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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
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 small business issuer in its charter)
DELAWARE 84-1141188
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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)
Check 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenue for its most recent fiscal year. $35,135,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $36,098,876 as of March 8, 1999.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 18,986,799 shares of common
stock, $.01 par value, were outstanding as of March 8, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Items 9, 10, 11 and 12 of Part III of this Form 10-KSB 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.
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. The SpectraLink Link
Wireless Telephone System increases the efficiency of employees by enabling
them to remain in telephone contact while moving throughout the workplace. The
system uses a micro-cellular design consisting of three components: a Master
Control Unit ("MCU"), Base Stations and Wireless Telephones. The Company's
proprietary MCU interfaces directly with a PBX, Centrex or key/hybrid system.
The MCU also connects with the system's Base Stations, which are small radio
transceivers located throughout the customer's facility that relay calls
between the six-ounce Wireless Telephones and the telephone system. Calls are
handed off from one Base Station to another as a user moves throughout the
facility.
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 can be cumbersome and 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 use
analog and digital radio transmissions which can be intercepted. Unless
specifically designed for on-premises use, cellular phones 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.
A number of cellular service providers offer products that specifically
address on-premises applications. These micro-cellular systems operate as a
subset of the public cellular network, and attach to a business phone system to
provide wireless phones to on-premises users. Although these systems operate in
the public cellular frequency band (824-894 MHz), a user cannot access them
with a traditional cellular phone. Proprietary dual-mode phones are required to
access the business phone system when used on the premises, or the public
cellular network when used off the premises. Currently, calls cannot be handed
off between the on-premises network and the public cellular network. Because
these micro-cellular systems use the same frequency band as public cellular
telephone service, they may have limited capacity in areas with a large number
of cellular subscribers. In addition, the use of analog transmissions may
diminish conversation privacy.
Because the majority of business employees, such as retail store clerks,
nurses and service personnel, require wireless phones only while in the
workplace, economic considerations such as the cost of dual-mode phones and
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monthly charges may limit the utility of these systems. In order to avoid
calling abuse and air-time charges, some businesses do not want business phones
that can be used off the premises. Further, many applications require that the
phones remain on site for use over multiple shifts.
Products dedicated to unlicensed, on-premises use first appeared in the
1990s in the 902-928 MHz band. 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 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 applications. Although the FCC originally proposed to
allocate 20 MHz of new spectrum to meet on-premises wireless telephone system
requirements, ultimately only 10 MHz from 1920-1930 MHz was assigned for this
purpose. The products which have been introduced for this new spectrum are
commonly referred to as unlicensed personal communications systems ("U-PCS").
This comparatively limited new spectrum is currently occupied by microwave
radios which must be cleared for full unlicensed use of the band. According to
the FCC, the U-PCS manufacturers or providers that intend to clear the spectrum
must pay the microwave radio operator all costs associated with the relocation
of its microwave equipment. Typically, the relocation costs will be borne by a
fee assigned to each U-PCS radio device, including handsets and base stations.
While U-PCS products are designed to operate as unlicensed systems,
installation of a system may require a frequency coordination study of the area
to insure the U-PCS system will not interfere with a fixed microwave system,
and the U-PCS user cannot move or expand the system without an additional
coordination study. Furthermore, the radio propagation characteristics of this
band compared to those of lower frequencies may require a greater number of
base stations for in-building applications.
PRODUCTS
The Link Wireless Telephone System 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. There are two ways in which the MCU connects to
the phone system. It can either interface directly with the analog ports of the
host telephone switching system, or, in many cases, it can connect via a
digital interface to certain PBX systems and key/hybrid systems. Currently, the
Company supports digital interfaces to the following phone systems: Definity
PBX systems and Merlin Legend key systems from Lucent Technologies; Meridian 1
PBX Systems and Norstar key systems from Northern Telecom, Ltd.; Rolm 9751 and
9200 CBX and HiCom systems from Siemens Business Communications Systems, Inc.;
F9600 PBX systems from Fujitsu Corporation; SX-200 and SX-2000 PBX systems from
Mitel Corporation; Strata DK280 and DK424 systems from Toshiba Corporation; and
DTS and DXP systems from Comdial, Inc. Additionally, the Spectralink Open
Application Interface (OAI) enables SpectraLink Wireless Telephones to be used
in conjunction with data servers.
The MCU is also connected to the Base Stations. The Base Stations are
small radio transceivers connected to the MCU via twisted-pair telephone wiring
and provide the wireless link to the Wireless Telephone. The Wireless Telephone
is a six-ounce portable phone with an alphanumeric display. When the
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. 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 Wireless Telephone System is
designed to provide seamless coverage, enabling real-time hand-off of an active
telephone call as the user walks about. A key attribute of the SpectraLink
Wireless Telephone System is that the hand-off implementation has been designed
to be non-disruptive to the call in progress, thus minimizing degradation to
the telephone conversation while the user is moving throughout the facility.
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SpectraLink offers two scalable MCU configurations: the Link 150 MCU and
the Link 3000 MCU. These two systems are targeted to meet the needs of a
variety of applications.
The Link 150 MCU supports up to 64 Wireless Telephones and up to 16 Base
Stations. A total of four MCU controllers can be interconnected to support the
maximum complement of Wireless Telephones and Base Stations. The typical
applications for the Link 150 are retail stores, healthcare clinics and nursing
homes.
The Link 3000 supports up to 3200 Wireless Telephones and up to 1000 Base
Stations. Its typical applications are hospitals, corporate offices,
manufacturing facilities and convention centers.
The Link 150 and Link 3000 MCUs support analog or digital integration with
a PBX or key/hybrid system.
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.
Spread Spectrum Technology and Frequency Hopping. Spread spectrum is a
radio frequency transmission technique in which the transmitted information is
spread over a relatively wide bandwidth. The Company also uses a form of spread
spectrum 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 use of frequency hopping 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. The FCC rules governing spread spectrum
operation permit higher RF transmitter power levels, thus improving indoor
propagation over a wide range of interior building construction types and
simplifying system planning and implementation. 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 Company believes that its
Link Wireless Telephone System is currently the only micro-cellular spread
spectrum wireless telephone system in the 902-928 MHz band.
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 and MCU designs. The Company expects to develop
additional ASICs and to incorporate these devices into future systems.
Wireless Access Protocols. Combining frequency hopping 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 protocols that allow
multiple users to have simultaneous telephone access in a frequency hopping,
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.
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Operation at 902-928 MHz. SpectraLink selected the 902-928 MHz frequency
band due to its availability for the application of spread spectrum technology
to Part 15 (unlicensed) equipment. SpectraLink believes this band offers the
following advantages: (i) the band is free of any microwave radio systems, thus
eliminating the need to conduct frequency coordination studies prior to product
deployment; (ii) the band provides 26 MHz of spectrum which is a significant
advantage for systems expected to provide capacity during periods of heavy user
demand; (iii) 26 MHz of spectrum allows systems to be implemented with lower
order modulation schemes that result in more reliable performance; and (iv)
free-space propagation is superior at 902-928 MHz compared to that at 1920-1930
MHz, so that an area may be covered by fewer base stations.
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 28, 1999, the Company had 73 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, San Diego, San Francisco, Seattle, Tampa, and Washington, D.C.
Distributors. SpectraLink distributes its entire product line through a
number of telecommunications distributors in the United States and Canada,
currently including Alltel Communications, Inc., Alphanet Solutions, Inc.,
Ameritech, Anixter, ATS Telephone and Data Systems, Inc., Bell Atlantic,
Fujitsu Business Communication Systems, GTE Communication Systems, Indyme,
Inc., InteCom, Inc. and Mitel Telecommunications Systems, 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.
In 1995, SpectraLink entered into a distribution and marketing agreement
with Hill-Rom Company, Inc. ("Hill-Rom"), a subsidiary of Hillenbrand
Industries, Inc., a leading manufacturer and distributor of patient-care
systems. This agreement provided that Hill-Rom would sell the Company's systems
to hospitals, medical clinics, and medical office buildings. Hill-Rom's sales
of SpectraLink equipment were slower than expected in 1996. Accordingly,
SpectraLink and Hill-Rom modified their agreement in 1997, such that
SpectraLink's direct sales representatives have primary responsibility for
sales to this market. As of November 30, 1998, SpectraLink ceased to have a
continuing contractual relationship with Hill-Rom.
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 28, 1999, the Company's dealer network currently was comprised of 103
dealers in 229 locations.
The Company currently sells its systems in the United States, Canada and
Mexico. In the future, the Company may consider selling its systems in other
countries which permit operation in the 902-928 MHz band using spread spectrum
radio transmissions. The Company has no current plans to market its 902-928 MHz
systems in Asia or Europe.
Customer Support
The Company has established a customer support department dedicated to
planning, installing and maintaining the SpectraLink systems. Customer support
personnel are located at the Company's facilities in Boulder, Atlanta,
Charlotte, Chicago and Washington, D.C.
Because of the relative complexity of designing on-premises wireless
telephone systems, the customer support department is a critical factor in the
Company's overall product and market strategy. The customer support department
is involved with the customers during early customer contact, the system
configuration and installation phases, and the on-going maintenance period.
The Wireless Telephones, Base Stations and MCUs are warranted to be free
of defects upon delivery. The
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Company provides Standard Warranty and Maintenance 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.
CUSTOMER DEPENDENCE
While the Company has a diverse customer base it considers its operations
to be conducted in one operating segment. During 1998, one customer comprised
more than 10% of total sales. Direct sales to Lowe's Companies, Inc. were 17.2%
of total 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 intensely
competitive and acutely 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, purchasers
may prefer to buy all of their telephone communications systems from a single
source provider, such as Lucent Technologies, Northern Telecom Limited, LM
Ericsson Telephone Co., Harris Corporation, or Siemens Business Communications
Systems, Inc., all of whom manufacture and sell PBX or key/hybrid systems.
Because the Company focuses on wireless on-premises telephone communications,
it cannot serve as the sole source for a complete telephone communications
system. There can be no assurance that the Company will be able to compete
successfully in the future.
