Item 1.
Business.
Item 1.A.
Risk Factors.
Item 2.
Properties.
Item 3.
Legal Proceedings.
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities.
Item 6.
Selected Financial Data.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7.A.
Quantitative and Qualitative Disclosures About Market Risk.
Item 8.
Financial Statements and Supplementary Data.
Item 9.A.
Controls and Procedures.
Part III
Item 10.
Directors and Executive Officers of the Registrant.
Item 11.
Executive Compensation.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13.
Certain Relationships and Related Transactions.
Item 14.
Principal Accounting Fees and Services.
Part IV
Item 15.
Exhibits, Financial Statements and Financial Statement Schedules.
Special Note Regarding Forward-Looking Statements
Certain statements about future events and expectations, or forward-looking statements in this Form 10-K, as well as statements made by us in periodic press releases, oral statements made by our officials to analysts and stockholders in the course of presentations about SpectraLink, and conference calls following earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “anticipates,” “expects,” “plans,” “estimates,” “intends,” “could,” “might,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements are based on assumptions, which are believed reasonable but, by their nature, are all inherently uncertain and involve risk. Examples of forward-looking statements include statements we make regarding future prospects for growth in the on-premise wireless telephone system and phone market, our ability to maintain or increase our market share and our future operating results. In all cases, results could differ materially from those projected. Certain risks and uncertainties relating to forward-looking statements are set forth below in “Management’s Discussion and Analysis of Financial Condition” and in Item 1.A. of this Form 10-K under the caption “Risk Factors.” New risks and uncertainties come up from time to time and it is impossible for us to predict these events or how they may affect us. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report.
PART I
Item 1. Business.
Overview
SpectraLink Corporation(1) (SpectraLink) was incorporated in Colorado in April 1990, and reincorporated in Delaware in March 1996. In December 1999, we formed SpectraLink International Corporation, a wholly owned subsidiary of SpectraLink, to operate our international business. On January 3, 2006, we acquired KIRK telecom A/S (KIRK telecom), and its subsidiaries, KIRK scantel A/S (KIRK scantel), and KIRK telecom, Inc. (together, KIRK). KIRK telecom and KIRK scantel are based in Denmark. KIRK was founded in 1892 as “Emil Moellers Telefonfabriker”, and was incorporated as KIRK telecom in 1991. KIRK scantel was established in 1999 to design, contract manufacture and sell wired and wireless telephones under the KIRK brand name to the residential market, primarily in the Scandinavian countries. KIRK telecom, Inc. was formed in 2004 and based in Atlanta, Georgia; distributed KIRK’s products in North America and was dissolved in January, 2007. Upon the acquisition of KIRK, we hired KIRK telecom, Inc.’s employees at SpectraLink. Any reference to “the Company,” “us,” “we,” or “our” in this document signifies the consolidated company, unless otherwise indicated.
Merger with Polycom (the Polycom Acquisition)
On February 7, 2007, SpectraLink Corporation entered into an Agreement and Plan of Merger (the Merger Agreement) with Polycom, Inc. (Polycom). Pursuant to the Merger Agreement, Polycom commenced a cash tender offer for all outstanding shares of SpectraLink common stock at a purchase price of $11.75 per share. Following the consummation of the tender offer, SpectraLink would become a wholly-owned subsidiary of Polycom.
As a condition to consummating the tender offer, SpectraLink stockholders must have validly tendered (and not withdrawn) shares constituting at least a majority of the outstanding shares of SpectraLink common stock (taking into account the potential exercise of stock options). In addition, the obligation of Polycom to consummate the tender offer is subject to several additional conditions described in the Merger Agreement, including among others, no material adverse effect on SpectraLink’s business having occurred. If more than a majority of the outstanding shares, but fewer than 90% of the outstanding shares, are validly tendered (and not withdrawn) in the tender offer, Polycom will be obligated to purchase the tendered shares but may elect to conduct a subsequent offering period in order to achieve ownership of 90% of the outstanding shares, in order to effect a short-form merger. We have granted Polycom an option (a top-up option) to purchase shares of SpectraLink common stock such that, if Polycom receives at least 80% of the outstanding shares through the tender offer, the additional shares purchased by exercising the option would enable Polycom to achieve ownership of 90% of the outstanding shares of SpectraLink common stock.
The closing of the merger is also subject to customary closing conditions. In particular, if Polycom owns fewer than 90% of the outstanding shares of SpectraLink common stock following the tender offer (and following exercise of the top-up option, if applicable), then SpectraLink will be required to hold a special stockholders meeting to obtain stockholder approval of the merger.
Tender and Voting Agreement
In order to induce Polycom to enter into the Merger Agreement, all directors and executive officers of the Company (in their capacities as stockholders of the Company), consisting of Carl D. Carman, Anthony V. Carollo, Jr., John H. Elms, Masood Garahi, John A. Kelley, Gerald J. Laber, Ole Lysgaard Madsen, Leah Maher, Ernest J. Sampias and Werner P. Schmücking, entered into Tender and Voting Agreements with Polycom concurrently with the execution and delivery of the Merger Agreement. Subject to the terms and conditions of these agreements, each director and executive officer of the Company agreed to tender the shares held by them in the tender offer and to vote such shares in favor of adoption of the Merger Agreement.
(1) SpectraLink and the SpectraLink logo are registered trademarks of SpectraLink Corporation. Link and NetLink are trademarks of SpectraLink Corporation. KIRK and the KIRK logo are registered trademarks of KIRK telecom. All other trademarks, service marks or trade names mentioned herein are the property of their respective owners.
Company Overview
We design, manufacture and sell workplace wireless telephone systems that complement existing telephone systems by providing mobile communications in a building or campus environment. Our wireless telephone systems increase the efficiency of employees by enabling them to remain in telephone contact while moving throughout the workplace. Our wireless telephone systems use a micro-cellular design and interface directly with a telephone system, such as a public branch exchange (PBX), Centrex, or key/hybrid system. Because all calls are routed through the corporate phone system, there are no airtime charges incurred for our customers when they use our wireless telephone system.
Our combined company product portfolio consists of three types of product categories differentiated by the wireless technologies implemented into the product: The LinkÔ Wireless Telephone System (Link WTS), NetLinkÔ Wireless Telephones and Digital Enhanced Cordless Telecommunication (DECT) wireless and corded systems and phones. Link WTS systems use a proprietary radio infrastructure in the 902-928 MHz radio band targeted to organizations that require a dedicated wireless voice solution for their on-premises mobile workforce. The NetLink Wireless Telephone products operate over IEEE 802.11-compliant wireless local area networks (WLANs) in the 2.4 GHz and 5 GHz unlicensed frequency bands using standards-based Internet Protocol (IP) technology. NetLink products are targeted to organizations that want both a wireless voice and wireless data solution on a single network. KIRK’s DECT products operate in the 1800, 1900 and 2400 MHz frequency bands using the DECT standard which is available as an unlicensed band in most of the world. In addition, we offer the SpectraLink Open Application Interface (OAI) and KIRK Serial In-Out (SIO) both of which enable third-party messaging applications to be integrated with SpectraLink and KIRK wireless telephones, respectively. Examples of these third-party applications are nurse call systems in hospital wards, inventory system look-ups in retail and warehousing sites, and control systems interactions in industrial and manufacturing facilities.
Both SpectraLink and KIRK are certified under, and have maintained compliance with, the International Standards of Operation (ISO) 9001; 2000 standard granted by the British Standards Institute evidencing our commitment to quality assurance.
