other technologies because of cost
or their belief that their needs do not require the full functionality provided
by a SpectraLink Wireless Telephone System.
PROPRIETARY RIGHTS
The Company's future success depends, in part, upon its proprietary technology.
The Company relies on a combination of patent, copyright, trade secret and
trademark laws, confidentiality procedures and nondisclosure and other
contractual provisions to protect its proprietary rights. As part of these
confidentiality procedures, the Company enters into confidentiality and
non-disclosure agreements with its employees and limits access to and
distribution of its proprietary information. The Company has been awarded nine
United States patents in the areas of radio frequency and spread spectrum
digital communication, and wireless telephony with various expiration dates,
none earlier than 2011. In addition, the Company has one United States patent
application pending. There can be no assurance that the Company's pending patent
applications will be allowed or that the issued or pending patents will not be
challenged or circumvented by competitors or provide meaningful protection
against competition. The Company may in the future be notified that it is
infringing certain patent and/or other intellectual property rights of others.
Although there are no such pending lawsuits against the Company or unresolved
notices that the Company is infringing intellectual property rights of others,
there can be no assurance that litigation or infringement claims will not occur
in the future.
MANUFACTURING
SpectraLink's manufacturing operations consist primarily of the fabrication and
assembly of components and subassemblies, which are individually tested and
integrated into full systems or shipped as individual items for expansion
orders. In order to facilitate initial start-up and manufacturing process
improvements, the Company conducts in-house prototype development and has
established pilot line capabilities. The Company maintains complete in-house
materials procurement, assembly, testing and quality control functions. The
Company utilizes only a minimal number of subcontract manufacturers to assemble
its components.
The principal components of SpectraLink's systems are unpopulated printed
circuit boards, electronic components, including microprocessors and ASICs, and
metal or plastic housings, all of which are purchased from outside vendors.
Although alternate suppliers are available for most of the components,
qualifying replacement suppliers and receiving components could take several
months. Many components are available only from sole source suppliers and embody
such parties' proprietary technologies. There can be no assurance that any sole
source supplier will continue to provide the required components in sufficient
quantities with adequate quality and at acceptable prices. The Company would be
adversely affected if, in order to develop alternative suppliers, a redesign of
the Company's subassemblies was necessary. Due to competition for parts commonly
used by the telecommunications and computer industries, in certain circumstances
a part will be placed on allocation. In such case, the Company could see a
material adverse effect on its operations, if demand for product considerably
exceeds what is anticipated by the Company. The Company does maintain, or
requires suppliers to maintain, inventory to allow it to fill customer orders
without significant interruption during the period that the Company believes
would be required to obtain alternate supplies of many replacement components.
However, there can be no assurance that the Company will have sufficient
inventory supply to meet every possible contingency. Any shortage or
discontinuation of, or manufacturing defect in, the supply of these components
would have a material adverse effect on the Company's operations.
From January 1996 until May 1997, the Company manufactured and assembled all of
its systems in a leased 11,300 square foot facility located in Boulder,
Colorado. In May 1997, the Company moved its manufacturing operation to its new
corporate headquarters, a 37,000 square foot leased facility in Boulder,
Colorado. In addition, SpectraLink has leased a second facility, a 11,684 square
foot facility in Boulder, Colorado. Since the Company relies on these
manufacturing facilities, a major catastrophe could result in a prolonged
interruption of the Company's business.
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RESEARCH AND PRODUCT DEVELOPMENT
The wireless telecommunications industry is subject to rapid technological
changes, frequent new product introductions and enhancements, product
obsolescence and changes in end-user requirements. The Company believes its
future success and ability to compete in the on-premises wireless telephone
market are largely dependent upon its ability to augment current product lines
and develop, introduce and sell new features and products while maintaining
technological competitiveness through the advancement of its core technologies.
As of February 25, 2000, the Company employed 35 people in support of its
research and development activities. The Company invested approximately
$4,110,000, $3,799,000, and $3,506,000 in 1999, 1998 and 1997, respectively, in
research and development. The Company expects to increase its investment in
research and development. The inability of the Company to introduce in a timely
manner new products or enhancements to existing products that contribute to
sales could have a material adverse effect on the Company's business and
financial condition.
GOVERNMENT REGULATION
The wireless communications industry, regulated by the Federal Communications
Commission (FCC), is subject to changing political, economic and regulatory
influences. Regulatory changes, including changes in the allocation of available
frequency spectrum, could significantly impact the Company's operations.
The 902-928 MHz Band. In 1985, the FCC permitted the use of spread-spectrum
technology under Part 15 Rules in the 902-928 MHz band. Part 15 Rules refer to
the section of the FCC regulations that permit the use of radio-based systems
without requiring the user to obtain an operating license from the FCC. For this
reason, Part 15 Rules permit devices to be deployed expediently without the
inherent delays associated with the traditional radio equipment licensing
procedure. A significant industry has developed around the Part 15 rules for
commercial products. The Company's Link Wireless Telephone Systems are all
certified by the FCC for unlicensed operation under Part 15 Rules in this band.
In the federal regulatory framework, Part 15 spread spectrum systems are
accorded secondary status in the 902-928 MHz band, which means that their
operators must accept interference received and correct any interference caused
to other systems, even if it requires the operator to cease operating in the
band. This status has been modified somewhat by an FCC rule in Docket 93-61,
which established an irrebuttable presumption of non-interference in favor of
Part 15 devices that meet certain requirements. The Company believes its Link
Wireless Telephone System satisfies these requirements. In addition, the Part 15
rules provide SpectraLink with additional flexibility to resolve interference
under certain circumstances.
The 1920-1930 MHz Band. In 1994, the FCC designated a 10 MHz segment from
1920-1930 MHz for isochronous wireless systems such as voice communications.
Wireless Telephone equipment that operates in this range falls under Subpart D
of the Part 15 Rules.
The 2400-2483 MHz band. The FCC permits the use of spread-spectrum technology
under Part 15 Rules in the 2400-2483 MHz band. Part 15 Rules refer to the
section of the FCC regulations that permit the use of radio-based systems
without requiring the user to obtain an operating license from the FCC. For this
reason, Part 15 Rules permit devices to be deployed expediently without the
inherent delays associated with the traditional radio equipment licensing
procedure. The Company's NetLink Wireless Telephone System is certified by the
FCC for unlicensed operation under Part 15 Rules, in this band.
In 1997, the Institute of Electrical and Electronics Engineers ("IEEE") approved
an 802.11 specification for a wireless LAN standard operating in the 2400-2483
MHz band. The 802.11 standard specified an "over the air" interface between a
wireless client and a base station or access point, as well as among wireless
clients. The standard provides interoperability among devices sharing a single
wireless LAN infrastructure, including both voice and data devices, thus
enabling organizations to provide mobile employees access to both data and
telephone applications over a single network. Subsequently, a significant
industry has developed around wireless local area networks in this band. The
802.11 specification is a global standard. Each country that supports the
standard also has a specific certification process which must be undergone
before a product can operate in that country. SpectraLink is involved in a
number of international certification processes.