Because there are different methods and different radio frequency bands by
which wireless communications can be delivered, the Company believes there are
five primary categories of direct competition: (i) the 902-928 MHz band, where
the Company's systems operate; (ii) unlicensed PCS, or U-PCS, in the 1920-1930
MHz band; (iii) licensed low-power, in-building cellular in the 824-894 MHz
band; (iv) licensed PCS in the 1850-1990 MHz band; and (v) the 2400-2483 MHz
band. In the 902-928 MHz band, the Company believes that no competitors offer
micro-cellular telephone systems and that competitors offering single-cell,
single user products include Lucent Technologies, Northern Telecom Limited, and
Uniden America Corporation. The Company believes that competitors offering
U-PCS in the 1920-1930 MHz band present the greatest potential threat of
competition to the Company because the products in this band will be able to
provide similar functionality to that of the Company's systems. There are a
number of competitors offering U-PCS systems in the 1920 to 1930 MHz band
including LM Ericsson Telephone Co., Lucent Technologies, Northern Telecom
Ltd., and Harris Corporation. Various leading manufacturers have established a
number of common air interface standards for unlicensed, on-premises operation
in the 1920-1930 MHz band. Three of these standards have been approved. The
primary status accorded to U-PCS products that will eventually occupy the
1920-1930 MHz band and the existence of air interface standards may make these
products more attractive to certain customers. Low-power, on-premises cellular
systems operating in the 824-894 MHz band are manufactured and distributed
principally by AG Communications, Mitsubishi Corporation, Northern Telecom,
Ltd., and Hughes Network Systems, and potentially can be offered through all
cellular operators. The Company believes that licensed PCS operators such as
AT&T Wireless, BellSouth Mobility DCS, Centennial Cellular Corporation,
Omnipoint Communications, Pacific Bell Mobile Services, Powertel, Inc., PrimeCo
Personal Communications, Sprint PCS, and Western Wireless Corporation,
operating in the 1850-1990 MHz band, intend to target the in-building,
on-premises market with service offerings similar to the low-power, in-building
cellular derivatives. In addition, a new category of competition has recently
emerged with products utilizing voice-over-IP technology in the 2400-2483 MHz
band, such as those announced by Symbol Technologies, Inc. While there are many
differences in the technologies used to deliver wireless telephone
communications in these categories, all of the competitive factors described in
the preceding paragraph are applicable, particularly the significantly greater
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financial, technical, research and development and marketing resources of such
competitors.
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 SpectraLink's 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 SpectraLink's 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, with various expiration dates, none earlier than 2011.
In addition, the Company has two United States patent applications 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 up to
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. 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. On April 1, 1998, SpectraLink leased a second facility, a 7,500
square foot facility in Boulder, Colorado. On January 13, 1999, the Company
entered into an amendment to the original lease for the 7,500 square foot
building to add an additional 4,184 square feet. Since the Company relies on
these manufacturing facilities, a major catastrophe could result in a prolonged
interruption of the Company's business.
RESEARCH AND PRODUCT DEVELOPMENT
The wireless telecommunications industry is subject to rapid technological
change, frequent new product introductions and enhancements, product
obsolescence and changes in end-user requirements. The Company believes
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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 28, 1999, the Company employed 31 people in support of its
research and development activities. The Company invested approximately
$3,799,000, $3,506,000 and $3,073,000 in 1998, 1997 and 1996, 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 systems are all certified
by the FCC for unlicensed operation under Part 15 Rules.
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 which 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 20 MHz segment from
1910-1930 MHz as unlicensed spectrum out of the total of 140 MHz set aside for
Personal Communications Systems (PCS). 1910-1920 MHz is specifically allocated
for asynchronous wireless systems such as data based communications, while
1920-1930 MHz is specifically allocated for isochronous wireless systems such
as voice communications. Unlicensed PCS equipment which operates in this range
falls under Subpart D of the Part 15 Rules. These rules provide eventual
primary status for unlicensed devices. However, the incumbent point-to-point
microwave systems currently situated in this frequency range must be relocated
to other frequency bands. Each relocated microwave radio operator is entitled
to comparable alternative facilities to replace the existing 1900 MHz radio
link, and the U-PCS manufacturers or providers must pay all costs associated
with the relocation of the incumbent microwave radio equipment. Typically,
these relocation costs will be borne by a fee assigned to each U-PCS radio
device, including handsets and base stations. Until all of the microwave
systems are removed from this band, on-premises wireless systems must be
frequency coordinated or accounted for prior to installation and activation.
According to industry organizations, it will take many years to remove all
microwave stations from this band.
The technical rules which pertain to the 1920-1930 MHz band are designed
to lessen the likelihood of interference between systems through a mechanism
referred to as "Listen Before Transmit," or LBT. The LBT criteria requires that
a U-PCS device first monitor and locate unused spectrum within the 1920-1930
MHz range prior to transmitting. This serves to protect any other U-PCS device
or system then in use from any unwanted interference. However, in locations
where multiple U-PCS systems are in use and the frequency spectrum becomes
increasingly congested, this LBT mechanism may prevent systems from realizing
their full capacity potential, as competing systems find fewer available
channels.
EMPLOYEES
As of February 28, 1999, the Company employed 265 persons, 252 of whom were
full time employees.
7
<PAGE> 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 7,500 square feet of manufacturing and office space at 5744 Central
Avenue. On January 13, 1999, the Company entered into an amendment to the
original lease at 5744 Central Avenue to add an additional 4,184 square feet of
office space. The Company also has a leased facility in Boulder which it
previously occupied: approximately 11,300 square feet at 3220 Prairie Avenue,
which was subleased through 2/15/99. 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 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 meetings of the Company's stockholders were held during the fourth
quarter of 1998.
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, mark-down or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>
1998 1997
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First quarter $4.500 $2.750 $4.250 $2.500
Second quarter 5.500 3.500 6.500 3.125
Third quarter 4.563 2.500 5.875 3.625
Fourth quarter 3.844 2.063 4.875 2.500
</TABLE>
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, 1999, the Company had approximately 184 shareholders of
record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS.
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 4,200 systems and 94,000 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 may consider selling its systems in other countries
outside the United States which permit
8
<PAGE> 10
operation in the 902-928 MHz band using spread spectrum radio transmissions.
The Company has no current plans to market its systems in Asia or Europe.
Since inception, the Company has expended considerable effort and
resources developing its wireless telephone systems, building its direct and
indirect channels of distribution, and managing the effects of rapid growth.
This rapid growth has required the Company to significantly increase the scale
of its operations, including the hiring of additional personnel in all
functional areas, and has resulted in significantly higher operating expenses.
The Company anticipates that its operating expenses will continue to increase.
Expansion of the Company's operations may cause a significant strain on the
Company's management, financial and other resources. The inability of the
Company to manage additional growth, should it occur, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
9
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth certain income and expense items as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .............................. 100.0% 100.0% 100.0%
Cost of sales .......................... 41.2 45.9 38.5
-------- -------- --------
Gross profit ........................... 58.8 54.1 61.5
Operating expenses:
Research and development ............. 10.8 12.6 14.3
Marketing and selling ................ 39.7 41.2 32.9
General and administrative ........... 6.2 7.8 7.4
-------- -------- --------
Total operating expenses ............... 56.7 61.6 54.6
-------- -------- --------
Income (loss) from operations .......... 2.1 (7.6) 6.9
Investment income and other, net ....... 4.2 5.5 5.6
-------- -------- --------
Income (loss) before income taxes ...... 6.3 (2.0) 12.5
Income tax expense ..................... 0.4 -- 0.6
-------- -------- --------
Net income (loss) ...................... 5.9% (2.0)% 11.9%
======== ======== ========
</TABLE>
FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
Net Sales. The Company derives its revenue principally from the sale,
installation and service of wireless, on-premises telephone systems. 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. The Company's cost of sales consists primarily of direct
material, direct labor, service expenses and manufacturing overhead. 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 (i) increased efficiencies in the manufacturing
processes, (ii) an enhanced reliability and durability of the Company's
products resulting in lower warranty expense and (iii) 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 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 $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 in both 1998 and 1997 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 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 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 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.
10
<PAGE> 12
Investment Income and Other (Net). Investment income is the result of the
Company's investment in money market, investment-grade debt securities, and
government securities. Other income is generated primarily from purchase
discounts. 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 tax credit and net
operating loss carryforwards expire between 2007 and 2012 and are subject to
examination by the tax authorities. The Company's tax provisions in 1998 and
1997 consist of accruals for state and federal minimum taxes.
The Company's operating expenses are based in part on its expectations of
future sales, and the Company's expense levels are generally determined in
advance of sales. The Company currently plans to continue to expand and
increase its operating expenses in an effort to generate and support additional
future revenue. If sales do not materialize in a quarter as expected, the
Company's results of operations for that quarter would be adversely affected.
Net income may be disproportionately affected by a reduction of revenues
because only a small portion of the Company's expenses vary with its revenue.
FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Sales. The Company derives its revenue principally from the sale,
installation and service of wireless, on-premises telephone systems. Net sales
increased by 29% to $27,785,000 in 1997 from $21,491,000 in 1996. This increase
was predominantly due to the growing acceptance of SpectraLink systems in the
marketplace.
Gross Profit. The Company's cost of sales consists primarily of direct
material, direct labor, service expenses and manufacturing overhead. Gross
profit increased by 14% to $15,018,000 in 1997 from $13,225,000 in 1996. The
Company's gross profit margin (gross profit as a percentage of net sales)
decreased to 54.1% in 1997 from 61.5% in 1996. The decrease in gross profit
margin was primarily due to (i) lower pricing to customers associated with
volume orders, (ii) costs associated with the introduction of new products and
(iii) increased service, installation, and warranty costs.
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 14% to $3,506,000 in 1997 from $3,073,000 in 1996,
representing 12.6% and 14.3%, respectively, of net sales. Research and
development expenses in both 1996 and 1997 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 62% to
$11,458,000 in 1997 from $7,073,000 in 1996, representing 41.2% and 32.9%,
respectively, of net sales. These increases in both dollar expense and percent
of sales were primarily due to adding sales and marketing personnel to increase
sales and market penetration.
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 35% to $2,154,000 in 1997 from $1,590,000
in 1996, representing 7.8% and 7.4%, respectively, of net sales. The increase
was primarily associated with the higher volume of production and sales, and
the expense of being a public company for a full year.
Investment Income and Other (Net). Investment income is the result of the
Company's investment in money market, investment-grade debt securities, and
government securities. Other income is generated primarily from purchase
discounts. The increase in this category from 1996 to 1997 was primarily due to
interest income from investment activities for all of 1997 compared to only
seven months for 1996.
Income Tax. The Company's tax provision in 1996 consists of an accrual for
state and federal minimum taxes.
11
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided net cash of $1,445,000 in 1998. From
December 31, 1997 to December 31, 1998, accounts receivable increased
$2,499,000 while accrued liabilities increased $1,345,000. The increase in
accounts receivable was primarily due to higher 1998 net sales, as compared to
1997. The increase in accrued liabilities was primarily due to the increase in
deferred revenue resulting from annual maintenance contracts that are billed in
advance. Investing activities in 1998 consisted of $1,240,000 for office
furniture acquisitions, leasehold improvements, and equipment mainly for
engineering and manufacturing. Purchases of investments were $10,863,000 in
1998. Investments of $15,000,000 matured in 1998. Financing activities in 1998
included proceeds from the issuance of stock under the provisions of the
Employee Stock Purchase Plan of $540,000, and issuance of common stock of
$176,000 from the exercise of incentive stock options. On November 11, 1998 and
February 26, 1997, the Board of Directors authorized the Company to buy back up
to 1,000,000 and 500,000 shares of the Company's common stock, respectively. As
of December 31, 1998 the Company had purchased 885,697 shares of common stock
at an aggregate purchase price of $2,743,000.
As of December 31, 1998, the Company had working capital of $33,795,000
compared to $27,903,000 as of December 31, 1997. Working capital as of December
31, 1998 included $22,922,000, $10,170,000 and $5,123,000 in cash and short
term investments, accounts receivable and inventory, respectively. As of
December 31, 1998, the Company's current ratio (ratio of current assets to
current liabilities) was 7.7:1, compared with a current ratio of 8.5:1 as of
December 31, 1997.