Market Background
A growing number of businesses require a high degree of mobility for their employees within the workplace with accessibility by telephone to customers or coworkers. Mobile healthcare workers in clinical settings benefit from real-time communications to efficiently deliver quality healthcare. Retailers seek competitive advantages by quickly responding to customers’ requests for information and service from employees dispersed throughout the retail location. Hospitality providers seek shorter customer hold or response time by allowing immediate communications with those who can solve a problem or answer a question. Manufacturers seek more efficient operations by enabling workers in the factory to solve problems or answer questions more rapidly, which save them from costly down-time. Information technology, maintenance and other corporate office support personnel are more productive if they remain mobile in the workplace without compromising communications with others. Across industries, businesses are recognizing the benefits of wireless communications in the workplace.
Traditionally, businesses have attempted to maintain communications with mobile, on-premise 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 is often difficult to understand and may create disruptive and stressful ambient noise.
Conventional alternatives to paging include the use of two-way radios, cordless phones and traditional cellular phones, all of which have various limitations. Two-way radios do not provide an adequate link to the wired telephone system. Cordless phones are typically single-cell systems and have a limited calling range. Traditional cellular phones often provide inconsistent indoor reception, and unless specifically designed for on-premises use and durability, are not directly interfaced with a company’s telephone system. Therefore, traditional cellular phones do not offer feature-rich benefits of the wired desk phone. In addition, monthly usage fees and airtime charges may make cellular phones prohibitively expensive in many applications.
Products dedicated to on-premise voice applications first appeared in the 1990s in the unlicensed bands in North America, Europe, the Middle East, Africa and parts of Asia Pacific. These adjunct products attach directly to existing business telephone systems and provide wireless phone extensions for use on the premises. Because these systems are unlicensed, they can be installed or relocated without prior approval from the Federal Communications Commission (FCC) or the corresponding governing body in other geographies. The 902-928 MHz band in North America is set aside for unlicensed products which employ either narrow-band or spread spectrum technology. SpectraLink products utilize the spread spectrum technology. Because narrow-band technology systems in the 902-928 MHz band must 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 handoff to adjacent base stations, and systems that restrict wireless phones to a single base station, are available in the 902-928 MHz band. In the United States in 1994, the FCC allocated additional spectrum in the 1920-1930 MHz band for unlicensed on-premises wireless voice applications, but in April 2005 the FCC approved a modified version of DECT for use in the unlicensed 1920-1930 MHz band. The products that use this spectrum are commonly referred to as unlicensed personal communications systems (U-PCS).
Throughout Europe, the Middle East, Africa, Australia, and other regions, DECT systems operate in the 1880-1900 MHz band. DECT technology is used for both multi-cell business systems and single-cell residential cordless telephones, thereby reaching a larger market and resulting in both higher production volumes and lower end-user costs. Our DECT offerings contribute to our goal of growing our geographic footprint.
In 1997, the IEEE approved its 802.11 standard for WLANs operating in unlicensed frequency bands. The 802.11 standard specifies the radio interface between a wireless device and a base station or access point, as well as among wireless handsets. The standard allows devices to share a single WLAN infrastructure, including both voice and data devices, thus enabling organizations to provide mobile employees access to both data and voice applications over a single network. We chose to offer products that worked within the IEEE’s 802.11 specifications in order to maximize long-term market opportunity.
SpectraLink Products
The Link Wireless Telephone System operates in the 902-928 MHz band and uses a micro-cellular design consisting of three components: a Master Control Unit, Base Stations and Link Wireless Telephones. A Master Control Unit is installed near the telephone system, or at the Centrex demarcation location. It can interface either directly with the analog ports of the host telephone switching system, or it can connect via a digital interface to certain PBX and key/hybrid systems.
The Master Control Unit also connects to small radio transceivers called Base Stations via twisted-pair telephone wiring. The Base Stations provide the wireless link to a six-ounce Link Wireless Telephone with an alphanumeric display. The Link Wireless Telephone battery provides up to four hours of talk time or up to 80 hours of standby time.
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 moves throughout the coverage area. High-density Base Stations are available to support applications that require a large number of users within an area such as trading floors, support centers and emergency response centers. SpectraLink designed the Link Wireless Telephone System to provide seamless coverage, enabling real-time handoff of an active telephone call as the user roams.
NetLink Wireless Telephones operate in the 2400-2483 MHz and 5 GHz unlicensed bands and are compatible with the IEEE 802.11b, 802.11a, or 802.11g specifications (depending on specific handset models) for use on 802.11-compliant WLANs. Customers can use a single network for both wireless voice and data applications by adding the NetLink Wireless Telephones to an existing 802.11-compliant network provided by a WLAN vendor. The NetLink product line consists of up to three component types: NetLink Wireless Telephones, a NetLink SVP Server and NetLink Telephony Gateways.
NetLink handsets support either frequency hopping or direct sequence implementations of the 802.11 standard. The direct sequence version is compatible with the 802.11b, 802.11a, or 802.11g Wi-Fi standard depending on handset model. NetLink handsets also support the Session Initiation Protocol (SIP) voice over IP (VoIP) standard, and other proprietary VoIP protocols from Alcatel-Lucent, Avaya, Cisco Systems, Inter-Tel, Mitel, NEC and Nortel. Support for additional VoIP protocols is under development, allowing NetLink Wireless Telephones to operate with other proprietary and standards-based IP telephony platforms.
The NetLink SVP Server is a dedicated network appliance used in conjunction with our voice priority technology implemented in WLAN access points. SpectraLink Voice Priority (SVP) is a voice prioritization mechanism developed by us that improves voice quality on WLANs through the use of packet prioritization and timed delivery of packets. A majority of enterprise WLAN network access point providers have implemented SVP technology to work with their access points, including: Alcatel-Lucent, Aruba Wireless, Networks, BelAir Networks, Cisco Systems, Colubris Networks, Enterasys Networks, Extreme Networks, Intermec Technologies, Meru Networks, Motorola, Nortel, Proxim, Strix Systems and Trapeze Networks. Although new standards for quality of service (QoS) have been developed, we believe the minimum implementation of these standards will still require a NetLink SVP server to improve voice quality and system performance. However, implementation of optional components of the standard or proprietary QoS enhancements may allow NetLink Wireless Telephones to operate without the requirement for a NetLink SVP Server.
For applications that use traditional PBX or Centrex technologies, NetLink Telephony Gateways are installed near the PBX or key/hybrid system or at the Centrex demarcation location. NetLink Telephony Gateways convert a circuit-switched telephone station interface to IP packets on a standard Ethernet interface, allowing calls to connect with NetLink Wireless Telephones over wireless 802.11 networks. NetLink Telephony Gateways can either interface directly with the analog ports of the host telephone switching system or can connect via proprietary digital interfaces to certain PBX and key/hybrid systems.
KIRK Products
KIRK DECT products are adjunct, modular solutions which are compliant with Generic Access Profile (GAP). GAP defines a minimum mandatory set of technical requirements to ensure interoperability between any DECT GAP infrastructure element and DECT handsets. KIRK solutions consist of a KIRK Wireless Server, Base Stations and KIRK handsets. The solutions are customized to the individual customer needs by adding KIRK Base Stations and/or KIRK Repeaters for larger area coverage.
KIRK solutions offer high standards of voice quality, and are designed to transparently transfer PBX/call handler functions to KIRK handsets. Seamless handover between KIRK Repeaters and Base Stations facilitate uninterrupted calls throughout the
installation coverage area. Furthermore, KIRK handsets can be subscribed to KIRK solutions at up to 10 different locations, and will automatically connect to the relevant location. The messaging function between KIRK handsets secures optimal integration with different applications to enhance use of the KIRK wireless solution.
KIRK Wireless Servers are available in different models with capacities ranging from 1 to 1,500 wireless users, as well as a choice of analog, T1 or IP interface technologies.