EMPLOYEES
As of February 25, 2000, the Company employed 266 persons, 254 of who were full
time employees.
7
9
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters and manufacturing, research, and
development activities are situated in Boulder, Colorado in one 37,000 square
foot leased building at 5755 Central Avenue. In addition, the Company has leased
11,684 square feet of manufacturing and office space at 5744 Central Avenue. The
Company also has a leased facility in Boulder, which it previously occupied:
approximately 11,300 square feet at 3220 Prairie Avenue, which is subleased
through 4/10/00. The length of these leases is as follows: (i) the lease for the
5755 Central Avenue facility runs through June 2005, (ii) the lease for the 5744
Central Avenue, as amended, runs through June 2005, (iii) the lease at 3220
Prairie Avenue runs through November 2000 (with certain renewal options). The
Company has short-term leases for its domestic and international sales offices.
The Company believes that the combination of its existing facilities together
with the availability of additional space for lease in the Boulder and other
real estate markets will be adequate to meet its current and foreseeable
facilities needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ Stock Market under the symbol
"SLNK." The following table sets forth for the quarterly periods indicated, the
high and low bid prices for the Company's Common Stock as reported by NASDAQ.
These quotations reflect inter-dealer prices, without retail mark-up, markdown
or commission and may not represent actual transactions.
1999 1998
------------- --------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First quarter $5.000 $3.125 $4.500 $2.750
Second quarter 5.875 3.063 5.500 3.500
Third quarter 7.375 4.125 4.563 2.500
Fourth quarter 17.750 4.313 3.844 2.063
The Company has never declared or paid any cash dividends on its Common Stock.
The Company currently anticipates that it will retain all future earnings for
the expansion and operation of its business and does not anticipate paying cash
dividends in the foreseeable future.
On March 8, 2000, the Company had approximately 148 shareholders of record.
8
10
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are qualified by reference to and should
be read in conjunction with the Company's Financial Statements and Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7. The statement of operations data for the years
ended December 31, 1999, 1998, 1997 and the balance sheet data at December 31,
1999 and 1998 are derived from, and are qualified by reference to, the audited
Financial Statements and Notes included in Item 8. The statement of operations
data for the years ended December 31, 1996 and 1995 and the balance sheet data
at December 31, 1997, 1996 and 1995 are derived from audited financial
statements not included in this Annual Report on Form 10-K.
STATEMENT OF OPERATIONS DATA:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
NET SALES $ 41,169 $ 35,135 $ 27,785 $ 21,491 $ 16,676
COST OF SALES 14,877 14,475 12,767 8,266 8,045
--------- --------- --------- --------- ---------
Gross profit 26,292 20,660 15,018 13,225 8,631
OPERATING EXPENSES:
Research and development 4,110 3,799 3,506 3,073 1,930
Marketing and selling 15,060 13,951 11,458 7,073 4,628
General and administrative 2,424 2,188 2,154 1,590 1,000
--------- --------- --------- --------- ---------
Total operating expenses 21,594 19,938 17,118 11,736 7,558
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 4,698 722 (2,100) 1,489 1,073
INVESTMENT INCOME AND OTHER, net 1,471 1,486 1,536 1,197 163
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 6,169 2,208 (564) 2,686 1,236
INCOME TAX EXPENSE (BENEFIT) (1,765) 133 (4) 134 57
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 7,934 $ 2,075 $ (560) $ 2,552 $ 1,179
========= ========= ========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE (Note 2) $ 0.42 $ 0.11 $ (0.03) $ 0.18 $ 0.32
========= ========= ========= ========= =========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 18,840 19,230 19,120 14,120 3,700
========= ========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE (Note 2) $ 0.41 $ 0.11 $ (0.03) $ 0.14 $ 0.08
========= ========= ========= ========= =========
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 19,500 19,600 19,120 18,560 15,320
========= ========= ========= ========= =========
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Balance Sheet Data:
Cash and Cash Equivalents $ 9,604 $ 9,019 $ 5,674 $ 7,334 $ 1,729
Working Capital 34,933 33,794 27,903 28,813 7,191
Total Assets 52,695 43,716 41,299 40,464 10,026
Long-Term Debt -- -- -- 31 437
Total Stockholders' Equity 46,319 38,498 37,426 38,504 8,004
9
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
BUSINESS DESCRIPTION
SpectraLink commenced operations in April 1990 to design, manufacture and sell
unlicensed digital wireless telephone communication systems for businesses. The
Company sold its first commercial system in June 1992, and has subsequently sold
approximately 5,000 systems and 100,000 phones. SpectraLink's primary sales
efforts are currently focused on home improvement and other retail store chains,
hospitals, nursing homes, distribution centers, manufacturing facilities, and
corporate offices. SpectraLink sells its systems in the United States, Canada,
and Mexico through its direct sales force, telecommunications equipment
distributors, and certain specialty dealers. In the future, the Company will
sell its NetLink WTS in other countries outside the United States. Effective
December 23, 1999, the Company incorporated SpectraLink International
Corporation in Delaware, as a wholly owned subsidiary of SpectraLink.
Since inception, the Company has expanded 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.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net Sales. The Company derives its revenue principally from the sale,
installation, and service of wireless, on-premises telephone systems. Net sales
increased by 17% to $41,169,000 in 1999 from $35,135,000 in 1998. The increase
in sales was mainly due to increased sales from dealers and distributors,
increased service revenue from maintenance contracts, and increased penetration
of commercial markets.
Gross Profit. The Company's cost of sales consists primarily of direct material,
direct labor, service expenses, and manufacturing overhead. Gross profit
increased by 27% to $26,292,000 in 1999 from $20,660,000 in 1998. The Company's
gross profit margin (gross profit as a percentage of net sales) increased to
63.9% in 1999 from 58.8% in 1998. The increase in gross profit margin as a
percentage of sales was mainly due to decreased material cost and lower average
unit cost that is associated with volume orders.
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 8% to $4,110,000 in 1999 from $3,799,000 in 1998,
representing 10.0% 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 expenses in both 1999 and 1998
were associated with new product development, improvements to existing products,
and manufacturing process improvements.
Marketing and Selling. Marketing and selling expenses consist primarily of
salaries and other expenses for personnel, commissions, travel, advertising,
trade shows, and market research. These expenses increased by 8% to $15,060,000
in 1999 from $13,951,000 in 1998, representing 36.6% and 39.7%, respectively, of
net sales. The increase in dollar expense was primarily due to 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. 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 11% to $2,424,000 in 1999 from $2,188,000
in 1998, representing 5.9% and 6.2%, respectively, of net sales. The increase
was primarily associated with the higher volume of production and sales.
Investment Income and Other (Net). Investment income is the result of the
Company's investment in money market, investment-grade debt securities,
government securities, and corporate bonds. Other income is generated primarily
from purchase discounts. There was a nominal change between 1999 and 1998 as the
Company's investment balances have remained constant through 1998 and 1999.