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 additional funds are raised by issuing equity securities,
further dilution to the existing stockholders will result. If adequate funds
are not available, the Company may be required to delay, scale back or
eliminate one or more of its research and development or manufacturing programs
or obtain funds through arrangements that may require the Company to relinquish
rights to certain of its technologies or potential products or other assets
that the Company would not otherwise relinquish. Accordingly, the inability to
obtain such financing could have a material adverse effect on the Company's
business, financial condition and results of operations.
READINESS FOR THE YEAR 2000
Many existing computer systems, applications software, and other control
devices, rely on only two digits to identify the year, without considering the
impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the Year 2000 and beyond. The Company relies
on information technology systems, applications and devices in operating and
monitoring all major aspects of its business, including financial systems (such
as general ledger, payroll and accounts payable modules), customer service,
manufacturing, infrastructure, embedded computer chips, networks,
telecommunications equipment and end products. The Company also relies,
directly or indirectly, on the external systems, software and devices of
business enterprises such as customers, suppliers, utilities, creditors,
financial organizations, consultants, and governmental entities, both domestic
and international, for accurate exchange of data. The Company feels that it is
taking reasonable steps to catalog and address those matters in both its
information technology systems and in other equipment with embedded
microprocessors that could cause a serious breach in its business and
operations due to Year 2000 issues. Specifically, with respect to its
information technology systems, the Company has assessed each item of software
and has completed 50% of the remediation necessary for such information
technology systems to be Year 2000 compliant. With respect to non-information
technology systems (such as the Company's telephone systems and security
system), the Company has completed approximately 50% of the assessment. The
Company also intends to test selected items to assure the integrity of the
Company's remediation programs. All testing is expected to be completed by June
30, 1999. At this point, the Company believes that all of its mission-critical
information technology and non-information technology systems will be Year 2000
compliant on time. However, delays in the implementation of remediation
programs for non-compliant systems or a failure by the Company to fully
identify all Year 2000 dependencies in the Company's systems could have a
material adverse effect on the Company's business, financial condition and
results of operations.
12
<PAGE> 14
The Company is also communicating with its major customers (including its
distributors), suppliers and financial institutions to assess the potential
impact on the Company's operations of such third parties failure to become Year
2000 compliant. This process has not been completed; based upon responses to
date, it appears that many of the Company's customers and suppliers have
indicated only that they have in place Year 2000 readiness programs, without
specifically representing that they will be Year 2000 compliant in a timely
manner. A failure by any of the Company's major customers or suppliers to be
Year 2000 compliant, or a failure by the Company to fully identify its
dependencies on the information technology systems of certain suppliers or
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. For example, the Company would
experience a material adverse impact on its business if significant suppliers
of electrical component parts, semi-conductors, printed circuit boards, other
raw materials or telecommunications systems fail to provide the Company in a
timely manner with necessary inventories or services due to Year 2000 systems
failures. Likewise, if the Company's customers are unable to process purchase
orders, payment checks, or other mission critical paperwork due to Year 2000
problems, SpectraLink's business, financial condition and results of operations
could be materially adversely affected. The Company's Year 2000 program
includes developing contingency plans to protect its business and operations
from Year 2000-related interruptions from third party non-compliance. The
Company expects to complete its risk assessment and contingency plan by June
30, 1999. The plans are expected to include back-up procedures, identification
of alternate suppliers (where possible), and increases in back-up inventory
levels.
Based upon its current assessment of its own information and
non-information technology systems, the Company does not believe it necessary
to develop an extensive contingency plan for those systems. There can be no
assurances, however, that any of the Company's contingency plans will be
sufficient to handle all problems or issues which may arise. The costs incurred
to date related to its Year 2000 activities have not been material to the
Company, and, based upon current estimates, the Company does not believe that
the total cost of preparing for Year 2000 programs will have a material adverse
impact on the Company's results of operations or financial condition. The
statements set forth herein concerning Year 2000 issues which are not
historical facts, are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
in the forward-looking statements. In particular, the costs associated with the
Company's Year 2000 programs and the time-frame in which the Company plans to
complete Year 2000 modifications are based upon management's best estimates.
These estimates were developed from internal assessments and assumptions of
future events. These estimates may be adversely affected by the scarcity of
personnel and system resources, and by the failure of significant third parties
to properly address Year 2000 issues. Therefore, there can be no guarantee that
any estimates, or other forward-looking statements will be achieved, and actual
results could differ significantly from those contemplated.
OTHER
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Annual Report on Form 10-KSB, 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, (i) the failure of the market for on-premises wireless telephone
systems to grow or to grow as quickly as the Company anticipates, (ii) the
intensely competitive nature of the wireless communications industry, (iii) the
ability of the Company and its resellers to develop and execute effective
marketing and sales strategies, (iv) the Company's reliance on sole or limited
sources of supply for many components and equipment used in its manufacturing
process, (v) the risk of business interruption arising from the Company's
dependence on a single manufacturing facility, (vi) the Company's dependence on
a single product line, (vii) the Company's ability to manage potential
expansion of operations, (viii) the Company's ability to attract and retain key
personnel, (ix) the Company's ability to respond to rapid technological changes
within the on-premises wireless telephone industry, (x) changes in rules and
regulations of the FCC, (xi) the Company's ability to protect its intellectual
property rights, (xii) the assertion of intellectual property infringement
claims
13
<PAGE> 15
against the Company, (xiii) changes in economic and business conditions
affecting the Company's customers, (xiv) potential business interruptions
associated with the Year 2000 issue including but not limited to the failure of
some customers to purchase capital equipment such as the Company's in the
periods immediately prior to the turn of the century, (xv) other factors over
which the Company has little or no control and (xvi) 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
<PAGE> 16
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants F-1
Balance Sheets as of December 31, 1998 and 1997 F-2
Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 F-3
Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 F-4
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-5
Notes to Financial Statements F-6
</TABLE>
15
<PAGE> 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, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
February 5, 1999
F-1
<PAGE> 18
SPECTRALINK CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
AS OF DECEMBER 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,019 $ 5,674
Short-term investments 13,903 12,980
Trade accounts receivable, net of allowance of
$355 and $354, respectively
10,170 7,671
Inventory 5,123 4,766
Other 607 554
-------- --------
Total current assets 38,822 31,645
-------- --------
INVESTMENTS IN GOVERNMENT SECURITIES 1,993 6,944
PROPERTY AND EQUIPMENT, at cost:
Furniture and fixtures 1,330 1,200
Equipment 4,247 3,203
Leasehold improvements 638 580
-------- --------
6,215 4,983
Less - Accumulated depreciation (3,435) (2,355)
-------- --------
Net property and equipment 2,780 2,628
OTHER 121 82
-------- --------
TOTAL ASSETS $ 43,716 $ 41,299
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 820 $ 492
Accrued payroll, commissions, and employee benefits 1,345 1,168
Accrued sales and use tax 332 358
Accrued warranty expenses 398 531
Other accrued expenses 262 141
Deferred revenue 1,871 1,052
-------- --------
Total current liabilities 5,028 3,742
LONG-TERM LIABILITIES 190 131
-------- --------
Total liabilities 5,218 3,873
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Note 3):
Common stock, $.01 par value; 50,000 shares
authorized; 19,837 and 19,419 shares
issued, respectively, and 18,951 and
19,130 outstanding, respectively 198 194
Additional paid-in capital 49,515 48,803
Accumulated deficit (8,472) (10,547)
Treasury stock, at cost (2,743) (1,024)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 38,498 37,426
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,716 $ 41,299
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part
of these balance sheets.
F-2
<PAGE> 19
SPECTRALINK CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES $ 35,135 $ 27,785 $ 21,491
COST OF SALES 14,475 12,767 8,266
-------- -------- --------
Gross profit 20,660 15,018 13,225
OPERATING EXPENSES:
Research and development 3,799 3,506 3,073
Marketing and selling 13,951 11,458 7,073
General and administrative 2,188 2,154 1,590
-------- -------- --------
Total operating expenses 19,938 17,118 11,736
-------- -------- --------
INCOME (LOSS)FROM OPERATIONS 722 (2,100) 1,489
INVESTMENT INCOME AND OTHER, net 1,486 1,536 1,197
-------- -------- --------
INCOME (LOSS)BEFORE INCOME TAXES 2,208 (564) 2,686
INCOME TAX EXPENSE (BENEFIT) 133 (4) 134
-------- -------- --------
NET INCOME (LOSS) $ 2,075 $ (560) $ 2,552
======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE (Note 2) $ 0.11 $ (0.03) $ 0.18
======== ======== ========
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING 19,230 19,120 14,120
======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE (Note 2) $ 0.11 $ (0.03) $ 0.14
======== ======== ========
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 19,600 19,120 18,560
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-3
<PAGE> 20
SPECTRALINK CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Treasury Stock Additional
--------------- --------------- ----------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1995 3,773 $ 38 7,415 $ 75 -- $ -- $ 20,430 $(12,539)
Exercise of incentive stock options 232 2 -- -- -- -- 80 --
Conversion of preferred stock 11,130 111 (7,415) (75) -- -- (36) --
Proceeds from sales of common stock
pursuant to Employee Stock
Purchase Plan 205 2 -- -- -- -- 493 --
Net proceeds from sale of common
stock in initial public offering
(net of offering costs of $939) 3,805 38 -- -- -- -- 27,333 --
Net income -- -- -- -- -- -- -- 2,552
------ ------ ------ ------ ------ -------- -------- --------
BALANCES, DECEMBER 31, 1996 19,145 191 -- -- -- -- 48,300 (9,987)
Exercise of incentive 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 incentive stock options 218 3 -- -- -- -- 175 --
Proceeds from sales of common 200 1 -- 537
stock pursuant to Employee Stock
Purchase Plan -- -- -- --
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)
====== ====== ====== ====== ====== ======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-4
<PAGE> 21
SPECTRALINK CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,075 $ (560) $ 2,552
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,083 978 656
Amortization of discount/premium on investments in
debt securities (109) (48) (233)
Loss (gain) on disposal of assets -- 21 (31)
Changes in assets and liabilities --
Increase in accounts receivable, net (2,499) (3,278) (108)
Increase in inventory (356) (1,132) (1,395)
Increase in other assets (93) (130) (339)
Increase (decrease) in accounts payable 328 134 (70)
Increase in other accrued liabilities and
deferred revenue 1,017 1,810 414
-------- -------- --------
Net cash provided by (used in) operating activities 1,446 (2,205) 1,446
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,240) (2,008) (1,224)
Proceeds from disposal of property and equipment 5 2 60
Purchases of investments, at cost (10,863) (16,900) (28,744)
Maturity of investments 15,000 20,000 6,525
-------- -------- --------
Net cash provided by (used in) investing activities 2,902 1,094 (23,383)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and notes payable -- -- 275
Repayments on line of credit and notes payable -- -- (610)
Payments on capital lease obligations -- (31) (71)
Purchase of treasury stock (1,719) (1,024) --
Proceeds from exercise of incentive common stock options 176 44 82
Proceeds from issuance of common stock, net of expenses 540 462 27,866
-------- -------- --------
Net cash (used in) provided by financing activities (1,003) (549) 27,542
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,345 (1,660) 5,605
CASH AND CASH EQUIVALENTS, beginning of year 5,674 7,334 1,729
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 9,019 $ 5,674 $ 7,334
======== ======== ========
NONCASH TRANSACTIONS:
In May 1996, 7,415 shares of Series A, B, C, D, and E voting convertible
preferred stock and 4 Series C warrants were converted into 11,130 shares of
common stock.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ -- $ 1 $ 28
======== ======== ========
Cash paid for income taxes $ 15 $ 28 $ 143
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements
F-5
<PAGE> 22
SPECTRALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) ORGANIZATION AND BUSINESS
SpectraLink Corporation (the "Company") was incorporated in Colorado on
April 25, 1990, and subsequently reincorporated in Delaware effective on March
1, 1996, to develop and market wireless business communications systems. The
Company grants credit to its customers, who are primarily (i) end-users such as
retail store chains, hospitals and other healthcare related entities, as well
as industrial concerns, and (ii) distributors in the telecommunications
industry who resell the product. The Company's customers are predominately
located in the United States. Foreign sales have not been significant to date.