KIRK handsets come in four models targeted at different job functions within the healthcare, retail, manufacturing and hospitality verticals. KIRK handsets offer high quality and durability attributes, with battery life of up to 16 hours of talk time or up to 150 hours in standby mode.
Technology
We devote significant planning and resources to development and use of advanced technology. Our focus on technology enables us to meet the requirements for delivery of portability, indoor radio and system performance, high reliability, low cost and manufacturability. All of our key technologies are incorporated into our Link WTS, NetLink and/or KIRK DECT wireless telephone portfolios. Our technologies include:
Spread Spectrum Technology. Spread spectrum is a radio frequency transmission technique in which the transmitted information is spread over a relatively wide bandwidth. The use of spread spectrum technology makes radio signals more immune to interference, reduces the possibility of interference with others, provides privacy against eavesdropping, and improves the quality of voice transmission. While there are many advantages to the spread spectrum technique, it is more complex to implement than more commonly used narrow-band modulation techniques. Link Wireless Telephone Systems use 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. NetLink Wireless Telephones use either frequency hopping or direct sequence spread spectrum technology. Direct sequence spread spectrum uses a technique whereby a signal is spread over the available band by mixing the signal data with a much higher data-rate pseudo-random data stream. As with frequency hopping spread spectrum, the resulting signal is decoded at the receiving end. The spread spectrum technologies implemented in NetLink Wireless Telephones conform with IEEE 802.11 (frequency hopping) and 802.11a/b/g (direct sequence) global standards.
Radio Technology. We have designed radio transceivers and digital circuits to implement the complex spread spectrum technique at an economical cost and in a small form factor. Our radio transceiver and digital circuit architectures also minimize power consumption and enhance manufacturability and reliability.
ASIC Design. Our expertise in digital application specific integrated circuit (ASIC) technology allows our systems to be miniaturized, power-efficient and cost-effective. Our wireless telephone, base station, master control unit, and telephony gateway designs all use ASICs. We expect to develop additional ASICs and to incorporate these devices into future systems.
Wireless Access Protocols. Combining spread spectrum with a micro-cellular design presents unique challenges compared to single-cell spread spectrum implementations, such as advanced home cordless telephones. To address this, we applied our software design expertise to develop robust networking that allows multiple users to have simultaneous telephone access in a spread spectrum radio environment without interfering with each other. We 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 the in-building wireless environment. The challenges include interference, multi-path degradation, signal absorption, near/far receiver desensitizing, security, busy-hour capacity demands and shared operation with other radio systems.
Call Hand-off. 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 with virtually no disruptive effect on the call in progress. We developed proprietary software to address the frequent and unpredictable nature of on-premises inter-cell handoffs due to interference, multi-path degradation and interior obstructions. Software in the SpectraLink wireless telephones automatically selects the best cell among available base stations or access points and performs the necessary timing and control to provide generally unnoticeable, seamless hand-off.
Telephone System Integration. When our system connects to the phone system using analog ports, our wireless telephones provide many calling features of a traditional desk phone including transfer, conference calling and hold. When the system digitally interfaces to the phone system, our wireless telephones also support the advanced features of the host phone system such as caller
identification or calling party name display and multiple line appearances. Currently, our products support digital interfaces to the following manufacturers’ telephone systems: Avaya, Comdial, Fujitsu, Inter-Tel, Mitel, NEC America, Nortel, Panasonic, Siemens and Toshiba. NetLink Wireless Telephones also integrate with IP standards-based telephone systems using standard or proprietary protocols. VoIP integration provides similar advanced features as traditional digital integration, but with a packet-based network interface. Currently, we support proprietary VoIP protocols from Alcatel-Lucent, Avaya, Cisco Systems, Inter-Tel, Mitel, NEC and Nortel.
Application Interface. The SpectraLink OAI and the KIRK SIO enable our handsets to work in conjunction with text messaging applications. The OAI and SIO allow third-party applications to write to the handset’s alphanumeric display, set up calls, and receive user input from the keypad. We have worked with application vendors to develop interfaces for e-mail, in-house paging systems, nurse-call systems, and industrial alarm and control systems.
Voice Quality. The SpectraLink SVP QoS mechanism demonstrates our commitment to interoperability, as SVP has served as the industry’s de facto QoS standard since 1999. Many major access point providers including Alcatel-Lucent, Aruba, Cisco Systems, Motorola, Nortel, Trapeze Networks and 3Com have implemented our SVP protocol, which enables our NetLink handsets to operate with their WLAN infrastructure. We anticipate that QoS standards will eventually replace the need for SVP and we intend to support those standards once they become more widely adopted among leading enterprise WLAN infrastructure vendors and provide adequate voice quality, capacity and battery life.
Sales, Marketing and Customer Support
SpectraLink Sales and Marketing
We sell and support our systems through direct and indirect channels including distributors and Original Equipment Manufacturers (OEMs). This strategy is intended to reduce our dependence on a single sales channel and to permit broad marketing of our products and services.
Sales. Our indirect sales channels sell a majority of our products and services through resellers, distributors and OEMs. Our direct sales channels sell our products and services to end-user customers and support the indirect sales channels. We have various sales offices throughout the United States and Canada. We also have international offices in Denmark, the United Kingdom and Australia.
Resellers. Our products are sold through a number of telecommunications equipment providers and distributors throughout the world. Each of these companies has a non-exclusive reseller relationship with us. We have not restricted our resellers from selling in the same geographical areas.
OEMs and Private Labels. We have established OEM agreements with various OEMs throughout the world. Through these agreements we manufacture products that are branded as, and sold exclusively through, the OEM partner and its channels. We also develop support for the OEM partners’ proprietary telephone switch protocols. We do not restrict markets for OEM partners. Each of these companies has a non-exclusive OEM relationship with us and there are no minimum purchase commitments.
KIRK Sales and Marketing
KIRK telecom has implemented an indirect sales strategy, divided into two categories: sales of KIRK branded products and sales of OEM branded products.
The KIRK-branded products are sold through a global network of distributors. A KIRK distributor may be a traditional vendor of telecommunication solutions as well as an IT system integrator.
OEM customers are typically leading PBX manufacturers who have chosen to outsource the development and manufacturing of wireless telephony. KIRK telecom develops and manufactures solutions based on OEM customer specifications, incorporating wireless KIRK products into OEM products. OEM customers market the KIRK manufactured products using their own product name and brand.
KIRK scantel sells its consumer telephones through distributors who have retail outlets, primarily in the Scandinavian countries.
Customer Support and Warranty Coverage
SpectraLink’s customer support operations are dedicated to planning, installing, repairing and maintaining our systems, as well as training our customers and business partners. Customer support personnel are located in Boulder, Colorado; and in other locations in the United States, Denmark, the United Kingdom and Australia. Customer support involvement occurs with customers during early customer contact, the system configuration and installation phases, on-going warranty periods, any contracted maintenance periods and on a time and materials basis.
Both SpectraLink and KIRK warrant that all products are free of defects upon delivery and provide standard warranty coverage at no cost for a limited period of time. After the warranty period, the SpectraLink and KIRK customer support departments sell various levels of support, based on the maintenance level selected and paid for by the customer.
The KIRK service organization provides customer technical training and third-level support to distribution and OEM customers, who provide first and second-level support to their sales channels. On-site trouble shooting visits are carried out on a time and materials basis to customers.
Customer Dependence, Geographical and Segment Information
One customer comprised more than 10% of total net sales in both 2006 and 2004. We had no customers exceeding 10% of sales in 2005. We had historically considered our operations to be conducted in one operating segment until the acquisition of KIRK. Our segment disclosures are included in Note 11 to the accompanying Consolidated Financial Statements in Item 8.