10
12
Income Tax. The Company's net income tax benefit was $(1,765,000) in 1999
compared to a tax provision of $133,000 in 1998. In 1999, the Company recorded
an income tax benefit of $2,641,000 due to the reversal of the valuation
allowance on its deferred tax assets, as management believes that it is more
likely than not that such tax benefits will be realized. Excluding the income
tax benefit, the Company had a tax provision of $876,000 in 1999. The increase
in 1999 was due to the Company recording larger accruals for state and federal
taxes as the Company generated more taxable income. As of December 31, 1999, the
Company had total net operating loss carryforwards of $344,000 and approximately
$1,670,000 of research and development and alternative minimum tax credit
carryforwards available to offset future federal taxable income and liabilities.
The tax credit and net operating loss carryforwards expire between 2007 and 2019
and are subject to examination by the tax authorities.
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 operating expenses varies with its revenue.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net Sales. Net sales increased by 26% to $35,135,000 in 1998 from $27,785,000 in
1997. This increase was predominantly due to the continued growing acceptance of
SpectraLink systems in the marketplace and the as expected improvement in
reseller channels.
Gross Profit. Gross profit increased by 38% to $20,660,000 in 1998 from
$15,018,000 in 1997. The Company's gross profit margin (gross profit as a
percentage of net sales) increased to 58.8% in 1998 from 54.1% in 1997. The
increase in gross profit margin was primarily due to increased efficiencies in
the manufacturing processes, an enhanced reliability and durability of the
Company's products resulting in lower warranty expense, and lower material
costs. These improvements more than offset lower average unit pricing that is
associated with volume orders.
Research and Development. Research and development expenses increased by 8% to
$3,799,000 in 1998 from $3,506,000 in 1997, representing 10.8% and 12.6%,
respectively, of net sales. Research and development expenses increased in 1998
compared to 1997 due to increased focus on new product development and making
improvements to the Company's existing products and manufacturing process
improvements.
Marketing and Selling. These expenses increased by 22% to $13,951,000 in 1998
from $11,458,000 in 1997, representing 39.7% and 41.2%, respectively, of net
sales. The increase in dollar expense was primarily due to adding sales and
marketing personnel to increase sales and market penetration.
General and Administrative. General and administrative expenses increased by 2%
to $2,188,000 in 1998 from $2,154,000 in 1997, representing 6.2% and 7.8%,
respectively, of net sales. The increase was primarily associated with the
higher volume of production and sales.
Investment Income and Other (Net). The decrease in this category from 1998 to
1997 was primarily due to lower interest rates and reduced cash available for
investment in 1998 compared to 1997.
Income Tax. As of December 31, 1998, the Company had total net operating loss
carryforwards of $5,522,000 and approximately $1,169,000 of research and
development and alternative minimum tax credit carryforwards available to offset
future federal taxable income and liabilities. The Company's tax provisions in
1998 and 1997 consist of accruals for state and federal minimum taxes.
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 December 31, 1999 the Company had $28,491,000 of cash, cash equivalents and
investments in marketable securities.
During 1999, the Company generated cash from operations of $4,767,000 which was
a direct result of net income of $7,934,000, which was reduced by changes in the
Company's deferred tax assets, and increases in accounts receivable, inventory
and other assets.
11
13
Investing activities used cash of $3,553,000 consisting primarily of purchases
and maturities of investments and purchases of property and equipment of
$841,000. The Company expects capital expenditures in 2000 to be consistent with
the expenditures in 1999.
The Company used $629,000 of cash in financing activities during 1999. On
October 25, 1999, November 11, 1998 and February 26, 1997, the Board of
Directors authorized SpectraLink to buy back up to 1,000,000, 1,000,000 and
500,000 shares of the common stock, respectively. As of December 31, 1999, the
Company had purchased 1,393,822 shares of common stock at an aggregate purchase
price of $5,090,000 including $2,347,000 used in 1999. The use of cash to
repurchase common stock was offset by proceeds of $1,718,000 received from
exercises of stock options and issuing common stock through the employee stock
purchase plan.
As of December 31, 1999, the Company had working capital of $34,933,000 compared
to $33,794,000 at December 31, 1998. The increase in working capital occurred
primarily from cash flows from operations, offset by investments in long term
marketable securities and the repurchase of common stock. As of December 31,
1999, the Company's current ratio (ratio of current assets to current
liabilities) was 6.7:1, compared with a current ratio of 7.7:1 as of December
31, 1998.
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. There
can be no assurance, however, that the Company will not require additional
financing. 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 issuing equity securities raises additional funds, further dilution
to the existing stockholders will result.
THE YEAR 2000
Computer systems and software must accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, many software and computer
systems that accepted only two digit entries needed to be upgraded in order to
accept dates beginning January 1, 2000. SpectraLink did not experience any
date-related problems with its systems. In addition, the Company has not been
made aware of, nor has experienced, date-related problems with any third-party
software. The Company does not believe that it will incur material costs in the
future because of date-related problems.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 and No. 137
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. It requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measures those
instruments at fair value. 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 does not typically enter into
arrangements that would fall under the scope of Statement No. 133 and thus,
management believes that Statement No. 133 will not significantly affect its
financial condition and results of operations.
Staff Accounting Bulletin No. 101
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application of
the guidance in SAB 101 will be required in the Company's second quarter of
2000. The effects of applying this guidance, if any, will be reported as a
cumulative effect adjustment resulting from a change in accounting principle.
SpectraLink does not expect the adoption of SAB 101 to have a material effect on
the Company's financial statements; however, the final evaluation of SAB 101 is
not yet complete.
12
14
ITEM 7A. 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 December 31, 1999, 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 December 31, 1999,
SpectraLink had short-term investments of $10,938,000 and long-term investments
of $7,949,000 consisting mainly of U.S. Treasury and government agency
securities and corporate debt securities. SpectraLink 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 year ended December 31, 1999 SpectraLink would have
experienced an unrealized loss of approximately $300,000 on these investments.
This is only an estimate. Any actual loss due to an increase in interest rates
could differ from this estimate.