(2) SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid instruments purchased with original maturity dates of 90 days or
less to be cash equivalents.
Short-term Investments and Investments in Government Securities
Short-term investments and investments in government securities consist
of U.S. Government or U.S. Government Agency notes as well as corporate
commercial paper. The Company has classified these investments as
held-to-maturity securities. As such, these investments are stated at amortized
cost at December 31, 1998 and 1997. Following is information related to these
investments:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1998 1997
-------- --------
Commercial Paper: (IN THOUSANDS)
<S> <C> <C>
Fair value $ 1,954 $ 967
Gross unrealized holding losses 1 1
-------- --------
Amortized cost $ 1,955 $ 968
======== ========
U.S. Government and Agency Obligations:
Fair value $ 13,981 $ 18,969
Gross unrealized holding gains (41) (16)
Gross unrealized holding losses 1 3
-------- --------
Amortized cost $ 13,941 $ 18,956
======== ========
</TABLE>
No investments were sold prior to maturity in 1998 or 1997. The
contractual maturity of the held-to-maturity investments as of December 31,
1998, ranges from one month to two years.
Concentrations of Credit Risk
The Company's revenues generally are concentrated among customers in the
healthcare and retail industries. The Company establishes an allowance for
uncollectible accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
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. Inventories at December 31, 1998 and 1997 consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $ 2,715 $ 2,529
Work in progress 3 57
Finished goods 2,405 2,180
-------- --------
$ 5,123 $ 4,766
======== ========
</TABLE>
F-6
<PAGE> 23
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.
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 or customer acceptance if that is a condition of the
contract. Revenue from service agreements is recorded as deferred revenue when
paid by the customer and recognized as revenue over the lives of the respective
agreements.
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. A deferred tax asset is reduced by a valuation allowance
if, based on the weight of evidence available, it is more likely than not that
some portion or all of a deferred tax asset will not be realized (see Note 4).
Earnings per Share
Effective December 15, 1997, the Company has adopted the provisions of
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share". SFAS 128 requires entities to present both Basic Earnings Per Share
("EPS") and Diluted EPS. Basic EPS excludes dilution and is computed by
dividing income (loss) available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. All
earnings per share amounts and weighted average shares outstanding for 1996
have been restated to reflect the adoption of SFAS 128. Potential dilution of
securities exercisable into common stock were computed using the treasury stock
method based on the average fair market value of the stock.
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except per share amounts)
------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- ------------------------- -------------------------
Net Per Net Per Net Per
Income Shares Share Loss Shares Share Income Shares Share
------ ------ ------ ----- ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS-- $2,075 19,230 $ 0.11 $(560) 19,120 $(0.03) $2,552 14,120 $0.18
Effect of dilutive securities:
Convertible preferred stock -- -- 3,560
Stock purchase plan 54 -- 60
Stock options outstanding 316 820
------------------------------------------------------------------------------------
Diluted EPS-- $2,075 19,600 $ 0.11 $(560) 19,120 $(0.03) $2,552 18,560 $0.14
====== ====== ====== ===== ====== ====== ====== ====== =====
</TABLE>
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.
F-7
<PAGE> 24
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.
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).
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income". SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, gains, and losses) in a
full set of general-purpose financial statements. SFAS 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
has not had any other comprehensive income for the three years ended December
31, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which establishes standards for the
reporting of information about operating segments. Since its inception, the
Company has conducted its operations in one operating segment due to
substantially all of its sales resulting from its wireless business
communications systems products.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and hedging activity. SFAS No. 133 is
effective for all periods in fiscal years beginning after June 15, 1999. SFAS
No. 133 requires recognition of all derivative instruments on the balance sheet
as either assets or liabilities and measurement at fair value. Changes in the
derivative's fair value will be recognized currently in earnings unless
specific hedge accounting criteria are met. Gains and losses on derivative
hedging instruments must be recorded in either other comprehensive income or
current earnings, depending on the nature of the instrument. The Company is
currently assessing the effect of adopting SFAS No. 133 on its financial
statements and plans to adopt the statement on January 1, 2000.
During 1998, the American Institute of Certified Public Accountants
issued Statements of Position Nos. 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" and 98-5 "Reporting of the
Costs of Start-up Activities." Adoption of these pronouncements in 1998 had no
effect on the Company's financial position, results of operations or cash
flows.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
(3) STOCKHOLDERS' EQUITY
Common Stock
In April and May 1996, the Company issued 3,805,100 shares of common
stock pursuant to an initial public offering. Proceeds of $27,371,000 were
received by the Company, net of offering costs of approximately $939,000. The
Company repurchased 597,197 and 288,500 shares of its common stock in 1998 and
1997, respectively, which are included in treasury shares.
F-8
<PAGE> 25
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 1,500,000 shares of common stock of the Company. Effective July
25, 1995, the number of shares of common stock of the Company reserved for
options was increased to 3,000,000 shares. Effective May 1, 1997, the number of
shares of common stock of the Company reserved for options was increased to
4,000,000 shares.
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, 1996, 1997
and 1998, is as follows:
<TABLE>
<CAPTION>
NON-QUALIFIED STOCK OPTIONS INCENTIVE STOCK OPTIONS
------------------------------------ ---------------------------------------
NUMBER OF SHARES NUMBER OF SHARES
------------------- --------------------
OFFICERS, DIRECTORS WEIGHTED AVERAGE WEIGHTED AVERAGE
AND CONSULTANTS EXERCISE PRICE OFFICERS EMPLOYEES EXERCISE PRICE
------------------- ---------------- -------- --------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1995 112 $3.29 461 746 $1.40
Granted -- -- -- 208 5.32
Canceled -- -- -- (24) 2.61
Exercised -- -- -- (232) 0.35
----- ----- -------- -------- -----
Outstanding at December 31, 1996 112 3.29 461 698 2.29
Granted 253 3.90 287 227 3.85
Canceled (3) 3.75 (70) (75) 3.83
Exercised -- -- -- (76) 0.59
----- ----- -------- -------- -----
Outstanding at December 31, 1997 362 3.71 678 774 2.77
Reclass -- -- (99) 99 1.41
Granted 163 3.95 73 188 3.62
Cancelled -- -- -- (99) 4.57
Exercised -- -- -- (218) 0.80
----- ----- -------- -------- -----
Outstanding at December 31, 1998 525 3.79 652 744 3.11
===== ===== ======== ======== =====
Exercisable at December 31, 1998 216 $3.67 348 391 $2.56
===== ===== ======== ======== =====
</TABLE>
The reclass of Incentive Stocks Options was due to a change in the
categorization of officers to non-officers as a result of reassignment.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Weighted average fair value of options granted during the year,
pursuant to SFAS 123 $ 1.93 $ 2.08 $ 2.49
</TABLE>
F-9
<PAGE> 26
A summary of additional information related to the options outstanding as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------------
Number Weighted Number
Outstanding at Average Weighted Exercisable Weighted
Range of 12/31/98 Remaining Average at 12/31/98 Average
Exercise Prices (in thousands) Contractual Life Exercise Price (in thousands) Exercise Price
- --------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.20 - $2.00 362 3.0 years $1.15 348 $1.12
$2.56 - $3.30 280 4.3 years $3.08 175 $3.15
$3.38 - 3.50 211 3.4 years $3.48 138 $3.50
$3.56 1 6.9 years $3.56 0 $3.56
$3.63 239 7.2 years $3.63 1 $3.63
$3.69 0 6.9 years $3.69 0 $3.69
$3.75 306 6.8 years $3.75 89 $3.75
$3.81 - $3.88 35 6.2 years $3.82 14 $3.81
$4.00 370 6.2 years $4.00 160 $4.00
$4.13 - $8.63 117 6.6 years $5.90 30 $7.62
----- ---
Total 1,921 5.5 years $3.30 955 $2.81
===== ===
</TABLE>
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 1998, 1997 and 1996,
respectively: risk-free interest rates of 5.51%, 6.1% and 6.0%; no expected
dividend yields; expected lives of 3.8 years, 3.8 years and 3.8 years; and
expected volatility of 65%, 68% and 55%.
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 employees 200,111 shares in 1998, 198,348 shares in 1997, and
204,977 shares in 1996. 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 1998, 1997 and 1996: no dividend yield; an
expected life of six months (eight months for the initial offering period ended
June 30, 1996); expected volatility of 65%, 68% and 55%, respectively; and a
risk free interest rate of 5.22%, 5.13% and 5.26%, respectively. The weighted
average fair value of the right to purchase those shares in 1998, 1997 and 1996
was $1.14, $.95 and $1.69 per share, respectively.
Pro Forma Disclosure of Stock-Based Compensation
Using these assumptions, the fair value of the stock options granted in
1998, 1997 and 1996 was approximately $819,000, $1,596,000 and $518,000,
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 $894,000, $721,000 and
$487,000 in 1998, 1997 and 1996, respectively, and for the Stock Purchase Plan
was $214,000, $189,000 and $318,000 in 1998, 1997 and 1996, 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 (in thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)
As reported $ 2,075 $ (560) $ 2,552
Pro forma $ 967 $ (1,470) $ 1,747
Diluted earnings (loss) per share
As reported $ .11 $ (.03) $ .14
Pro forma $ .05 $ (.08) $ .09
</TABLE>
Weighted average shares used to calculate pro forma diluted earnings
(loss) per share were determined as described in Note 2, except in applying the
treasury stock method to outstanding options, net proceeds assumed received
upon exercise were increased by the amount of compensation cost attributable to
future service periods and not yet recognized as pro forma expense.