The following table summarizes the sales to different customer types as a percentage of total net sales:
We had revenue from international operations as a percentage of sales of approximately 26.5% during 2006, 6.3% during 2005 and 4.5% during 2004.
Backlog
SpectraLink generally ships systems promptly upon the receipt of an order. KIRK telecom primarily applies job production but with a relatively short lead-time. KIRK scantel carries inventory to sell to retail customers, and carries inventory quantities as necessary to meet those needs over its current operating cycle. With the exception of KIRK scantel, our backlog of orders is generally less than 30 days at any given time. Some of our 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, we currently do not consider backlog to be a meaningful indicator of future sales.
Competition
The on-premises wireless telephone system industry is competitive and influenced by the introduction of new products. The competitive factors affecting the market for our systems include product features and functions, 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 our competitors have significantly greater financial, technical, research and development, and marketing resources than we do. As a result, our competitors may respond more quickly to new or emerging technologies and changes in customer requirements, or may devote greater resources to the development, promotion, sale and support of their products than us. In addition, some purchasers may prefer to buy their wireless telephone systems from a single source provider of telephone systems. Other purchasers may prefer to buy their 802.11 wireless telephone systems from a single source provider of WLANs, such as Cisco Systems, which provides 802.11 wireless network infrastructure and enterprise telephone systems as well as wireless telephones, but is limited due to its inability to interoperate with the traditional PBX equipment. Because we focus on wireless on-premises telephone
communications, we cannot serve as the sole source for a complete telephone or data communications systems. There is no assurance that we will be able to compete successfully in the future.
Our product competition falls into four general categories: multi-user cordless telephone products, unlicensed multi-cell systems, cellular-based systems, and WLAN-based systems. Single-user cordless telephones are not considered competing products because of their low user capacity, limited range, and consumer-grade handset design. This category also includes recently announced handsets designed for use with residential Wi-Fi networks and consumer-focused VoIP services. We also do not regard public cellular or PCS services as current competitors because of their lack of integration with enterprise telephone systems, inadequate indoor coverage, and usage-based cost structure.
· Multi-user cordless telephone systems allow multiple handsets to operate in the same area without interference on shared or unique base stations. Some of these systems offer limited hand-off capability to a secondary base station for additional coverage. These products are typically sold through consumer electronics channels and are targeted at residential and small office applications.
· Unlicensed multi-cell systems are products that offer similar capacity and functions to our Link WTS. They operate on unlicensed radio spectrum with no airtime charges or licensing requirements. Some of these products are integrated into the host PBX system, allowing the wireless system to share some of the PBX common equipment and administration. Unlicensed multi-cell systems are available in North America from Alcatel-Lucent, Ascom and NEC America. Similar systems using DECT technology are sold throughout Europe and in several Asia-Pacific countries. DECT technology is used for both multi-cell business systems and single-cell residential cordless products. DECT systems are available from Alcatel-Lucent, Ascom, Avaya, Ericsson, Nortel, Philips, Siemens and several other manufacturers. Recent changes in FCC rules allow for sale of DECT-based systems for use in the U.S. and Canada operating in the U-PCS band at 1920 - 1930 MHz. Some modified DECT-based products were introduced into the North American market in 2005 and 2006.
· Cellular-based systems operate on licensed cellular frequencies, allowing handsets to be used on both the in-building wireless system and the public cellular network. These systems utilize a network of active or passive antennas installed throughout a building to provide radio coverage for cellular telephone users. Integration with the enterprise telephone system is addressed by forwarding calls to the cellular network through the telephone system or through an adjunct device.
· WLAN-based systems use VoIP technology to carry packetized voice information over a standards-based WLAN. Along with our NetLink handset, Ascom and Cisco Systems offer 802.11 handset products. In addition, Vocera Communications offers an 802.11 communication system that utilizes voice recognition technology. Additional WLAN-based handsets targeting users of consumer-targeted VoIP services are available from various vendors including D-Link, Netgear, 3Com and UT Starcom. These products are being offered at price points that are significantly lower than enterprise-targeted wireless handsets, yet significantly higher than typical consumer cordless phones. Several original design manufacturing (ODM) providers of electronic devices have developed Wi-Fi handsets targeted at consumer and low-end enterprise markets.
· Most of the leading cellular handset manufacturers have announced or launched dual-mode or multi-mode handsets combining traditional public cellular services along with 802.11 WLAN support including Motorola and Nokia. The 802.11 support capability is primarily focused on providing broadband data access on residential or public 802.11 networks, although in some cases the ability to use broadband VoIP services is also featured. The target market for dual-mode handsets is existing cellular telephone users, and therefore has little overlap with SpectraLink’s target market of on-premises enterprise users.
We also consider the existing technologies of overhead and electronic paging, two-way radios and cordless telephones to be competitive with our products. 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 our products. 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 functions provided by our products.
With the acquisition of KIRK telecom in January 2006, through KIRK scantel, we now compete in the residential market (both wired and wireless DECT systems), primarily in the Scandinavian countries. The overall market in the consumer segment is highly competitive and most of our competitors have significantly greater financial, technical, research and development, and marketing resources than we do. As a result, our competitors may respond more quickly to new or emerging technologies and changes in customer requirements, or may devote greater resources to the development, promotion, sale and support of their products than us.
Patents, Intellectual Property, and Licensing
We seek to establish and maintain our proprietary rights in our technology and products through the use of patents, copyrights, trademarks, trade secret laws and contractual restrictions, such as confidentiality agreements and licenses.
We have a program to file applications for, and obtain patents, copyrights and trademarks. We also seek to maintain our trade secrets and confidential information by nondisclosure policies and through the use of appropriate confidentiality agreements. SpectraLink has obtained a number of patents in the United States and in other countries. SpectraLink has registered SpectraLink and the SpectraLink logo in the United States. KIRK has registered the KIRK and the KIRK logo in key markets, including Denmark, the European Union, the United States, Canada and other countries. There can be no assurance, however, that the rights thereby obtained can be successfully enforced against competitive products. Although we believe the protection afforded by our patents, copyrights, trademarks, and trade secrets has value, the rapidly changing technology in the networking industry and uncertainties in the legal process make our future success dependent primarily on the innovative skills, technological expertise, and management abilities of our employees rather than on the protection afforded by patent, copyright, trademark and trade secret laws.
Many of our products are designed to include software or other intellectual property licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe based upon past experience and standard industry practice that such licenses generally could be obtained on commercially reasonable terms. Nonetheless, there can be no assurance that the necessary licenses would be available on acceptable terms, if at all. Our inability to obtain certain licenses or other rights, or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse effect on our business, operating results, and financial condition.
The industry in which we compete is characterized by rapidly changing technology, a large number of patents, and frequent claims and related litigation regarding patent and other intellectual property rights. We may in the future be notified that we are infringing certain patent and/or other intellectual property rights of others. Although there are no such pending lawsuits against us or unresolved notices that we are infringing intellectual property rights of others, there can be no assurance that our patents and other proprietary rights will not be challenged, invalidated, or circumvented; that others will not assert intellectual property rights to technologies that are relevant to us; or that our rights will give us a competitive advantage. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as the laws of the United States. The risks associated with patents and intellectual property are more fully discussed in the section of this report entitled “Risk Factors,” including the risk factors entitled “Our ability to protect or enforce our intellectual property rights,” “The assertion of intellectual property infringement claims against us,” and “We rely on the availability of third-party licenses.”