OTHER
Certain statements in this Annual Report on Form 10-K, as well as statements
made by the Company in periodic press releases, oral statements made by the
Company's officials to analysts and stockholders in the course of presentations
about the Company and conference calls following earnings releases, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Caution should be taken not to
place undue reliance on any such forward-looking statements since such
statements speak only as of the date of the making of such statements and
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Such factors include, among other
things,
o the failure of the market for on-premises wireless telephone systems to
grow or to grow as quickly as the Company anticipates,
o the intensely competitive nature of the wireless communications
industry, and a customer preference to buy all telephone communications
systems from a single source provider that manufactures and sells PBX
or key/hybrid systems. Other purchasers may prefer to buy their 802.11
wireless telephone communications systems from a single source provider
of wireless LANs such as Symbol Technologies, who provides 802.11
wireless application devices, such as bar code scanners, as well as
wireless telephones. Because the Company focuses on wireless
on-premises telephone communications, it cannot serve as the sole
source for a complete telephone or data communications system,
o the ability of the Company and its resellers to develop and execute
effective marketing and sales strategies,
o the Company's reliance on sole or limited sources of supply for many
components and equipment used in its manufacturing process,
o the risk of business interruption arising from the Company's dependence
on a single manufacturing facility,
o the Company's ability to manage potential expansion of operations in
the U.S. and internationally,
o the Company's ability to attract and retain personnel, including key
technical and management personnel,
o the Company's ability to respond to rapid technological changes within
the on-premises wireless telephone industry,
o the Company's reliance on a limited number of significant customers,
o changes in rules and regulations of the FCC,
o the Company's ability to protect its intellectual property rights,
o the assertion of intellectual property infringement claims against the
Company,
o changes in economic and business conditions affecting the Company's
customers,
o a lower than anticipated rate of adoption of the 802.11 standard in
international markets,
o the Company's reliance on its 802.11 technology partners to continue to
provide the wireless local area network for the Company's NetLink
product, and to provide access points which support SpectraLink Voice
Priority,
o the homologation process for its NetLink product for use in countries
that support the 802.11 standard,
o other factors over which the Company has little or no control and
13
15
o potential fluctuations in the Company's future operating results. The
Company has experienced, and may in the future continue to experience,
significant quarterly fluctuations in revenue, gross margins and
operating results due to numerous factors, some of which are outside
the Company's control. These factors include (a) fluctuating market
demand for, and declines in the average selling prices of, the
Company's products, (b) the timing of and delay of significant orders
from customers and (c) seasonality in demand. Historically, the Company
has not operated with a significant order backlog and a substantial
portion of the Company's revenue in any quarter has been derived from
orders booked and shipped in that quarter. Accordingly, the Company's
revenue expectations are based almost entirely on its internal
estimates of future demand and not on firm customer orders. Planned
expense levels are relatively fixed in the short term and are based in
large part on these estimates, and if orders and revenue do not meet
expectations, the Company's operating results could be materially
adversely affected. In addition, due to the timing of orders from
customers, the Company has often recognized a substantial portion of
its revenue in the last month of a quarter. As a result, minor
fluctuations in the timing of orders and the shipment of products may,
in the future, cause operating results to vary significantly from
quarter to quarter. It is possible that due to such fluctuations or
other factors, the Company's future operating results could be below
the expectations of securities analysts and investors. In such an
event, or in the event that adverse market conditions prevail or are
perceived to prevail either generally or with respect to the Company's
business, the price of the Company's common stock would likely be
materially adversely affected.
14
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Arthur Andersen LLP, Independent Public Accountants F-1
Balance Sheets as of December 31, 1999 and 1998 F-2
Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 F-3
Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 F-4
Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 F-5
Notes to Financial Statements F-6
15
17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SpectraLink Corporation:
We have audited the accompanying balance sheets of SPECTRALINK
CORPORATION (a Delaware corporation) as of December 31, 1999 and 1998, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SpectraLink
Corporation as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
January 28, 2000
F-1
18
SPECTRALINK CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
As of December 31,
-----------------------
1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,604 $ 9,019
Short-term investments in marketable securities 10,938 13,903
Trade accounts receivable, net of allowance of
$352 and $355, respectively 11,734 10,170
Inventory 5,191 5,123
Deferred income taxes - current portion 1,973 --
Other 1,632 607
-------- --------
Total current assets 41,072 38,822
-------- --------
INVESTMENTS IN MARKETABLE SECURITIES 7,949 1,993
PROPERTY AND EQUIPMENT, at cost:
Furniture and fixtures 1,329 1,330
Equipment 4,741 4,247
Leasehold improvements 718 638
-------- --------
6,788 6,215
Less - Accumulated depreciation (4,384) (3,435)
-------- --------
Net property and equipment 2,404 2,780
DEFERRED INCOME TAXES - NON CURRENT 668 --
OTHER 602 121
-------- --------
TOTAL ASSETS $ 52,695 $ 43,716
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,403 $ 820
Accrued payroll, commissions, and employee benefits 1,948 1,345
Accrued sales and use tax 288 332
Accrued warranty expenses 291 398
Other accrued expenses 273 262
Deferred revenue 1,936 1,871
-------- --------
Total current liabilities 6,139 5,028
LONG-TERM LIABILITIES 237 190
-------- --------
TOTAL LIABILITIES 6,376 5,218
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 3):
Common stock, $.01 par value; 50,000 shares authorized; 20,457 and
19,837 shares issued, respectively, and 19,063 and 18,951 outstanding,
respectively 204 198
Preferred Stock, 5,000 shares authorized, none issued and outstanding
Additional paid-in capital 51,743 49,515
Accumulated deficit (538) (8,472)
Treasury stock, at cost (5,090) (2,743)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 46,319 38,498
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 52,695 $ 43,716
======== =========
The accompanying notes to financial statements are an integral part
of these balance sheets.
F-2
19
SPECTRALINK CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
----------- ------------ ----------
NET SALES $ 41,169 $ 35,135 $ 27,785
COST OF SALES 14,877 14,475 12,767
----------- ------------ ----------
Gross profit 26,292 20,660 15,018
OPERATING EXPENSES:
Research and development 4,110 3,799 3,506
Marketing and selling 15,060 13,951 11,458
General and administrative 2,424 2,188 2,154
----------- ------------ ----------
Total operating expenses 21,594 19,938 17,118
----------- ------------ ----------
INCOME (LOSS) FROM OPERATIONS 4,698 722 (2,100)
INVESTMENT INCOME AND OTHER, net 1,471 1,486 1,536
----------- ------------ ----------
INCOME (LOSS) BEFORE INCOME TAXES 6,169 2,208 (564)
INCOME TAX EXPENSE (BENEFIT) (1,765) 133 (4)
----------- ------------ ----------
NET INCOME (LOSS) $ 7,934 $ 2,075 $ (560)
=========== ============ ==========
BASIC EARNINGS (LOSS) PER SHARE (Note 2) $ 0.42 $ 0.11 $ (0.03)
=========== ============ ==========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 18,840 19,230 19,120
=========== ============ ==========
DILUTED EARNINGS (LOSS) PER SHARE (Note 2) $ 0.41 $ 0.11 $ (0.03)
=========== ============ ==========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 19,500 19,600 19,120
=========== ============ ==========
The accompanying notes to financial statements are an integral part
of these statements.