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
<PAGE> 27
(4) INCOME TAXES
The expense (benefit) for income taxes for the years ended December 31,
1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal $ 49 $ -- $ 63
State and local 84 (4) 71
-------- -------- --------
$ 133 $ (4) $ 134
======== ======== ========
Current $ 133 $ (4) $ 134
Deferred -- -- --
-------- -------- --------
$ 133 $ (4) $ 134
======== ======== ========
</TABLE>
The following reconciles the Company's effective tax expense (benefit)
to the federal statutory expense (benefit) for the years ended December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense (benefit) per federal statutory
rate (34%) $ 751 $ (192) $ 913
Alternative minimum tax 49 -- 63
State income taxes 84 (22) 47
Permanent differences and other (179) (96) (1)
Adjustment of net operating loss to tax return (300) -- --
Increase (reduction) of valuation allowance (272) 306 (888)
-------- -------- --------
$ 133 $ (4) $ 134
======== ======== ========
</TABLE>
For federal income tax reporting purposes, at December 31, 1998, the
Company has approximately $5,385,000 of net operating loss carryforwards,
approximately $1,169,000 of research and development tax credit carryforwards
and approximately $129,000 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 2012 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:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31,
1998 CHANGE 1997
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Current deferred tax assets (liabilities)--
Warranty reserve $ 151 $ (50) $ 201
Allowance for uncollectible accounts 142 7 135
Inventory reserve 144 (2) 146
Accrued vacation 200 59 141
Other 87 44 43
Less--Valuation allowance (724) (58) (666)
Long-term deferred tax assets (liabilities)--
Depreciation 282 52 230
Capital leases (106) 2 (108)
Net operating loss carryforwards 2,048 (683) 2,730
Tax credit carryforwards 1,298 299 1,000
Less--Valuation allowance (3,522) 330 (3,852)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
Given the historical net losses of the Company (1995 represented the
first profitable year of the Company), management believes that the future tax
benefits as of December 31, 1998 and 1997, do not satisfy the realization
criteria set forth in Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" and has recorded a valuation allowance for the
entire net deferred tax asset.
F-11
<PAGE> 28
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value.
Cash and Cash Equivalents
The carrying amounts approximate fair value.
Short-Term Investments and Investments in Government Securities
The carrying amount of investments is at amortized cost (see Note 2),
and fair values are based on market prices at year-end, or for certain
investments with a short maturity, amortized cost approximates fair values.
(6) 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 and $65,000 for the years ended
December 31, 1997 and 1996, respectively. This rental agreement ended December
31, 1997.
F-12
<PAGE> 29
(7) 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, 1998, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1999 $ 759
2000 663
2001 585
2002 585
2003 585
Thereafter 878
-------
$ 4,055
=======
</TABLE>
Total rent expense for noncancelable, cancelable and month-to-month
operating leases for the years ended December 31, 1998, 1997 and 1996 was
approximately $1,080,000, $995,000 and $465,000, respectively.
(8) 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, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Customer A 17% 9% 19%
Customer B 5% 11% 6%
Customer C 3% 11% 7%
Customer D --% --% 18%
-------- -------- --------
25% 31% 50%
======== ======== ========
</TABLE>
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, 1998 and 1996 and one customer with an accounts
receivable balance of approximately 12% as of December 31, 1997.
(9) 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 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,
1998, 1997 and 1996.
F-13
<PAGE> 30
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
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 1999 Annual Meeting of Stockholders to be held on or about
May 11, 1999.
ITEM 10. 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 1999 Annual Meeting of Stockholders to be held on or about
May 11, 1999.
ITEM 11. 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 1999 Annual Meeting of Stockholders to be held on or about
May 11, 1999.
ITEM 12. 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 1999 Annual Meeting of Stockholders to be held on or about
May 11, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 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)
10.4 Form of Indemnification Agreement with directors and
executive officers of the Registrant.(1)
14
<PAGE> 31
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.*
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
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of
1998.
SpectraLink and the SpectraLink logo are registered trademarks of SpectraLink
Corporation. Link Wireless Telephone System and Wireless@work are trademarks of
SpectraLink Corporation. All other trademarks mentioned herein are the property
of their respective owners.
15
<PAGE> 32
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant 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 18, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ BRUCE M. HOLLAND Principal Executive Officer March 18, 1999
- --------------------------------------- and Director
Bruce M. Holland
/s/ WILLIAM R. MANSFIELD Principal Financial Officer March 18, 1999
- --------------------------------------- and Principal Accounting Officer
William R. Mansfield
/s/ CARL D. CARMAN Director March 18, 1999
- ---------------------------------------
Carl D. Carman
/s/ ANTHONY V. CAROLLO, JR. Director March 18, 1999
- ---------------------------------------
Anthony V. Carollo, Jr.
/s/ BURTON J. MCMURTRY Director March 18, 1999
- ---------------------------------------
Burton J. McMurtry
/s/ F. GIBSON MYERS, JR. Director March 18, 1999
- ---------------------------------------
F. Gibson Myers, Jr.
</TABLE>
16
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
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.*
23.1 Consent of Arthur Andersen LLP*
27 Financial Data Schedule*
</TABLE>
- ---------------
* 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
17
<PAGE> 1
LEASE AGREEMENT
THIS LEASE AGREEMENT is entered into this 26th day of February, 1998,
between Flatiron Park Company, hereinafter called "Lessor," and SpectraLink,
Corporation, hereinafter called "Lessee."
1. Introduction. The Lessor has the legal right to lease the real
property and improvements (hereinafter called "Premises") described in Exhibit
"A," which exhibit is attached hereto and incorporated by reference. The
Premises comprise a portion of 5744 Central Avenue, Boulder, Colorado. The
parties now desire to enter into an agreement providing for the Lessee's lease
of the Premises, and this document sets forth in writing the terms of their
agreement.
2. Premises, Term of Lease, Rental. The Lessor hereby leases the
Premises to the Lessee, and the Lessee hereby leases the Premises from the
Lessor, for a term commencing at 12:01 A.M. on the 1st day of April, 1998 and
ending at 11:59 P.M. on the 31st day of March, 2001, unless sooner terminated
as herein set forth. The Lessee agrees to pay Lessor as rent for the Premises
according to the terms of the RENT SCHEDULE in paragraph 31 of this lease. Said
rent is payable, in advance, by 12:00 noon on the first day of each and every
month of the term hereof at the office of the Lessor.
In the event that the tenancy commences on a date other than the
first day of a month, the rent for the first and last months of the tenancy
shall be prorated and paid on the date of commencement and the first day of the
last month, respectively.
3. Condition of Premises. The Lessor, shall deliver the Premises to
Lessee clean and free of debris on the Lease commencement date (unless the
Lessee is already in possession) and the Lessor warrants to the Lessee that the
plumbing, lighting, air-conditioning, and heating in the Premises shall be in
good operating condition on the Lease commencement
1
<PAGE> 2
date. In the event that it is determined that this warranty has been violated,
then it shall be the obligation of the Lessor, after receipt of written notice
from the Lessee setting forth with the specificity nature of the violation, to
promptly rectify such violation. The Lessee's failure to give such written
notice within thirty (30) days after the Lease commencement date shall cause
the conclusive presumption that the Lessor has complied with all of the
Lessor's obligations hereunder. The warranty contained in this paragraph shall
be of no force or effect if, prior to this date, the Lessee was an occupant of
the Premises. Except as otherwise set forth in this paragraph, the Lessee
accepts the Premises in the condition existing as of the Lease commencement
date or the date that the Lessee takes possession of the Premises, whichever is
earlier, and the Lessee hereby waives any and all warranties of condition or
habitability, suitability for occupancy, use, or habitation, merchantability or
fitness for a particular purpose, whether express or implied, relating to the
Premises.
4. Use of Premises. The Lessee covenants and agrees that it will not
without Lessor's previous written consent, use, suffer or permit the Premises,
or any part thereof, to be used for any purpose other than that of conducting
thereon an electronic research and development and manufacturing business.
Lessee acknowledges that its use of the Premises is subject to all applicable
zoning, municipal, county and state laws, ordinances and regulations governing
and regulating the use of the Premises, and further subject to any covenants or
restrictions of record (a copy of such covenants and restrictions are attached
as Exhibit "B" and incorporated by reference). Lessee shall have no right to
grant utility easements or rights of way on the Premises or to permit the
construction or location on the Premises of utility equipment or infrastructure
without Lessor's prior written consent. Lessee further agrees that no materials
(including toxic chemicals) other than trash and rubbish in sanitary containers
approved by Lessor will be placed outside the building. No vehicles of any kind
will be parked on the Premises except in the designated parking areas. No
vehicles will be parked at
2
<PAGE> 3
the loading docks other than while being actively loaded or unloaded. No
vehicles, trailers, or other equipment of Lessee or its agents, employees, or
invitees shall be parked overnight on the Premises without the written
permission of Lessor.
5. Assignment. It is expressly understood and agreed by the Lessee
that the Lessee's leasehold interest may not be assigned or sublet in whole or
in part without in each case having first obtained the written consent of the
Lessor. Such consent will not be unreasonably withheld.
6. Access to Premises. It is expressly understood and agreed by the
Lessee that the Lessor or their agents shall have free access at all reasonable
hours to the Premises for the purpose of examining the same or exhibiting the
same to prospective buyers or lessees (Lessor will use reasonable efforts to
screen all prospective buyers or Lessees to determine that they are not
competitors of Lessee and will give Lessee 24 hour notice before exhibiting the
Premises) or for making repairs on the Premises which the Lessor may desire to
make, or for accessing, servicing or installing utility equipment, transmission
lines, or other infrastructure on the Premises, Lessor will make reasonably
diligent efforts not to disturb Lessee's business during any Lessor's access.
Lessor shall have the right to use any and all means that Lessor may deem
necessary and proper to enter any portion of the Premises in an emergency, and
such entry shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into, or a detainer of, the Premises or an eviction,
actual or constructive, of the Lessee from the Premises.
7. Alterations. Lessee shall not make any alterations, additions, or
improvements including, but not limited to painting and signs, in or to the
Premises without Lessor's prior written consent, which will not be unreasonably
withheld. In particular, and not by way of limitation, Lessee agrees that: (a)
Lessee will submit to Lessor all plans for signs to be erected, substituted,
changed or modified on the Premises, including color, site, location,
3
<PAGE> 4
height, and lighting; (b) No temporary structure, tent, or trailer shall be
constructed or permitted to remain on the Premises; (c) No apparatus of any
kind may be added to the exterior of the building by Lessee; and (d) No locks
may be changed on the Premises without Lessor's consent. Any alterations,
additions, or improvements that the Lessee shall desire to make and which
require the consent of the Lessor shall be presented to the Lessor in written
form with scaled, detailed plans showing modifications of all electrical,
heating, ventilating, air-conditioning, plumbing and other systems as well as
modifications to walls, permanent partitions, doors and other structures, and
the Lessee shall furnish as-built scaled plans upon the completion of the
modifications. Lessee agrees that it shall be solely responsible for all costs
and expenses incurred in connection with any alterations, additions, or
improvements desired by Lessee, including, without limitation, the cost of any
additional construction, modifications, or improvements mandated under federal,
state, or local law as a result of Lessee's alterations, additions, or
improvements.