Manufacturing
Our 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, we conduct in-house prototype development and have established pilot line capabilities. We maintain complete in-house materials procurement, assembly, testing and quality control functions. In August 2001, SpectraLink entered into an agreement with Offshore International, Inc. (Offshore), as Offshore has an existing contractual relationship with Maquilas Teta Kawi S.A. de C.V., for the furnishing of manufacturing space, labor (primarily for component assembly) and services in Empalme, Sonora, Mexico. We utilize a minimal number of subcontract manufacturers to assemble our components.
The principal components of our systems are unpopulated printed circuit boards, electronic components, including microprocessors and ASICs, and metal or plastic housings, all of which are purchased from outside vendors. Although alternate suppliers are available for most of the components, qualifying replacement suppliers and receiving components could take several months. Many components are available only from sole source suppliers and embody such suppliers’ proprietary technologies. There is no assurance that any sole source supplier will continue to provide the required components in sufficient quantities with adequate quality and at acceptable prices. We would be adversely affected if a redesign of our subassemblies is necessary to develop alternative suppliers. In certain circumstances, a part will be placed on allocation due to competition for parts commonly used by the telecommunications and computer industries.
Consequently, we could see a material adverse effect on our operations if demand for our products considerably exceeds what is anticipated by the component manufacturers. We maintain, or require suppliers to at certain times maintain, inventory to allow us
to fill customer orders without significant interruption during the period that we believe would be required to obtain alternate supplies of many replacement components. However, there is no assurance that we will have sufficient inventory supply to meet every possible contingency. Any shortage or discontinuation of, or manufacturing defect in, these components could have a material adverse effect on our operations.
We lease 36,125 square feet of manufacturing space at 6175 Longbow Drive in Boulder, Colorado, and we also lease 18,654 square feet of manufacturing space primarily for component assembly in Empalme, Sonora, Mexico. Since we rely on these manufacturing facilities, a major catastrophe affecting either of these locations could result in a prolonged interruption of our business with adverse impact on us. However, we believe this risk is mitigated as a result of our acquisition of KIRK, since KIRK’s manufacturing facilities and equipment are similar to SpectraLink’s, and each of our facilities could be re-deployed to handle each other’s products.
All KIRK telecom manufacturing and final assembly takes place in Horsens, Denmark; in a 102,037 sq ft leased facility. Printed boards, plastic covers for handsets, components and other materials are sourced in the Far East and assembled in Horsens. Production planning and testing also take place in Horsens. KIRK scantel sub-contracts all manufacturing to facilities located in China.
Research and Product Development
The wireless telecommunications industry is subject to rapid technological changes, frequent new product introductions and enhancements, product obsolescence and changes in end-user requirements. We believe our future success and ability to compete in the on-premises wireless telephone market are largely dependent upon our ability to augment current product lines and develop, introduce and sell new features and products while maintaining technological competitiveness through the advancement of our core technologies.
Our research and development costs were approximately $20.5 million, $11.3 million, and $8.8 million in fiscal years 2006, 2005 and 2004, respectively. Our inability to introduce in a timely manner new products or enhancements to existing products that contribute to sales could have a material adverse effect on our business and financial condition.
Product Warranties and Service
We provide warranties against defects in materials and workmanship for products for periods ranging from 90 days to 15 months, and in limited cases up to 24 months. KIRK provides product warranties ranging from 15 to 24 months from the manufacturing date. At the time the product is shipped, we establish a provision for estimated costs of providing service under these warranties based on historical warranty experience and other relevant factors. As of December 31, 2006 and 2005, accrued warranty costs were $1.9 million and $0.9 million, respectively. Product failure rates, materials usage and warranty-related service costs incurred in correcting a product failure affect our warranty obligation. Revisions to the estimated warranty liability would be required should actual product failure rates, material usage or warranty-related service costs differ from our estimates.
Government Regulation
The wireless communications industry, which is regulated by the FCC in the United States and similar regulatory agencies in other countries, is subject to changing political, economic and regulatory influences. Regulatory changes, including changes in the allocation of available frequency spectrum, could significantly impact our operations. In addition, we must comply with European directives relating to environmental issues including the Waste Electrical and Electronic Equipment (WEEE) and Restriction of Hazardous Substances (RoHS).
The 902-928 MHz Band. In 1985, the FCC permitted the use of spread spectrum technology under its 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 developed around the Part 15 Rules for commercial products. The FCC has certified the Link WTS for unlicensed operation under Part 15 Rules in this band.
In the federal regulatory framework, Part 15 spread spectrum systems are accorded secondary status in the 902-928 MHz band, which means that their operators must accept interference received, and correct any interference caused to other systems, even if it requires the operator to cease operating in the band. The FCC, in Docket 93-61, modified this status somewhat, establishing a presumption of non-interference in favor of Part 15 devices that meet specific requirements. We believe that our Link WTS satisfies these requirements. In addition, the Part 15 Rules provide us with additional flexibility to resolve interference under certain circumstances.
The 1880-1900 MHz Band. The 1880-1900 MHz DECT band is an available unlicensed spectrum for DECT communication in most of the world, except Japan, some countries in Africa and the Middle East, and the United States among others. In some of these mentioned regions including the Middle East, the respective government administrative body made DECT available only for professional use and restricted for residential use.
The 1920-1930 MHz Band. In 1994, the FCC designated a 10 MHz segment from 1920-1930 MHz for isochronous wireless systems such as voice communications. Wireless telephone equipment operating in this range falls under Subpart D of the Part 15 Rules. In April of 2005, the FCC allowed modified DECT products to operate in the 1920 - 1930 MHz band. KIRK DECT products are FCC-approved for operation in this band in the U.S.
The 2400-2483 MHz Band. The FCC permits the use of spread spectrum technology under the Part 15 Rules in the 2400-2483 MHz band. The FCC has certified NetLink and KIRK DECT wireless telephones for unlicensed operation under Part 15 Rules in this band.
In 1997, the IEEE approved an 802.11 specification for a WLAN standard operating in the 2400-2483 MHz band. The 802.11 standard specified an “over the air” interface between a wireless client and a base station or access point, as well as among wireless clients. The standard provides interoperability among devices sharing a single WLAN infrastructure, including both voice and data devices, thus enabling organizations to provide mobile employees access to both data and voice applications over a single network. Subsequently, a significant industry developed around WLANs in this band. The 802.11 specification is a global standard. Each country that supports the standard also has specific certification processes that must be undergone before a product can operate in that country. We are involved in a number of international certification processes.
The 5 GHz Bands. The FCC permits the use of spread spectrum technology under the Part 15 Rules in various 5 GHz bands which includes 802.11a standards. The 5 GHz bands are also available globally with some country-specific restrictions. The NetLink 8000 Series handsets are FCC-certified for use in these bands.
WEEE and RoHs. All products we sell in Europe comply with the WEEE and RoHS directives relating to minimizing use of metals.
Employees
As of January 31, 2007, SpectraLink employed 422 persons, 419 of whom were full-time employees, and KIRK telecom employed 179 persons, 173 of whom were full-time employees. We believe we have satisfactory relations with our employees.
Available Information
Our internet website address is www.spectralink.com. Information contained in our website is not incorporated by reference into this annual report, and you should not consider information contained in our website as part of this annual report. You may access, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, plus amendments to such reports, as filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the Investors portion of our website. We post these materials on our website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission.
We have adopted a written code of conduct and business ethics that applies to all SpectraLink employees and directors, including, but not limited to, our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. We have also established charters for our Audit, Compensation, and Nominating and Governance committees of the Board of Directors. The code of conduct and business ethics, and each of the Board committee charters are available at the Investors portion of our website. In the event we amend, or provide any waivers from, the provisions of this code of conduct, we intend to disclose these events on our website as required by law.
Item 1. A. Risk Factors.