F-3
20
SPECTRALINK CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
Common Stock Treasury Stock Additional
---------------------- --------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
-------- ------ ------- --------- ---------- -----------
BALANCES, DECEMBER 31, 1996 19,145 $ 191 -- $ -- $ 48,300 $ (9,987)
Exercise of common stock options 76 1 -- -- 43 --
Proceeds from sales of common stock
pursuant to Employee Stock Purchase
Plan 198 2 -- -- 460 --
Net loss -- -- -- -- -- (560)
Purchase of treasury stock -- -- (289) (1,024) -- --
-------- ------ ------- --------- ---------- -----------
BALANCES, DECEMBER 31, 1997 19,419 194 (289) (1,024) 48,803 (10,547)
Exercise of common stock options 218 3 -- -- 175 --
Proceeds from sales of common
stock pursuant to Employee
Stock Purchase Plan 200 1 -- -- 537 --
Net income -- -- -- -- -- 2,075
Purchase of treasury stock -- -- (597) (1,719) -- --
-------- ------ ------- --------- ---------- -----------
BALANCES, DECEMBER 31, 1998 19,837 198 (886) (2,743) 49,515 (8,472)
Exercise of common stock options 479 5 -- -- 1,206 --
Proceeds from sales of common
stock pursuant to Employee
Stock Purchase Plan 141 1 -- -- 506 --
Income tax benefit from exercise
of stock options -- -- -- -- 516 --
Net income -- -- -- -- -- 7,934
Purchase of treasury stock -- -- (508) (2,347) -- --
-------- ------ ------- --------- ---------- -----------
BALANCES, DECEMBER 31, 1999 20,457 $ 204 (1,394) $ (5,090) $ 51,743 $ (538)
======== ====== ======= ========= ========== ==========
The accompanying notes to financial statements are an integral part
of these statements.
F-4
21
SPECTRALINK CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
---------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,934 $ 2,075 $ (560)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,196 1,083 978
Provision for bad debts 72 11 58
Provision for excess and obsolete inventory 177 127 144
Amortization of discount on investments in securities (263) (109) (48)
Loss on disposal of assets 5 -- 21
Deferred income taxes (2,641) -- --
Changes in assets and liabilities --
Increase in trade accounts receivable, net (1,636) (2,510) (3,336)
Increase in inventory (245) (483) (1,276)
Increase in other assets (1,506) (93) (130)
Increase in accounts payable 583 328 134
Increase in other accrued liabilities and deferred revenue 1,091 1,017 1,810
---------- ----------- -----------
Net cash provided by (used in) operating activities 4,767 1,446 (2,205)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (841) (1,240) (2,008)
Proceeds from disposal of property and equipment 16 5 2
Purchases of investments in marketable securities (20,728) (10,863) (16,900)
Maturity of investments in marketable securities 18,000 15,000 20,000
---------- ----------- -----------
Net cash provided by (used in) investing activities (3,553) 2,902 1,094
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations -- -- (31)
Purchases of treasury stock (2,347) (1,719) (1,024)
Proceeds from exercises of common stock options 1,211 176 44
Proceeds from issuances of common stock 507 540 462
---------- ----------- -----------
Net cash used in financing activities (629) (1,003) (549)
---------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 585 3,345 (1,660)
CASH AND CASH EQUIVALENTS, beginning of year 9,019 5,674 7,334
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 9,604 $ 9,019 $ 5,674
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ -- $ -- $ 1
========== =========== ===========
Cash paid for income taxes $ 343 $ 15 $ 28
========== =========== ===========
NONCASH FINANCING ACTIVITIES:
Income tax benefit from the exercise of stock options $ 516 $ -- $ --
========== =========== ===========
The accompanying notes to financial statements
are an integral part of these statements
F-5
22
SPECTRALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) ORGANIZATION AND BUSINESS
SpectraLink Corporation ("SpectraLink" or the "Company") was incorporated in
Colorado on April 24, 1990, and was reincorporated in Delaware on March 1, 1996.
Effective December 23, 1999, the Company incorporated SpectraLink International
Corporation in Delaware, as a wholly owned subsidiary of SpectraLink
Corporation. SpectraLink designs, manufactures and sells on-premises wireless
telephone systems to customers in the United States that complement existing
telephone systems by providing mobile communications in a building or campus
environment. The SpectraLink Wireless Telephone System increases the efficiency
of employees by enabling them to remain in telephone contact while moving
throughout the workplace.
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying financial statements reflect the consolidated results of
SpectraLink Corporation and SpectraLink International Corporation. There have
been no significant intercompany transactions to date.
Cash and Equivalents
The Company considers all highly liquid instruments purchased with original
maturity dates of 90 days or less to be cash equivalents.
Investments in Marketable Securities
The Company accounts for its investments in accordance with the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." ("SFAS No. 115"). Investments in
marketable securities consist of U.S. Government or U.S. Government Agency notes
as well as corporate commercial paper. The Company has both the intent and
ability to hold these investments to maturity and thus classifies these
investments as held-to-maturity securities. As such, these investments are
stated at amortized cost at December 31, 1999 and 1998. The following is a
summary of held-to-maturity investments as of December 31, 1999 and 1998.
AS OF DECEMBER 31,
-------------------------------
1999 1998
--------- ---------
(IN THOUSANDS)
Commercial Paper:
Fair value $ 2,919 $ 1,954
Gross unrealized holding losses 27 1
--------- ---------
Amortized cost $ 2,946 $ 1,955
========= =========
U.S. Government and Agency Obligations:
Fair value $ 13,868 $ 13,981
Gross unrealized holding gains -- (41)
Gross unrealized holding losses 73 1
--------- ---------
Amortized cost $ 13,941 $ 13,941
========= =========
Corporate Bonds:
Fair value $ 1,993 $ --
Gross unrealized holding losses 7 --
--------- ---------
Amortized cost $ 2,000 $ --
========= =========
No investments were sold prior to maturity in 1999 or 1998. The contractual
maturity of the held-to-maturity investments as of December 31, 1999 ranges from
one month to two years.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk are primarily cash and cash equivalents, accounts receivable and
investments in marketable debt securities. The Company maintains its cash
balances in the form of bank demand deposits and money market accounts with
financial institutions that management believes are creditworthy. Accordingly,
the Company may be exposed to credit risk generally associated with healthcare
and retail companies. The Company established an allowance for uncollectible
accounts based upon factors surrounding the credit risk of specific customers,
historical trends and other information. The Company has no significant
financial instruments with off-balance sheet risk of accounting loss, such as
foreign exchange contracts, option contracts or other foreign currency hedging
arrangements.
F-6
23
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
investments in marketable securities and trade receivables and payables. The
carrying values of the cash equivalents, short-term investments, trade
receivables and payables approximate their fair values.
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 at December 31, 1999 and 1998 consists of the following:
1999 1998
--------- ---------
(IN THOUSANDS)
Raw materials $ 2,355 $ 2,715
Work in progress 3 3
Finished goods 2,833 2,405
--------- ---------
$ 5,191 $ 5,123
========= =========
Depreciation and Amortization
Depreciation is provided using the straight-line method over estimated useful
lives of three to ten years for property and equipment. Amortization of
leasehold improvements is provided over the shorter of the estimated useful life
of the improvements or the remaining term of the related lease.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable from future undiscounted cash flows. Impairment losses are
recorded for the difference between the carrying value and fair value of the
long-lived asset.
Research and Development Costs
Research and development costs are expensed as incurred. These costs consist
primarily of salaries, parts, supplies and contract services.