8. Landlord Not Liable. Lessor shall not be liable for any damages
occasioned by failure to keep the Premises in repair, and shall not be liable
for any damage done or occasioned by or from electrical current, plumbing, gas,
water, steam, or sewage, or the bursting, leaking, running or failure of
operation of any radiator, tank, water closet, wash stand, waste pipe, air
conditioning, or any other apparatus, above, upon, or about the Premises or the
Building, nor the damage occasioned by water, snow, or ice being upon any
sidewalk or entrance way, or being upon or coming through the roof, sky light,
trap door or any other opening in the Premises or the Building, nor from loss
suffered by fire, regardless of origin, wind, rain, flood or other elements,
nor from any damage arising from the action or negligence of Lessee or other
occupants of the Building or of any owners or occupants of its adjacent or
contiguous property. Lessee hereby releases, discharges, and agrees to
indemnify Lessor of and from any and all claims, demands, and liability for
any loss, damage, injury, or
4
<PAGE> 5
other casualty to property, whether it be that of either of the parties hereto
or of third persons, whether they be third persons of Lessee or agents or
employees of Lessee, caused by, arising from, or happening in connection with
Lessee's use or occupancy of the Premises or Lessee's use of any equipment,
facilities, or property in, on, or adjacent to the Premises or the Building.
Not-withstanding anything else in this Paragraph 8, if any of the damages are
caused by the gross negligence or willful misconduct of Lessor, its agents,
employees, guests, or invitees, Lessor is liable and Lessee does not indemnify
Lessor for claims related to such acts or omissions.
9. Additional Areas. It is expressly understood and agreed by Lessee
that if the Lessor shall furnish any automobile parking spaces, common areas,
or any other facilities, equipment or appliances outside of and in addition to
the Lessee's Premises, the same shall be deemed gratuitously furnished by the
Lessor and that if any person shall use the same, such person does so at his or
her own risk and upon the express understanding and stipulation that the Lessor
shall not be liable for any loss of property through theft, casualty, or
otherwise, or for any damage or injury whatsoever to person or property.
Maintenance of such additional areas for normal wear and tear shall be the
responsibility of Lessor, but Lessee agrees to be responsible for any
additional damage caused by its agents, employees, guests or invitees.
10. Additional Rent.
10.1 Utilities. Whenever possible, all utility services to the leased
premises, including, without limitation, gas, electricity, telecommunications,
water, and sewer, shall be contracted directly in the name of the Lessee, and
the Lessee shall be solely responsible for the direct payment of all utility
fees and service charges for such utilities. If, for any reason, it is not
possible for the Lessee to contract directly for any utility service, and the
cost of such service is billed to the Lessor, the Lessee shall pay Lessor
additional annual rent equal to the full amount of such utility fees and
service charges paid by Lessor. Where such a utility
5
<PAGE> 6
service is metered by a common meter, the Lessor shall apportion the total cost
among the tenants serviced by such meter, taking into account the area leased,
type of business conducted, and any other factors deemed relevant by the
Lessor. Such apportionment shall be made in the Lessor's sole, good faith
judgment, and shall be final and binding upon Lessee.
10.2 Operating Expenses. In addition, the Lessee shall pay Lessor
additional annual rent equal to the cost of all operating expenses for the
Building multiplied by 50% percent. Operating expenses shall be limited to: (a)
taxes, assessments and governmental taxes, whether federal, state, county or
municipal, which are levied on or charged against the Premises and any other
taxes and assessments attributable to the Premises and its operation excluding,
however, federal and state income taxes; (b) all insurance premiums paid by the
Lessor attributable to the Premises; (c) all expenses incurred in connection
with the maintenance, operation, and repair of the Building, associated
equipment, adjacent walks, parking areas, and landscaped areas; (d) Building
and cleaning supplies and materials; (e) the cost of all charges for cleaning,
maintenance and service contracts, trash collection, snow removal, and other
services with independent contractors; (f) the reasonable amortization of any
capital improvements which are made or installed by Lessor after the
commencement of this Lease for the purpose of saving labor or otherwise
reducing applicable operating expenses; (g) all other costs and expenses
reasonably necessary in the operation and maintenance of a first class
Building; (h) the cost of all common area utility and service charges for the
Premises, including, without limitation, gas, electricity, water, and sewer.
Operating costs shall not include the cost of any work or service performed
specially by the Lessor for any lessee at the cost of such lessee, damages
caused by Lessor's gross negligence or willful misconduct, depreciation (except
as provided in "f" above), or financing costs (including interest or principal
amortization) paid by Lessor.
6
<PAGE> 7
10.3 Payment of Additional Rent. Such additional rent shall be paid at
monthly intervals in advance within fifteen days after receipt of statements of
charges and/or estimated charges from Landlord. At the end of each calendar
year, or, at Lessor's option, at any other more frequent interval, Lessor shall
provide an accounting of the utility fees and service charges for the leased
premises paid by Lessor, if any, total operating expenses for the Building,
Lessee's share of operating expenses, and Lessee's payments toward such amounts
during the year or interval. During the thirty-day period following such
accounting, Lessor shall pay any excess to the Lessee if payments exceed
expenses, and the Lessee shall pay additional rent to Lessor if expenses exceed
payments.
11. Personal Property Taxes. The Lessee shall pay and discharge all
personal property taxes which are levied, assessed, imposed or charged upon its
personal property and inventory or which arise out of or result from the
activities carried on by the Lessee at or upon the leased Premises.
12. Insurance. The Lessee shall, at its expense, acquire a general
liability insurance policy effective as of the date of this Lease Agreement.
Said policy shall be acquired from a company qualified and permitted to do
business in the State of Colorado. Said policy shall be in the minimum total
amounts of $1,000,000.00 combined single limits for bodily injury and property
damage. Said policy shall be maintained in full force and effect during the
entire lease term and shall contain a provision prohibiting cancellation
thereof without at least ten (10) days' notice to the Lessor, who shall be a
named insured. A copy of the Policy and Current Declaration of coverage shall
be provided to the Lessor within ten (10) days after commencement of the lease
and each renewal date.
The Lessor shall maintain on the Building and other improvements (but
not Lessee's personal property, fixtures, equipment, and tenant improvements)
in which the Premises are located a policy of standard fire and extended
coverage insurance to the extent of at least
7
<PAGE> 8
ninety percent (90%) of full replacement value. The insurance policy shall be
issued in the names of Lessor and Lessor's lender, as their interest appear,
and any proceeds shall be made payable to Lessor. The cost of such insurance
shall be passed on to the Lessee as part of the operating expenses for the
Building.
The parties release each other, and their respective authorized
representatives, from any claims for damages arising out of or incident to the
perils insured against or under the insurance policies carried by the parties
and in force at the time of such damage, whether due to the negligence of
Lessor or Lessee or their agents, employees, or invitees. The parties shall,
upon obtaining the policies of insurance required herein, give notice to the
insurance carrier or carriers that the foregoing mutual waiver of subrogation
is contained in this Agreement.
13. Indemnification. The Lessee agrees to indemnify and hold the
Lessor harmless from any claims, damages, liens, or judgments that may be
filed, entered or asserted against it by virtue of the Lessee's use of the
Premises or by virtue of any act of the Lessee, its agents, servants or
employees.
14. Condemnation. If all or a substantial part of the Premises is
taken or condemned for a public or quasi-public use (or any transfer is made in
lieu thereof), and the part thereof which remains is not suitable for the
Lessee's business use, then this Lease shall, upon written notice from Lessee,
terminate as of the date that title is taken by the condemnor. Lessor shall,
after the taking of all or any portion of the Premises, provide the same amount
of square feet of usable building space for Lessee's operations in the immediate
vicinity of the Premises, and, in the event Lessor cannot do so, Lessee shall
have the right to terminate this Lease, but shall not receive payment in any
form of compensation. All compensation awarded upon any such condemnation or
taking shall go to the Lessor except that the Lessee shall be
8
<PAGE> 9
entitled to that part of the total award, if any, specifically allocated to the
value of the Lessee's fixtures so taken.
15. Release of Liens. Lessee expressly covenants and agrees that it
will, during the term hereof, promptly remove or release, by the posting of a
bond or otherwise, as required or permitted by law, any lien attached to or
upon the Premises or any portion thereof by reason of any act or omission on
the part of the Lessee, and it hereby expressly agrees to save and hold
harmless the Lessor from or against any such lien or claim of lien. In the
event any such lien does attach, or any claim of lien is made against the
Premises, which may be occasioned by any act or omission upon the part of the
Lessee, and it is not thus removed or released within thirty (30) days after
notice thereof, Lessor, in its sole discretion, (but nothing herein contained
shall be construed as requiring it so to do) may pay and discharge the said
lien and relieve the said demised Premises from any such lien, and the Lessee
agrees to pay and reimburse Lessor upon demand for or on account of any expense
which may be incurred by Lessor in connection with such lien of claim,
including reasonable attorney's fees.
16. Repair and Maintenance. The Lessor shall be responsible for all
repair, maintenance, and replacements required to maintain and keep the
Building in good condition and shall receive reimbursement of such costs as
part of the operating expenses for the Building; provided, however, that the
Lessee shall be wholly responsible for replacement of cracked or broken glass,
replacement of all incandescent and fluorescent lights and maintenance of all
light fixtures on the Premises and all damage to the Building resulting from
acts or omissions of the Lessee, its agents, employees or invitees. The Lessee
shall not be responsible for maintenance or repair resulting from acts or
omissions of other tenants, their agents, employees, or invitees.
17. Compliance With Laws and Regulation. The Lessee shall comply with
all laws and regulations of governmental entities, agencies or authorities
having jurisdiction over
9
<PAGE> 10
the Premises and the uses made therein. The Lessee shall not permit a nuisance
to exist on the leased Premises.
18. Payments to Lessor. Until notice to the contrary is given to the
Lessee, all payments to be made to the Lessor hereunder shall be made by
delivering the same at the address of the Lessor as set forth in Paragraph 19
hereof so that payment is received by the Lessor on or before the due date.
19. Notice. Whenever notice is required to be given to a party
hereunder, said notice shall be in writing and shall be given to the party
entitled thereto by delivering a copy thereof to the party entitled thereto or
by mailing a copy thereof to the party entitled thereto by registered or
certified mail, return receipt requested. If such notice is given by delivering
a copy to the person entitled thereto, said notice shall be complete and
effective on the date of such delivery. If such notice is given by mailing a
copy to the person entitled thereto, said notice shall be complete and
effective on the date it is received by the following persons at the addresses
indicated:
Lessor: Flatiron Park Company
5540 Central Avenue
Boulder, Colorado 80301
Lessee: V. P. of Finance
SpectraLink, Corporation
5755 Central Avenue, Suite 100
Boulder, Colorado 80301
10
<PAGE> 11
20. Surrender of Premises. The Lessee shall, upon the termination of
this lease, whether said termination occurs due to the expiration of the lease
term or otherwise, surrender the Premises in as good a condition as when
entered upon, subject only to ordinary wear and tear. Upon the surrender of the
Premises, the Lessee shall, if it is not then in default hereunder, have the
right to remove its inventory, furnishings, equipment and trade fixtures from
the leased Premises provided that it repair all damage done to the leased
Premises in accomplishing said removal so as to leave the Premises in the same
condition as when entered upon, ordinary wear and tear excepted.