The factors discussed below are cautionary statements that identify important factors that could cause actual results to differ materially from those anticipated by the forward-looking statements contained in this report. For more information regarding the forward-looking statements contained in this report, see the introductory paragraph to Part I of this report. You
should carefully consider the risks and uncertainties described below together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing SpectraLink. Additional risks and uncertainties not presently known to us also may impair our business operations. The occurrence of any of the following risks could affect our business, financial condition or results of operations.
· We are subject to numerous risks associated with our planned acquisition by Polycom, Inc. On February 7, 2007, SpectraLink Corporation entered into an Agreement and Plan of Merger (the Merger Agreement) with Polycom, Inc. (Polycom) and Spyglass Acquisition Corp., a wholly-owned subsidiary of Polycom (the Polycom acquisition). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Polycom commenced a cash tender offer for all outstanding shares of SpectraLink common stock at a purchase price of $11.75 per share on February 20, 2007.
The obligation of Polycom to consummate the merger is subject to customary closing conditions as described in the Merger Agreement, including among other things, the absence of any material adverse effects on SpectraLink’s business. If the conditions set forth in the Merger Agreement are not met or waived, the Polycom acquisition may not occur. The details of these conditions are set forth in the Merger Agreement which was filed with the Securities and Exchange Commission on February 8, 2007. We cannot assure you that each of the conditions set forth in the Merger Agreement will be satisfied. Mergers and acquisitions of telecommunications companies are inherently risky, and no assurance can be given that our acquisition by Polycom, Inc. or any other future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition.
To the extent that our announcement of the acquisition creates uncertainty among customers such that one of our largest customers or a significant number of smaller customers delay or cancel their orders for our products or services pending consummation of the Polycom acquisition, our results of operations could be negatively affected. Decreased revenue could have a variety of adverse effects, including negative consequences to our relationships with customers, suppliers, resellers and others. In addition, our earnings could be below the expectations of market analysts which could cause a decline in our stock price.
If the acquisition is unsuccessful, it may cause a material disruption to our business and require payment to Polycom of a termination fee of $7,600,000. If the Polycom acquisition is not consummated, we could suffer a number of consequences that may adversely affect our business, results of operations and stock price, including, but not limited to, the following:
· we would not realize any anticipated benefits from being a part of a combined company;
· the price of our common stock will decline to the extent that its current market price reflects a market assumption that the merger will be completed;
· we may experience difficulties in attracting strategic customers and partners who were expecting to acquire the products and related services proposed to be offered by the combined company;
· we may not be able to find another buyer willing to pay an equivalent or higher price per share in an alternative transaction than the price that Polycom has offered;
· we would remain liable for significant costs related to the acquisition, such as legal, accounting and investment banking fees;
· activities relating to the acquisition and related uncertainties may lead to a loss of revenue and market position that we may not be able to regain if the acquisition does not occur;
· we may not be able to retain key employees;
· we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures due to loss of our sales personnel; and
· we may not be able to maintain effective internal control over financial reporting due to employee departures.
In addition to the above risks, the announcement of the tender offer may intensify the other risks that SpectraLink is exposed to as described herein:
· We are exposed to goodwill impairment risk associated with our investment in KIRK. Our allocation of the KIRK acquisition price resulted in the recognition of $26.5 million of goodwill that is recoverable through future operating results of KIRK telecom and KIRK scantel. If forecasted future operating results for the two operations do not materialize to the extent necessary to support the value of the acquisition goodwill, we may have to record an impairment charge in our statements of operations to reflect a lower value. An impairment could have a significant impact on our future operating results and earnings per share.
· Our foreign operations are subject to economic, political and other risks that could adversely affect our revenue or financial position. Our business operations in Denmark, the United Kingdom, Australia and any other possible foreign operations in the future could result in adverse financial consequences and operational problems not experienced in the United States. We anticipate that our revenue from our international operations may grow in the future. Accordingly, our business is subject to risks associated with doing business internationally, including:
· Changes in a specific country’s or region’s political or economic conditions;
· laws and regulations that restrict repatriation of earnings or other funds; and
· difficulty in recruiting trained personnel; and
· language and cultural differences.
In addition, we face risks associated with changes in foreign currency exchange rates. Due to the acquisition of KIRK, we will increase our exposure to foreign currency exchange rates and the risks associated therein. We have limited forward currency contracts but we have not historically engaged in any hedging activities relating to our non-U.S. Dollar operations, and we may suffer future losses as a result of changes in currency exchange rates.
· Leverage and debt service obligations may adversely affect us. In anticipation of the KIRK acquisition, we took on a substantial amount of indebtedness. In August 2006 we renegotiated our Credit Facility. As of December 31, 2006, we had $13.6 million of debt outstanding under our Credit Facility. Our indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on, or other amounts due with respect to our indebtedness. All of our outstanding indebtedness bears interest at floating rates. As a result, our interest payment obligations on such indebtedness will increase if interest rates increase. Subject to certain restrictions under our existing indebtedness, we may also obtain additional long-term debt and working capital lines of credit to meet future financing needs. This would have the effect of increasing our total leverage.
Our leverage could have significant negative consequences on our financial condition and results of operations, including:
· impairing our ability to meet one or more of the financial ratios contained in our credit facility agreement or to generate cash sufficient to pay interest or principal, which events could result in an acceleration of all or some of our outstanding debt as a result of cross-default provisions;
· increasing our vulnerability to general adverse economic and industry conditions;
· requiring us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations;
· limiting our ability to obtain additional debt or equity financing;
· requiring the dedication of a substantial portion of our cash flow from operations to service our debt, thereby reducing the amount of our cash flow available for other purposes, including capital expenditures;
· limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete;
· placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources; and
· causing our Danish holding company, SpectraLink Denmark ApS, to trigger thin capitalization tax consequences in Denmark due to the substantial intercompany debt held on its books, as compared to its equity at the end of our fiscal year. This would cause us to use cash to increase capitalization in Denmark.
· Restrictive covenants in the Credit Facility could adversely affect our business by limiting flexibility. The Credit Facility contains restrictive covenants and requirements that we comply with certain leverage and other financial tests. These limit our ability to take various actions, including incurring additional debt, guaranteeing indebtedness, issuing preferred stock, engaging in various types of transactions, including mergers and sales of assets, and paying dividends, repurchasing our stock, and making distributions or other restricted payments, including investments. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing third-party product development, merger and acquisition or other opportunities.
· Our ability to generate continued market growth rates may require us to participate in industry consolidation. As part of our business strategy and the business environment in the telecommunications equipment industry in general, we may engage in further acquisitions or mergers with other companies, or individual product lines, technologies and/or personnel or become the target for a merger or acquisition. Our ability to take such actions may be constrained by the covenants in our Credit Facility. Further, to remain competitive, we may need to partner with a larger telecommunications company to obtain access to dual-mode markets.
· If we are unable to fulfill quarter end customer orders, we could lose revenue and customers. The volume of customer orders for our products typically increases significantly at the end of each quarter. We face significant challenges in meeting this demand. It is difficult to ensure that we have the resources available to meet any such increase in order volume since it is very difficult to predict what the level of demand will be. We may not have the personnel and/or systems necessary to fulfill the large order volume or the ability to upgrade and develop our systems and infrastructure to meet an increased order volume. If we are unable to meet demand from our customers for our products in a cost effective manner, then we might lose revenue and customers, or incur increased operating costs, either of which would harm our business.