Revenue Recognition
Sales revenue is recorded on transfer of title, which is generally upon shipment
of product. Revenue from installation is deferred and recognized when the
services are performed. Maintenance revenue is deferred and recognized over the
term of the maintenance agreement.
Income Taxes
Deferred income tax assets and liabilities are recorded for the expected future
income tax consequences based on enacted tax laws of temporary differences
between the financial reporting and tax bases of assets, liabilities and
operating loss and tax credit carryforwards. The overall change in deferred tax
assets and liabilities for the period measures the deferred tax expense for that
period. Effects of changes in enacted tax laws on deferred tax assets and
liabilities are reflected as adjustments to tax expense in the period of
enactment. Deferred tax assets may be reduced, if deemed necessary based on a
judgmental assessment of available evidence, by a valuation allowance for the
amount of any tax benefits which are more likely, based on current
circumstances, not expected to be realized (see Note 4).
Earnings (Loss) per Share
The Company presents basic and diluted earnings or loss per share in accordance
with Statements of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS No. 128"), which establishes standards for computing and presenting basic
and diluted earnings per share. Under this statement, basic earnings or loss per
share is computed by dividing the net earnings or loss by the weighted average
number of shares of common stock outstanding. Diluted earnings or loss per share
is determined by dividing the net earnings or loss by the sum of the weighted
average number of common shares outstanding and if not anti-dilutive, the effect
of outstanding stock options determined utilizing the treasury stock method. A
reconciliation of the numerators and denominators used in computing earnings
(loss) per share is as follows:
F-7
24
Years Ended December 31,
(In thousands, except per share amounts)
-------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------- --------------------------
Net Per Net Per Net Per
Income Shares Share Income Shares Share Loss Shares Share
------ ------ ------ ------ ------ ------ ----- ------ ------
Basic EPS--- $7,934 18,840 $ 0.42 $2,075 19,230 $ 0.11 $(560) 19,120 $(0.03)
Effect of dilutive securities:
Stock purchase plan -- 50 -- -- 54 -- -- -- --
Stock options outstanding -- 610 -- -- 316 -- -- -- --
------ ------ ------ ------ ------ ------ ----- ------ ------
Diluted EPS--- $7,934 19,500 $ 0.41 $2,075 19,600 $ 0.11 $(560) 19,120 $(0.03)
====== ====== ====== ====== ====== ====== ====== ====== ======
Assumed exercise of stock options for approximately 610,000 shares were not
included in the calculation for diluted EPS in 1997 as they would have been
anti-dilutive because of the loss in that year.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities as well as disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees". The Company follows the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation". SFAS 123 defines a fair value based method of accounting for
stock options and similar equity instruments. (see Note 3).
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting comprehensive income and its components in financial
statements. Comprehensive income includes all changes in equity during a period
from non-owner sources. During each of the three years ended December 31, 1999
and for the cumulative period from inception, the Company has not had any
transactions that are required to be reported as adjustments to determine
comprehensive income (loss).
Reportable Segments
Statement of Financial Accounting Standards No. 131, "Disclosure About Segments
of an Enterprise and Related Information," establishes standards for the
reporting of information about operating segments. Since its inception, the
Company has conducted its operations in one operating segment.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" which established accounting and
reporting standards for derivative instruments and hedging activity. SFAS 133
requires recognition of all derivative instruments on the balance sheets 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 ("SFAS 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 137 delays the effective date of SFAS 133 to financial quarters and
financial years beginning after June 15, 2000. The Company is currently
assessing the effect of adopting SFAS 133 on its financial statements and plans
to adopt the statement on January 1, 2001.
F-8
25
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application of
the guidance in SAB 101 will be required in the Company's second quarter of
2000. The effects of applying this guidance, if any, will be reported as a
cumulative effect adjustment resulting from a change in accounting principle.
The Company does not expect the adoption of SAB 101 to have a material effect on
its financial statements; however, the final evaluation of SAB 101 is not yet
complete.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
(3) STOCKHOLDERS' EQUITY
Stock Option Plan
Effective June 7, 1990, the Company adopted a Stock Option Plan (the "Plan") to
provide key employees, consultants, and directors options to purchase up to
4,000,000 shares of common stock of the Company, as amended.
Under the terms of the Plan, the board of directors may grant key employees,
consultants and directors either nonqualified or incentive stock options, as
defined by the Internal Revenue Service. The purchase price per share of a
nonqualified stock option will not be less than 85% of the fair market value of
each share at the time of grant. The purchase price per share of an incentive
stock option will not be less than 100% of the fair market value of each share
at the time of grant. If the grantee of an incentive stock option owns more than
10% of the total combined voting power of all classes of stock on the date of
grant, the purchase price will be at least 110% of the fair market value of the
shares at the date of grant. Options granted under the Plan are exercisable up
to 8 years from the date of the grant or 5 years from the date of the grant for
a holder of 10% or greater of the Company's stock.
Options granted become exercisable at a rate of 25% after 12 months from the
date of grant and ratably per month thereafter, conditioned upon continued
employment. Full vesting occurs after 48 months from the date of grant.
A summary of activity of the Plan for the years ended December 31, 1999, 1998
and 1997, is as follows:
Non-Qualified Stock Options Incentive Stock Options
---------------------------------- ----------------------------------
Weighted Average Weighted Average
Number of Shares Exercise Price Number of Shares Exercise Price
---------------- ---------------- ---------------- ----------------
(In thousands, except per share amounts)
Outstanding at
December 31, 1996 112 $ 3.29 1,159 $ 2.29
Granted 253 3.90 514 3.85
Canceled (3) 3.75 (145) 3.83
Exercised -- -- (76) .59
---- -------- ------ --------
Outstanding at
December 31, 1997 362 3.71 1,452 2.77
Granted 163 3.95 261 3.62
Canceled -- -- (99) 4.57
Exercised -- -- (218) .80
---- -------- ------ --------
Outstanding at
December 31, 1998 525 3.79 1,396 3.11
---- -------- ------ --------
Granted 294 4.36 454 4.76
Canceled (53) 4.00 (183) 3.96
Exercised (75) 3.54 (404) 2.33
---- -------- ------ --------
Outstanding at
December 31, 1999 691 $ 4.04 1,263 $ 3.97
==== ======== ====== ========
Exercisable at
December 31, 1999 293 $ 3.78 581 $ 3.19
==== ======== ====== ========
1999 1998 1997
---- ---- ----
Weighted average fair value of options granted during the year,
pursuant to SFAS 123 $4.22 $1.93 $2.08
F-9
26
A summary of additional information related to the options outstanding as of
December 31, 1999 is as follows:
Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------------
Number Weighted Number
Outstanding at Average Weighted Exercisable Weighted
Range of 12/31/99 Remaining Average at 12/31/99 Average
Exercise Prices (In thousands) Contractual Life Exercise Price (In thousands) Exercise Price
- --------------- -------------- ---------------- -------------- -------------- --------------
$0.20 - $2.94 238 3.6 years $1.69 177 $1.53
$3.00 - $3.30 238 2.8 years $3.15 221 $3.16
$3.31 - $3.56 203 7.1 years $3.52 15 $3.45
$3.63 - $3.69 155 6.2 years $3.63 73 $3.63
$3.75 224 5.8 years $3.75 97 $3.75
$3.81 - $3.94 21 5.4 years $3.83 11 $3.82
$4.00 303 5.3 years $4.00 224 $4.00
$4.13 - $4.56 234 7.2 years $4.32 8 $4.23
$4.69 - $5.00 201 7.4 years $4.88 2 $4.69
$5.13 - $9.63 137 6.5 years $7.29 46 $7.13
----- ---
Total 1,954 5.7 years $3.90 874 $3.39
===== ===
For SFAS 123 purposes, the fair value of each option grant is estimated as of
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.23%, 5.51% and 6.1%; no expected
dividend yields; expected lives of 3.8 years, 3.8 years and 3.8 years; and
expected volatility of 124%, 65%, and 68%.