21. This paragraph intentionally left blank.
22. Premises Damages or Destroyed. In the event the Premises are
damaged or rendered wholly or partially unusable by fire, flood, windstorm,
explosion or any other casualty, then the rights and obligations of the parties
shall be as follows:
Lessor shall a) within ten days of the Casualty give Lessee a good
faith estimate of the time to repair or replace the damaged Premises, b) and if
reasonably possible complete the repair or replace said premises within 120
from date of the damage. In the event the repairs or replacements will not be
or are not completed within 120 days, the Lessee may at its option terminate
this lease, and all the Lessee's obligation for further rent payments shall
cease as of the date of said termination. Rent shall not be abated unless more
than 20 percent of the interior floor space in the Premises is rendered
untenantable and the total repairs are not completed in 30 days, in which event
there shall be an abatement of rent from the casualty date in proportion to the
portion of the interior floor space rendered untenantable. In no event shall
there be an abatement of rent if the damage is caused by any casualty on the
Premises as a result of acts or omissions of the Lessee.
The parties recognize that the Lessee on most occasions will be
storing valuable materials and equipment within the Premises. In the event the
Premises are so damaged by
11
<PAGE> 12
such casualty that Lessee's property would be endangered by exposure to the
elements, and in the further event that Lessee desires to complete emergency
repairs, the restoration of any alterations to the Premises occasioned by
emergency repairs shall also be borne by the Lessee. Lessor shall have no
obligation to make such emergency repairs nor any liability for damage directly
or indirectly caused to Lessee's property by such casualty.
23. Default and Abandonment. If the Lessee defaults in any of its
obligations hereunder and fails to correct said default within ten days after
written notice thereof from the Lessor, or, if such breach is not in payment of
money, has not within said ten-day period of time commenced substantial efforts
to cure said breach and thereafter continued its efforts to cure said breach
with due diligence, or, if the Lessee abandons the Premises, which shall be
conclusively deemed to occur if Lessee makes no use of the Premises for fifteen
consecutive days during the term of this lease (except in the case of causality
to this Premises or any other reason not within the control of Lessee, in
which case Lessor has no such right), then the Lessor shall have the right to
declare this agreement terminated and to re-enter and take immediate possession
of the demised Premises, or, without in any way being obligated so to do, the
Lessor may elect to retake possession of said Premises and rent the same for
such rent and pursuant to such conditions as the Lessor believes best, making
such changes and repairs as may be required, and giving credit for the amount
of rent so received less all expenses for reletting, advertising, cleaning,
removal or storage of Lessee's property, and repairs, and in such event, said
Lessee shall be liable for the balance of the rent herein reserved until the
expiration of the term of this lease.
The Lessee shall pay unto the Lessor additional rent for late rent
payments as to all rental payments not made on or before the fifth (5th) day of
the month in which they are due, said additional rent to be five percent (5%)
of the rent payment so delinquent for each month or fraction thereof that such
payment is late; however the Lessor shall give Lessee 24 hours
12
<PAGE> 13
notice before imposing said late fee. The parties agree that this late charge
is reasonable liquidated damages taking into account the time spent by Lessor,
its agents and employees because of such late rent payments, processing and
accounting charges, and late charges that may be imposed on Lessor under the
trust deed covering the Premises.
In the event of a default by the Lessee in the performance of any of
its duties and obligations hereunder, the Lessee shall pay all costs incurred
by the Lessor in the enforcement of the provisions of this lease (including
this provision) as against said Lessee, said costs to include reasonable
attorneys' fees whether or not litigation is commenced.
24. Holding Over. If Lessee remains in possession of the Premises
after the expiration of this lease and without the execution of a new lease, it
shall be deemed to be occupying said Premises as Lessee from month to month
at a rent equal to one and one half times the monthly rental being paid by it
at the time of said expiration of lease.
25. Bankruptcy. If at any time during the term hereof the Lessee
shall file a voluntary petition in Bankruptcy, or if an involuntary petition in
Bankruptcy shall be filed against Lessee if the same shall not be dismissed
within sixty (60) days, or if the Lessee makes an assignment for the benefit of
creditors, or if a receiver shall be appointed for Lessee, then the Lessor may,
at its option, in any of such events, immediately take possession of the
demised Premises and terminate this lease. Upon such termination, all
installments of rent earned to the date of termination and unpaid shall at once
become due and payable, and in addition thereto Lessor shall have all rights
provided by the Bankruptcy Code relative to the proof of claims on an
anticipatory breach on an executory contract.
26. Rent Regulations. If the rent to be paid by the Lessee to the
Lessor hereunder, whether pursuant to Paragraph 2 or Paragraph 24, is subject
to regulation by law, then the rent to be so paid shall be the maximum rental
permitted by said laws but in no event
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<PAGE> 14
in excess of the rent provided for or determined in accordance with the
applicable provisions of this Lease Agreement.
27. Meaning of Words. Unless the context clearly indicates a contrary
intention, all words used herein in one gender shall extend to and include
the other gender; all words in the singular number shall extend to and include
the plural; and all words used in the plural number shall extend to and include
the singular.
28. Remedies Not Exclusive. It is agreed that each and every one of
the rights, remedies and benefits provided by this lease shall be cumulative,
and shall not be exclusive of any other of said rights, remedies and benefits,
or of any other rights, remedies and benefits allowed by law.
29. Waiver. One or more waivers of any covenant or condition by the
Lessor shall not be construed as a waiver of a further breach of the same.
30. Lease Binding. The covenants, conditions and agreements
contained in this lease shall bind and inure to the benefit of the Lessor and
Lessee and their respective heirs, personal representatives and successors,
and except as otherwise provided in this lease, their assigns.
14
<PAGE> 15
31. Rent Schedule.
<TABLE>
<S> <C> <C> <C>
April 1, 1998 through March 31, 1999 $8,048.00 per month
April 1, 1999 through March 31, 2000 $8,370.00 per month
April 1, 2000 through March 31, 2001 $8,705.00 per month
</TABLE>
15
<PAGE> 16
32. Quiet Enjoyment. Subject to the terms and conditions of this
lease, Lessor covenants that so long as the rental is current for the demised
Premises and there is no default in any of the covenants to be performed by
Lessee, the Lessee shall peaceably and quietly hold and enjoy the demised
Premises for the entire term of this lease and any renewals thereof.
33. Subordination. This lease is and shall be subordinate to any
mortgage, deed of trust, or other security agreement now of record or recorded
after the date of this lease affecting the Premises. Such subordination is
effective without any further act of Lessee. Lessee shall from time to time on
request from Lessor execute and deliver any documents that may be required by a
lender to effectuate any subordination. If Lessee fails to execute and deliver
such documents, Lessee irrevocably constitutes and appoints Lessor as Lessee's
special attorney-in-fact to execute and deliver such documents on Lessee's
behalf. Lessor will use reasonable effort to get a non-disturbance agreement
from applicable lenders.
34. Security Deposit. On execution of this lease, Lessee shall
deposit with Lessor $8,048.00 to be held by Lessor without liability for
interest, as a security deposit for the performance by Lessee of all its
obligations under this lease. If Lessee is in default, Lessor can use the
security deposit, or any portion of it, to cure the default or to compensate
Lessor for all damage sustained by Lessor resulting from Lessee's default.
Lessee shall, within fifteen (15) days of demand pay such amount to Lessor as
is necessary to restore the security deposit to the amount set forth above. At
the expiration or termination of this lease, Lessor shall return to Lessee that
portion of the security deposit remaining after application of such amounts as
are necessary to compensate Lessor for Lessee's defaults, if any.
35. Additional Rent and Interest. Any monetary obligations of Lessee
to Lessor under the terms of this lease shall be deemed to be rent. Any amount
due to Lessor under any of the provisions of this lease shall bear interest
from the date due at fifteen (15%) percent per annum, provided, however, that
interest shall not be payable on late charges nor any amounts
16
<PAGE> 17
upon which late charges are paid. Payment of such interest shall not cure or
excuse any default by Lessee.
36. Severability. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction shall in no way affect the
validity of any other provision hereof.
37. Prohibition on Animals. Lessee, its employees, authorized
representatives, and invitees shall not permit any access to or use of the
Premises or any part of the Premises by any animals, whether domestic or
agricultural. Any such use shall constitute a default under this lease, and
Lessee shall be fully responsible for any damages caused thereby.
38. Environmental Matters.
38.1 Definitions.
38.1.1 Hazardous Material. Hazardous Material means any substance:
(a) which is or becomes defined as a "hazardous material,"
"hazardous waste," "hazardous substance," "regulated substance," pollutant or
contaminant under any federal, state or local statute, regulation, rule, order,
or ordinance or amendments thereto; or
(b) the presence of which on the Premises causes or
threatens to cause a nuisance upon the Premises or to adjacent properties or
poses or threatens to pose a hazard to the health or safety of persons on or
about the Premises or requires investigation or remediation under any federal,
state or local statute, regulation, rule, order, or ordinance or amendments
thereto.
38.1.2 Environmental Requirements. Environmental Requirements means
all applicable present and future statutes, regulations, rules, ordinances,
codes, licenses, permits, orders, approvals, plans, authorization, concessions,
franchises, and similar items, of all governmental agencies, departments,
commissions, boards, bureaus, or instrumentalities, of the United States,
states and political subdivisions thereof and all applicable judicial,
17
<PAGE> 18
administrative, and regulatory decrees, judgments, and orders relating to the
protection of human health or the environment.
38.1.3 Environmental Damages. Environmental Damages means all claims,
judgments, injuries, damages (including without limitation damages for
diminution in the value of the Premises and adjoining property and for the loss
of business from the Premises and adjoining property), losses, penalties,
fines, liabilities (including strict liability), encumbrances, liens, costs,
and expenses of investigation and defense of any claim, and of any good faith
settlement of judgment, of whatever kind or nature, contingent or otherwise,
matured or unmatured, foreseeable or unforeseeable, including without
limitation reasonable attorneys' fees and disbursements and consultants' fees,
any of which are incurred at any time as a result of the existence of
"Hazardous Material" upon, about, beneath the Premises or migrating or
threatening to migrate to or from the Premises or the existence of a violation
of "Environmental Requirements" pertaining to the Premises.
38.2 Obligation To Indemnify, Defend And Hold Harmless.
38.2.1 Lessee, its successors, assigns and guarantors, agree to
indemnify, defend, reimburse and hold harmless the following persons from and
against any and all "Environmental Damages" arising from activities of Lessee
or its employees, agents, or invitees which (a) result in the presence of
"Hazardous Materials" upon, about or beneath the Premises or migrating to or
from the Premises, or (b) result in the violation of any "Environmental
Requirements" pertaining to the Premises and the activities thereon:
(i) Lessor;
(ii) any other person who acquires a portion of the Premises
in any manner, including but not limited to through purchase, at a foreclosure
sale or otherwise through the exercise of the rights and remedies of Lessor
under this Agreement; and
18
<PAGE> 19
(iii) the directors, officers, shareholders, employees,
partners, agents, contractors, subcontractors, experts, licensees, affiliates,
lessees, mortgagees, trustees, heirs, devisees, successors, assigns and
invitees of such persons.