· Many of the orders for our products are realized at the end of the quarter, which makes it difficult to forecast or adjust our operating activities quickly in response to an unexpected increase or decrease in customer demand. Due to the timing of orders from customers, we have often recognized a substantial portion of our 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. The demand for our products depends upon many factors and is difficult to forecast. Significant unanticipated fluctuations in demand could cause problems in our operations. The lead-time required to assemble our systems is often longer than the lead-time our customers provide to us for delivery of their product requirements. Therefore, we often must place orders in advance of expected purchase orders from our customers. As a result, we have only a limited ability to react to fluctuations in demand for our products, which could cause us to have either too much or too little inventory of a particular product. Further, the business relationship which we have with Offshore Group to use a Mexico facility to assemble our products may not be able to provide product in a timely manner. The majority of the KIRK products are manufactured in Horsens, Denmark, and the manufacturing lines for SpectraLink product are located in Boulder, Colorado. Additionally, once we receive an order, it requires sufficient time to complete the configuration of our product to our customer’s individual phone systems.
Our inability to satisfy customer demand in a timely manner would lead to lost sales and impede our ability to increase our revenue. Conversely, a large portion of our expenses, including rent and salaries, is fixed and difficult to reduce. Our expenses are based in part on expectations for our revenue. If our revenue does not meet our expectations, the adverse effect of the revenue shortfall upon our operating results may be acute in light of the fixed nature of our expenses.
· Our revenue and earnings are seasonal. Seasonality and other factors may cause significant quarterly fluctuations in our revenue and net income. Our business is seasonal based on budget cycles in various vertical markets such as healthcare and retail. This causes significant quarterly fluctuations in our financial results. Generally, revenue and operating results are sequentially down in the first quarter from the fourth quarter, sequentially higher in the second quarter, sequentially flat or slightly higher or lower in the third quarter, and strongest in the fourth quarter. Actual results from operations may or may not follow these normal seasonal patterns in a given year leading to performance that is not in alignment with expectations.
· Our reliance on sole or limited sources of supply for many components and equipment used in our manufacturing process. We rely on sole or limited sources of supply for many components and equipment used in our manufacturing process. The delay, inability, or refusal of any of these suppliers to ship these components or equipment could interrupt our manufacturing process and ability to manufacture products in a timely manner to meet customer demand. The limited number of sources for many of these components may also prevent us from decreasing our reliance on certain suppliers and finding other sources at competitive prices. Unforeseen price increases by any of the sole or limited source suppliers could negatively impact product margins and our financial performance
· Because many of our current and planned products are or will be highly complex, they may contain defects or errors that are detectable only after deployment in complex networks and which, if detected, could have a negative effect on our business, operating results or financial condition. Many of our complex products can only be fully tested when deployed in “live” existing wireless networks. As a result, end-users may only discover defects or errors or experience breakdowns in their networks after the products have been deployed. If any of these products contain defects, or have reliability, quality or compatibility problems, our reputation might be damaged significantly and customers might be reluctant to buy our products. These defects could interrupt or delay sales. We may have to invest significant capital and other resources to correct these problems. If we fail to provide solutions to the problems, we will also incur product recall, repair, warranty or replacement costs. These problems might also result in claims against us by our customer or others. In addition, the occurrence of any defects or errors in these products could result in: failure to achieve market acceptance and loss of market share; cancellation of orders; difficulty in collecting accounts receivable; increased service and warranty costs in excess of our estimates; diversion of resources, and; increased insurance costs and other losses to our business or to end-users.
· If we experience product failure that indicates either manufacturing or design deficiencies, we may be required to recall units in the field and/or stop producing and shipping such products until the deficiency is identified and corrected. In the event of such product failures, our business could be adversely affected resulting in reduced revenue, increased costs and decreased customer satisfaction. End-users have discovered errors in our products in the past and may discover errors in our products in the future. In addition, if our costs of remediating problems experienced by our customers exceed the expectations used in developing our warranty reserves, these costs may adversely affect our operating results. Consequently, our product failure could have a material adverse impact on our operations and financial results.
· Our ability to attract and retain personnel, including key technical and management personnel. Much of the future success of our company depends on the continued service and availability of skilled personnel, including technical, marketing and staff positions. Experienced personnel in the wireless communications industry are in high demand and competition for their talents is intense. For example, we have appointed two chief financial officers within two years and we have not replaced our executive vice president of Americas sales and marketing since her resignation, effective August 31, 2006.
There can be no assurance that we will be able to successfully retain and attract the key personnel we need. Many of our key personnel receive a total compensation package that includes stock options. In order to comply with changes to accounting principles generally accepted in the United States enacted by the Financial Accounting Standards Board and other agencies starting in the first quarter of 2006, we recorded a charge to earnings for employee stock option grants, employee stock purchase plans and other equity incentives. In addition, applicable stock exchange listing standards relating to obtaining stockholder approval of equity compensation plans could make it more difficult or expensive to grant options to employees in the future. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur higher compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, any of which could have a material and adverse impact on our business.
· The risk of business interruption arising from our dependence on our manufacturing facilities located in Boulder, Colorado, and Horsens, Denmark, and the business relationship we have with Offshore Group to use a facility in Empalme, Sonora, Mexico which provides assembly services. We are highly dependent on our Boulder, Colorado, and Horsens, Denmark, manufacturing facilities, which is where the majority of our manufacturing and repair operations occur. We are also highly dependent upon our business relationship with Offshore Group to provide management services and an assembly facility located in Empalme, Sonora, Mexico. Any event that may disrupt or indefinitely discontinue any of the facilities’ capacity to manufacture, assemble and repair our products could greatly impair our ability to generate revenue, fulfill orders and attain financial goals. For instance, we may experience delays in the receipt of assembled product from the facility in Mexico should the border between the U.S. and Mexico close.
· Our ability to respond to rapid technological changes within the on-premises wireless telephone industry. The wireless communications industry is characterized by rapid technological change, short product life cycles, and evolving industry standards. To remain competitive, we must:
· develop or gain access to new technologies in order to increase product performance and function, reduce product size, and maintain cost effectiveness;
· develop new products for existing and emerging wireless communications markets, and introduce such products in a timely manner;
· implement emerging wireless standards or multiple emerging wireless standards quickly enough to satisfy market demands and without significant product redesign or the need to allocate additional resources to comply with multiple standards;
· develop or obtain access to advanced wireless capabilities as they become available; and
· design, develop and introduce competitive new products on a timely basis.
We may not successfully execute on our vision of product requirements because of errors in defining product marketing requirements, planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. Due to the competitive nature of our business, any failure by us to meet any of these challenges could render our products or technologies obsolete or noncompetitive and thereby materially and adversely affect our business, reputation, and operating results.
· Potential fluctuations in our future revenue, gross margins and operating results. We have 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 our control. Among other things, these factors include:
· changes in customer, geographic or product mix, including mix of configurations within each product group;
· fluctuating market demand for, and declines in the average selling prices of, our products;
· the timing of, and/or delay of, significant orders from customers;
· seasonality in demand within our various sectors;
· increases in material or labor costs;
· excess inventory;
· obsolescence charges;
· changes in shipment volume;
· foreign currency fluctuations;
· loss of cost savings due to changes in component pricing or charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand;
· increases in price competition;
· changes in the mix of our distribution channels including our OEM partners;
· government regulation of frequency spectrum;
· increases in warranty costs;
· introduction of new products and costs of entering new markets; and
· impairment to our ability to ship orders due to lack of available parts.
For example, historically we have not operated with a significant order backlog, and a substantial portion of our revenue in any quarter has been derived from orders booked and shipped in that quarter. Accordingly, our revenue expectations are based almost entirely on our internal estimates of future demand and not on firm customer orders. Further, our acquisition of KIRK may make it more difficult for us to predict demand for our products. 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, our revenue, gross margins and operating results could be materially adversely affected.