Employee Stock Purchase Plan
In December 1996, the Board of Directors of the Company amended the Stock
Purchase Plan to increase the authorized shares available for issue to 500,000
shares, which was approved by shareholders in May 1997. Subject to certain
maximum stock ownership restrictions, employees are eligible to participate in
the Stock Purchase Plan if employed by the Company at the beginning of each
offering period, on a full-time or part-time basis, and regularly scheduled to
work more than 20 hours per week. Participating employees may have up to 10% of
their base pay in effect at the commencement of each offering period withheld
pursuant to the Stock Purchase Plan. Common stock purchased under the Stock
Purchase Plan will be equal to 85% of the lower of the fair market value on the
commencement date or termination date of each offering period (usually six
months). Under the Stock Purchase Plan, the Company sold to employee's 140,772
shares in 1999, 200,111 shares in 1998, and 198,348 shares in 1997. The fair
value of each purchase right is estimated, for disclosure purposes, on the date
of grant using the Black-Scholes model with the following assumptions for 1999,
1998 and 1997: no dividend yield; an expected life of six months; expected
volatility of 124%, 65% and 68% respectively; and a risk-free interest rate of
5.04%, 5.22% and 5.13%, respectively. The weighted average fair value of the
right to purchase those shares in 1999, 1998 and 1997 was $2.10, $1.14 and $0.95
per share, respectively.
Pro Forma Disclosure of Stock-Based Compensation
Using these assumptions, the fair value of the stock options granted in 1999,
1998 and 1997 was approximately $3,159,000, $819,000 and $1,596,000,
respectively, which would be amortized as compensation expense over the graded
vesting period of the options. Pro forma stock-based compensation expense for
stock options, net of the effect of forfeitures, was $796,000, $894,000 and
$721,000 in 1999, 1998 and 1997, respectively, and for the Stock Purchase Plan
was $295,000, $214,000 and $189,000 in 1999, 1998 and 1997, respectively. If
compensation cost had been determined consistent with SFAS 123, utilizing the
assumptions detailed above, the Company's net income (loss) and diluted earnings
(loss) per share would have been reduced (increased) to the following pro forma
amounts:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss):
As reported $ 7,934 $ 2,075 $ (560)
Pro forma $ 7,258 $ 1,388 $ (1,470)
Diluted earnings (loss) per share:
As reported $ 0.41 $ 0.11 $ (0.03)
Pro forma $ 0.37 $ 0.07 $ (0.08)
Weighted average shares used to calculate pro forma diluted earnings (loss) per
share were determined as described in Note 2.
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
F-10
27
(4) INCOME TAXES
The expense (benefit) for income taxes for the years ended December 31, 1999,
1998 and 1997, is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------- ------ -------
(IN THOUSANDS)
Current provision-
Federal $ 672 $ 49 $ --
State 204 84 (4)
------- ------ -------
876 133 (4)
------- ------ -------
Deferred provision-
Federal 1,462 248 (279)
State 143 24 (27)
------- ------ -------
1,605 272 (306)
Increase (reduction) of valuation allowance (4,246) (272) 306
------- ------ -------
(2,641) -- --
------- ------ -------
Income tax expense (benefit) $(1,765) $ 133 $ (4)
======= ====== =======
The following reconciles the Company's effective tax expense (benefit) to the
federal statutory expense (benefit) for the years ended December 31, 1999, 1998
and 1997:
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------- ------ -------
(IN THOUSANDS)
Income tax expense (benefit) per federal statutory
rate (34%) $ 2,097 $ 751 $ (192)
State income taxes 204 84 (22)
Permanent differences and other 124 (179) (96)
Income tax credits and tax return true-ups 56 (251) --
Increase (reduction) of valuation allowance (4,246) (272) 306
------- ------ -------
$(1,765) $ 133 $ (4)
======= ====== =======
For federal income tax reporting purposes, at December 31, 1999, the Company has
approximately $344,000 of net operating loss carryforwards, approximately
$1,436,000 of research and development tax credit carryforwards and
approximately $234,000 of alternative minimum tax credit carryforwards available
to offset future federal taxable income and liabilities, respectively. The tax
credit and net operating loss carryforwards expire between 2007 and 2019 and are
subject to examination by the tax authorities.
The Tax Reform Act of 1986 contains provisions which may limit the net operating
loss carryovers available to be used in any given year upon the occurrence of
certain events, including significant changes in ownership interests.
The Company's deferred income taxes are summarized as follows:
AS OF DECEMBER 31,
-----------------------
1999 1998
------- -------
(IN THOUSANDS)
Current deferred tax assets (liabilities)--
Warranty reserve $ 111 $ 151
Allowance for uncollectible accounts 134 142
Inventory reserve 90 144
Accrued vacation 180 200
Net operating loss carryforward 131 --
Tax credit carryforward 1,224 --
Other accrued liabilities 103 87
Less--Valuation allowance -- (724)
Long-term deferred tax assets (liabilities)--
Depreciation 328 282
Capital leases (106) (106)
Net operating loss carryforward -- 2,048
Tax credit carryforwards 446 1,298
Less--Valuation allowance -- (3,522)
------- -------
$ 2,641 $ --
======= =======
During 1999, the Company eliminated the valuation allowance against its deferred
tax assets, as management believes that it is more likely than not that such tax
benefits will be realized.
F-11
28
(5) RELATED PARTIES
The Company rented office space, on a month-to-month basis, from an affiliated
company owned by one of the Company's shareholders. Total rent paid to related
parties was approximately $72,000 for the year ended December 31, 1997. This
rental agreement ended December 31, 1997.
(6) COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain research and office equipment
under noncancelable operating lease agreements. Minimum future annual lease
payments under these leases as of December 31,1999, are as follows:
(IN THOUSANDS)
--------------
2000 $ 949
2001 840
2002 817
2003 813
2004 773
Thereafter 380
-------
$ 4,572
=======
Total rent expense for noncancelable, cancelable and month-to-month operating
leases for the years ended December 31, 1999, 1998 and 1997 was approximately
$1,346,000, $1,080,000 and $995,000, respectively.