38.2.2 This obligation shall include, but not be limited to, the
burden and expense of defending all claims, suits and administrative
proceedings (with counsel reasonably approved by the indemnified parties), and
conducting all negotiations of any description, and paying and discharging,
when and as the same become due, any and all judgments, penalties or other sums
due against such indemnified persons. Lessee, at its sole expense, may employ
additional counsel of its choice to associate with counsel representing Lessor.
38.2.3 The obligations of Lessee in this section shall survive the
expiration or termination of this Lease.
38.3 Notification.
38.3.1 If Lessee shall become aware of or receive notice or other
communication concerning any actual, alleged, suspected or threatened violation
of "Environmental Requirements," or liability of Lessee for "Environmental
Damages" in connection with the Premises or past or present activities of any
person thereon, or that any representation set forth in this Agreement is not
or is no longer accurate, then Lessee shall deliver to Lessor, within ten days
of the receipt of such notice, or communication or correcting information by
Lessee, a written description of such information or condition, together with
copies of any documents evidencing same.
38.4 Negative Covenants.
38.4.1 No Hazardous Material on Premises. Except in strict compliance
with all Environmental Requirements, Lessee shall not cause, permit or suffer
any "Hazardous Material" to be brought upon, treated, kept, stored, disposed
of, discharged, released, produced, manufactured, generated, refined or used
upon, about or beneath the Premises or
19
<PAGE> 20
any portion thereof by Lessee, its agents, employees, contractors, tenants or
invitees, on any other person without prior written consent of Lessor.
38.4.2 No Violations of Environmental Requirements. Lessee shall not
cause, permit or suffer the existence or the commission by Lessee, its agents,
employees, contractors, or invitees, or by any other person of a violation of
any "Environmental Requirements" upon, about or beneath the Premises or any
portion thereof.
38.5 Right To Inspect.
38.5.1 Lessor shall have the right in its sole and absolute
discretion, but not the duty, to enter and conduct an inspection of the
Premises at any reasonable time to determine whether Lessee is complying with
the terms of this Agreement, including but not limited to the compliance of the
Premises and the activities thereon with "Environmental Requirements" and the
existence of "Environmental Damages." Lessee hereby grants to Lessor the right
to enter the Premises and to perform such tests on the Premises as are
reasonably necessary in the opinion of Lessor to conduct such reviews and
investigations. Lessor shall use its best efforts to minimize interference with
the business of Lessee but Lessor shall not be liable for any interference
caused thereby.
38.6 Right To Remediate.
38.6.1 Should Lessee fail to perform or observe any of its obligations
or agreements pertaining to "Hazardous Materials" or "Environmental
Requirements," then Lessor shall have the right, but not the duty, without
limitation upon any of the rights of Lessor pursuant to this Agreement, to
enter the Premises personally or through its agents, consultants or contractors
and perform the same. Lessee agrees to indemnify Lessor for the costs thereof
and liabilities therefrom as set forth in Section 38.2.
39. Monitoring Equipment. Should equipment for monitoring fire systems
and/or security systems be deemed necessary by the Lessee or be required for
the Premises by
20
<PAGE> 21
Federal, State, or Local Governing Agencies because of Lessee's equipment, the
nature of Lessee's business, or Lessee's modification of the Premises, Lessee
shall be responsible for installation of such monitoring system, for any
required building permits, and monthly monitoring fees. Should such monitoring
systems be otherwise required by Federal, State, or Local Governing Agencies,
Lessor shall be responsible for installation of such monitoring systems, but
Lessee shall pay for monthly monitoring fees as additional rent.
40. Force Majeure. In the event that Lessor shall be delayed or
hindered in, or prevented from, the performance of any act required hereunder
by reason of strikes, lockouts, labor troubles, inability to procure
materials, the inability to obtain building inspections, approvals, or permits,
stop work orders, the inability to obtain a certificate of occupancy, failure
of power or unavailability of utilities, riots, insurrection, war or other
reason of like nature not the fault of Lessor or not within its control, the
performance of such acts shall be excused for the period of delay, and the
period for the performance of any such act shall be extended for a period
equivalent to the period of such delay (including extension of both the
commencement and termination dates of this Lease); provided, however, that if
Lessee is not in any way responsible for the delay and does not have use or
occupancy of the Premises during the period of delay, the rent payable
hereunder shall be abated for such period of delay.
41. Other. A. This lease agreement is expressly conditioned upon
Lessor obtaining an agreement for modification of the existing Lease to reduce
space occupied by SystemSoft Colorado Corporation to the first floor of the
building, the terms and conditions of such modification agreement to be
satisfactory to Lessor, in its sole discretion. In the event such modification
agreement is not obtained, this lease shall be null and void.
B. Lessee shall have a right of offer to the first floor space after
SystemSoft Colorado Corporation's first right of offer, terms and conditions to
be determined at such time Lessee's right are exercised. This right of offer
must be exercised within 3 business days after
21
<PAGE> 22
notification by Lessor that the space is available, failure to do so shall
result in forfeiture of all rights under this paragraph.
IN WITNESS WHEREOF, the parties have hereunto set their hands and
seals this date and year above written.
LESSOR: Flatiron Park Company
BY: /s/ RICHARD L. HEDGES
-----------------------------
LESSEE: SpectraLink, Corporation
BY: /s/ JAMES C. BROD
-----------------------------
ITS: VP Finance
-----------------------------
22
<PAGE> 23
STATE OF COLORADO)
)SS
COUNTY OF BOULDER)
The foregoing instrument was acknowledged before me by DICK HEDGES, of FLATIRON
PARK CO., Lessor, on the 13th day of MARCH, 1998.
Witness my Hand and official Seal.
My commission expires:
---------------------
Notary Public: /s/ CHARISSE J. KOLISH CHARISSE J. KOLISH
------------------------ NOTARY PUBLIC
STATE OF COLORADO
My Commission Expires Feb. 11, 2002
STATE OF COLORADO)
)SS
COUNTY OF BOULDER)
The foregoing instrument was acknowledged before me by JIM C. BROD, of
SPECTRALINK CORPORATION, Lessee, on the 3 day of MARCH, 1998.
Witness my Hand and official Seal.
My commission expires:
---------------------
Notary Public: /s/ CHARISSE J. KOLISH CHARISSE J. KOLISH
------------------------ NOTARY PUBLIC
STATE OF COLORADO
My Commission Expires Feb. 11, 2002
23
<PAGE> 24
Exhibit A has not been attached. Exhibit A depicts a sketch of the leased
premises.
Exhibit B has not been attached. Exhibit B describes the declaration of
protective covenants for the Flatirons Industrial Park filing number four.
<PAGE> 25
AMENDMENT TO LEASE AGREEMENT
(Addition of square feet and modification of terms and rents)
The purpose of this Amendment, dated January 8, 1999 is to add approximately
4,184 square feet and modify the terms of the Lease as noted, between Flatiron
Park Company "LESSOR," and Spectralink, Corporation, "LESSEE," for The Premises
(Exhibit "A") located at 5744 Central Avenue, Boulder, CO.
This Amendment modifies the term of the Lease Agreement, dated February 26,
1998 as referenced in Paragraph 2 and provides for the rent schedule Paragraph
31 and terms to be modified.
The Lessor hereby leases the Premises to the Lessee, and the Lessee hereby
leases the Premises from the Lessor, for a term commencing at 12:01 A.M. on the
1st day of March, 1999 and ending at 11:59 P.M. on the 30th day of June, 2005
unless sooner terminated as herein set forth. The Lessee agrees to pay Lessor
as rent for the premises according to the terms of the RENT SCHEDULE below:
March 1, 1999 through February 29, 2000 $13,094.00 per month
March 1, 2000 through February 28, 2001 $13,618.00 per month
March 1, 2001 through February 28, 2002 $14,162.00 per month
March 1, 2002 through February 28, 2003 $14,729.00 per month
March 1, 2003 through February 29, 2004 $15,318.00 per month
March 1, 2004 through February 28, 2005 $15,931.00 per month
March 1, 2005 through June 30, 2005 $16,568.00 per month
Paragraph 10. Additional Rent. Operating multiplier shall be 78%.
Lessor shall construct a wall to separate the restroom facilities from the
Lessee's space (the restroom facilities will become common to the building) and
Lessor shall construct a wall at the rear stair well
<PAGE> 26
[ILLEGIBLE]
-----------
Initials
to demise the premises. Lessor shall also construct wall to fill in existing
interior doors and windows on South wall of space in rear of building. The
changes are noted on Exhibit C. Except as noted above Lessee shall take the
premises "as is".
All other terms and conditions of the original Lease, all Amendments and all
other written agreements are to remain in full force and effect.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals this
date and year above written.
LESSOR: Flatiron Park Company
BY: /s/ RICHARD L. HEDGES
----------------------------
LESSEE: SpectraLink Corporation
BY: /s/ WILLIAM R. MANSFIELD
----------------------------
ITS: CFO
----------------------------
<PAGE> 27
STATE OF COLORADO)
) SS
COUNTY OF BOULDER)
The foregoing instrument was acknowledged before me by
RICHARD L. HEDGES, of FLATIRON PARK CO., Lessor, on the 13 day of JANUARY,
1999.
Witness my Hand and official Seal.
My commission expires: FEB. 11, 2002
--------------------
Notary Public: /s/ CHARISSE J. KOLISH CHARISSE J. KOLISH
---------------------------- NOTARY PUBLIC
STATE OF COLORADO
My Commission Expires Feb. 11, 2002
STATE OF COLORADO)
) SS
COUNTY OF BOULDER)
The foregoing instrument was acknowledged before me by William R. Mansfield, of
SpectraLink Corp., Lessee, on the 13 day of January, 1999.
Witness my Hand and official Seal.
My commission expires: My Commission Expires: 1/23/02
Notary Public: /s/ JAMES C. BROD JAMES C. BROD
---------------------------- NOTARY PUBLIC
STATE OF COLORADO
<PAGE> 28
Exhibit A has not been attached. Exhibit A depicts a sketch of the leased
premises.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-KSB into SpectraLink
Corporation's previously filed Form S-8, File Nos. 333-4650 and 333-30225.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
March 19, 1999.
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,019
<SECURITIES> 13,903
<RECEIVABLES> 10,170
<ALLOWANCES> 355
<INVENTORY> 5,123
<CURRENT-ASSETS> 38,822
<PP&E> 2,780
<DEPRECIATION> 3,435
<TOTAL-ASSETS> 43,716
<CURRENT-LIABILITIES> 5,218
<BONDS> 0
0
0
<COMMON> 198
<OTHER-SE> 38,300
<TOTAL-LIABILITY-AND-EQUITY> 43,716
<SALES> 35,135
<TOTAL-REVENUES> 35,135
<CGS> 14,475
<TOTAL-COSTS> 14,475
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,208
<INCOME-TAX> 133
<INCOME-CONTINUING> 2,075
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,075
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