(7) MAJOR CUSTOMERS
The Company's sales to major customers, which individually comprised more than
10% of total net sales for the years ended December 31, 1998 and 1997, are as
follows:
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
------- -------
Customer A 17% 9%
Customer B 5% 11%
Customer C 3% 11%
----- -----
25% 31%
===== =====
The Company did not have any customers which individually comprised more than
10% of total sales for the year ended December 31, 1999.
The Company's accounts receivable balances from customers in excess of 10% of
the net trade accounts receivable balance consisted of no customers for the
years ended December 31, 1999 and 1998 and one customer with an accounts
receivable balance of approximately 12% as of December 31, 1997.
(8) RETIREMENT PLAN
The Company has a 401(k) Profit Sharing Plan (the "401(k) Plan") which covers
all eligible employees who have completed one month of service, as defined in
the 401(k) Plan, and are age 18 or older. Participants may defer from 2% to 15%
of their compensation, as defined, up to a maximum limit determined by law.
Participants are always fully vested in their contributions.
The Company may make discretionary matching contributions up to a maximum of 6%
of each participant's compensation. Additionally, the Company may make
discretionary contributions to eligible employees in proportion to the
employee's compensation and unrelated to any employee contributions. Vesting in
the Company's discretionary contributions is based on years of service, with a
participant fully vested after four years of credited service. The Company has
not made any contributions to the 401(k) Plan for the years ended December 31,
1999, 1998, and 1997.
F-12
29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required to be set forth hereunder has been omitted and will
be incorporated by reference, when filed, from the Company's Proxy Statement for
its 2000 Annual Meeting of Stockholders to be held on or about May 24, 2000.
ITEM 11. EXECUTIVE COMPENSATION.
Information required to be set forth hereunder has been omitted and will
be incorporated by reference, when filed, from the Company's Proxy Statement for
its 2000 Annual Meeting of Stockholders to be held on or about May 24, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required to be set forth hereunder has been omitted and will
be incorporated by reference, when filed, from the Company's Proxy Statement for
its 2000 Annual Meeting of Stockholders to be held on or about May 24, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required to be set forth hereunder has been omitted and will
be incorporated by reference, when filed, from the Company's Proxy Statement for
its 2000 Annual Meeting of Stockholders to be held on or about May 24, 2000.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
The financial statements filed as part of this report are listed on the
Index to Financial Statements on page 15.
(2) Financial Statement Schedules.
All financial statement schedules have been omitted because they are
not required, are not applicable, or the information is included in the
Financial Statements, or notes thereto.
(3) Exhibits.
Exhibit Number Description
-------------- -----------
3.1 Certificate of Incorporation of the Registrant.(1)
3.2 Amended and Restated Bylaws of the Registrant.(1)
4.1 Specimen Common Stock Certificate.(1)
10.1 SpectraLink Corporation Stock Option Plan, as amended.(1)
10.2 Form of Incentive Stock Option Agreement under the Company's Stock Option Plan.(1)
10.3 Form of Non-Qualified Stock Option Agreement under the Company's Stock Option
Plan.(1)
16
30
Exhibit Number Description
-------------- -----------
10.4 Form of Indemnification Agreement with directors and executive officers of the
Registrant.(1)
10.5 Stock Restriction Agreement dated September 5, 1995, between the Company and
Wellington Trust.(1)
10.6 Lease Agreement dated September 29, 1995 between the Company and Walnut Prairie
Joint Venture.(1)
10.7 Form of Consultant Non-Disclosure Agreement used between the Company and
consultants.(1)
10.8 Form of Employee Non-Disclosure Agreement used between the Company and its
employees.(1)
10.9 Sublease Agreement dated May 1, 1990, between Incubix, Inc. and the Company.(1)
10.10 Lease agreement dated October 17, 1996 between the Company and Flatiron Park
Company.(2)
10.11 Lease agreement dated February 26, 1998, as amended January 8, 1999, between the
Company and Flatiron Park Company.(3)
21.1 Subsidiaries of the Company.*
23.1 Consent of Arthur Andersen LLP.*
27 Financial Data Schedule.*
- ---------------
* Filed herewith.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-2696-D).
(2) Incorporated by reference from the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996
(3) Incorporated by reference from the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
SpectraLink and the SpectraLink logo are registered trademarks of SpectraLink
Corporation. Link Wireless Telephone System , NetLink Wireless Telephone System
and Wireless@work are trademarks of SpectraLink Corporation. All other
trademarks mentioned herein are the property of their respective owners.
17
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SPECTRALINK CORPORATION
By: /s/ BRUCE M. HOLLAND
--------------------------------
Bruce M. Holland,
President
Date: March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ BRUCE M. HOLLAND Principal Executive Officer March 24, 2000
- --------------------------------------- and Director
Bruce M. Holland
/s/ NANCY K HAMILTON Principal Financial Officer March 24, 2000
- --------------------------------------- and Principal Accounting Officer
Nancy K. Hamilton
/s/ CARL D. CARMAN Director March 24, 2000
- ---------------------------------------
Carl D. Carman
/s/ ANTHONY V. CAROLLO, JR. Director March 24, 2000
- ---------------------------------------
Anthony V. Carollo, Jr.
/s/ BURTON J. MCMURTRY Director March 24, 2000
- ---------------------------------------
Burton J. McMurtry
/s/ F. GIBSON MYERS, JR. Director March 24, 2000
- ---------------------------------------
F. Gibson Myers, Jr.
18
32
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
3.1 Certificate of Incorporation of the Registrant.(1)
3.2 Amended and Restated Bylaws of the Registrant.(1)
4.1 Specimen Common Stock Certificate.(1)
10.1 SpectraLink Corporation Stock Option Plan, as amended.(1)
10.2 Form of Incentive Stock Option Agreement under the Company's Stock Option Plan.(1)
10.3 Form of Non-Qualified Stock Option Agreement under the Company's Stock Option
Plan.(1)
10.4 Form of Indemnification Agreement with directors and executive officers of the
Registrant.(1)
10.5 Stock Restriction Agreement dated September 5, 1995, between the Company and
Wellington Trust.(1)
10.6 Lease Agreement dated September 29, 1995 between the Company and Walnut Prairie
Joint Venture.(1)
10.7 Form of Consultant Non-Disclosure Agreement used between the Company and
consultants.(1)
10.8 Form of Employee Non-Disclosure Agreement used between the Company and its
employees.(1)
10.9 Sublease Agreement dated May 1, 1990, between Incubix, Inc. and the Company.(1)
10.10 Lease agreement dated October 17, 1996 between the Company and Flatiron Park
Company. (2)
10.11 Lease agreement dated February 26, 1998, as amended January 8, 1999, between the
Company and Flatiron Park Company.(3)
21.1 Subsidiaries of the Company.*
23.1 Consent of Arthur Andersen LLP.*
27 Financial Data Schedule.*
- ---------------
* Filed herewith.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-2696-D).
(2) Incorporated by reference from the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996.
(3) Incorporated by reference from the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998.
19