· The uncertainty about economic prospects in some sectors of our target customer market adversely impacts their information technology spending and our business. Our business has from time to time been adversely impacted by the uncertainty about general economic prospects in some sectors of our target customer market within the United States and worldwide, because this uncertainty has resulted in a decline in, or a failure to increase, their information technology spending. Consumers of information technology in some of these sectors may defer, and in some cases cancel, their purchase decisions. Our operating results may be adversely affected as a result. The adverse impacts from economic uncertainty include longer sales cycles, lower average selling prices, fewer large orders from a single customer and reduced revenue.
· Changes in rules and regulations of the FCC and other regulatory agencies. The wireless communications industry, regulated by the FCC in the United States and similar government agencies in other countries, is subject to changing political, economic, and regulatory influences. Regulatory changes, including changes in the allocation of available frequency spectrum, or changing free un-licensed to free based spectrum licensing could significantly impact our operations in the United States and internationally.
· We are dependent on indirect sales channels for most of our revenue. A significant portion of our revenue is derived from a variety of third-party business partners, including OEMs, distributors and resellers. During the twelve months ended December 31, 2006, sales of our products through our indirect distributors accounted for 49% of our product revenue and 34% of product revenue was contributed by our OEM partners. Our contracts with third party business partners do not require those partners to purchase minimum quantities of our products or services. In fact, some of our third party business partners also offer the products of some of our competitors. In addition, our OEM agreements do not restrict an OEM from acquiring products from a third party or independently developing products and services that would directly compete with us. We cannot guarantee that any of our third party business partners will continue to market our products or devote significant resources to doing so. Furthermore, we will, from time to time, terminate or adjust some of our relationships with third party business partners in order to address changing market conditions, adapt such relationships to our business strategy, resolve disputes, or for other reasons. Any such termination or adjustment could have a negative impact on our relationships with third party business partners and our business, and result in decreased sales through third party business partners or threatened or actual litigation. If our third party business partners do not successfully market and sell our products or services for these or any other reasons, our sales could be adversely affected and our revenue could decline. In addition, our third-party business partners have confidential information concerning our products and services, product release schedules and sales, marketing and third-party reseller operations. Although we have nondisclosure agreements with our third-party business partners, we cannot guarantee that any third-party business partner would not use our confidential information to compete with us. Furthermore, since we have experienced lower gross margins related to sales to our OEM partners, we may experience lower gross margins in the future if sales to our OEM partners become a larger percentage of product sales. Our success depends in part upon our ability to maintain and expand these relationships. The loss of any major partner, the failure to attract new partners or inability to maintain the current level of revenue from our existing partners could have an adverse effect on our business, operating results and financial condition.
· A lower than anticipated rate of acceptance of domestic and international markets using the 802.11 standard may impede our growth. Our NetLink wireless telephones are compatible with the IEEE 802.11 standard for use on 802.11 compliant wireless LAN networks. Consequently, demand for NetLink wireless telephones depends upon the acceptance of markets utilizing 802.11-compliant networks. This depends in part upon the initial adoption of the 802.11 standard in international markets, as well as enhancements to that standard in the U.S. and foreign markets where the standard has already been adopted. Additionally, the acceptance of 802.11 compliant networks may move more slowly, if at all, if competing wireless networks are established and utilized. Additionally, the deployment of
wireless voice and data systems has been inhibited by security concerns including the potential of unauthorized access to data and communications transmitted over or accessible through a wireless system. Potential customers may choose not to purchase our products until wireless systems are developed which provide for greater security. Further, our products may not be compatible with secure wireless systems that may be developed in the future. If markets utilizing 802.11 compliant networks do not grow as we anticipate, our growth would be impeded and we would not be able to factor the related revenue into our growth in the future. If the 802.11 standard does not emerge as the dominant wireless standard in our markets, or multiple standards are adopted that require different technologies we may need to spend time and resources to add functionality to meet the additional standards and many of our strategic initiatives and investments may be of no or limited value. Further, to the extent that additional standards are adopted, our product differentiation could be minimized and our implementation may not be interoperable with the standard, necessitating additional product development to meet the standard which may cause product delays.
· The market for KIRK DECT or SpectraLink proprietary technology may decline. If the market adoption of 802.11 standards are faster than anticipated, it may affect sales of DECT technology and Link WTS. Sales of our Link product have generally been flat in recent years. DECT solutions could face the same competition and cause a downward trend in our sales growth and our overall gross margin.
· The market for on-premises wireless telephone systems may fail to grow or to grow as quickly as we anticipate. We derive our revenue principally from the sale of wireless, on-premises telephone systems and related installation and other services relating to those systems. Therefore, our future operating results depend on the demand for those types of services. If this market does not grow or grow quickly, our future results of operations would be significantly harmed. In particular, increased demand for our NetLink product depends on the growth of the voice over Wi-Fi-related market. Although NetLink handset sales have grown significantly in recent periods, the market for deployment of converged voice and data wireless networks in the general enterprise continues to be immature. We expect that this will remain the case unless that market moves through its acceptance of IP wireless applications, standards adoption increases to reduce complexity, and customers deploy wireless IP access points more fully throughout their enterprise networks in densities required to support wireless voice traffic.
· Our revenue may fluctuate because we rely on a limited number of significant customers. A portion of our revenue in the past has been derived from a limited number of customers. We also have experienced quarter-to-quarter variability in sales to each of our major customers and expect this pattern to continue in the future.
· We might not be able to execute on our business plan if we lose key sales or technical personnel, on whose knowledge, leadership and technical expertise we rely, or if new members of our management team fail to work effectively together. Our success depends heavily upon the contributions of our key management and technical personnel, whose knowledge, leadership and technical expertise would be difficult to replace. Many of these individuals have been with us for several years and have developed specialized knowledge and skills relating to our technology and business. On August 31, 2006, Jill Kenney, executive vice president of Americas sales and marketing, resigned her position as an executive officer of the Company. A permanent replacement has not been hired. In addition, during the last two years, four of the six executive officers were either new to the Company or were promoted. Our success depends in part upon the ability of new executives to work effectively together and with the rest of our employees to continue to develop our technology and manage the operation and growth of our business. Excepting Ole Lysgaard Madsen, president and managing director of KIRK in Denmark, we have no employment contracts for our executive officers, and do not maintain key person insurance on any of our executive officers. We might not be able to execute on our business plan if we were to lose the services of any of our key personnel. If any of these individuals were to leave us unexpectedly, we could face substantial difficulty in hiring qualified successors, and could experience a loss in productivity while any such successor develops the necessary training and experience.
· We rely on our 802.11 technology partners to continue to provide the wireless local area network for our NetLink product, and to provide access points which support SpectraLink’s Voice Priority (SVP) technology. In the absence of a wireless voice prioritization standard to ensure quality of service, we rely on 802.11 technology partners, such as Alcatel-Lucent, Aruba Wireless Networks, Cisco Systems, Nortel, Symbol Technologies, 3 Com, and Trapeze Networks Inc. to continue to provide wireless local area network support for our NetLink product, and to provide access points that support SVP capability. If any of our technology partners fail to provide voice prioritization support for our products, the market opportunity for NetLink products would be reduced and our future results of operations would be materially harmed until we find new 802.11 technology partners or voice prioritization standards are adopted.
· If we are unable to develop and introduce new products and transition existing products and respond to emerging technological trends and customers’ changing needs, our operating results and market share may suffer. The process of developing new technology is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends, our business could be harmed. We must commit significant resources to developing new products before knowing whether our investments will result in products the market will accept. We may encounter delays in deploying new or improved products. For instance, our new products may not properly function with our customers’ existing telephone systems, or our new products may contain defects or bugs. These incompatibilities, defects or bugs may not be detected until our customers begin to install the products or thereafter. We may need to modify the design of our new or improved products if they have incompatibilities, defects or bugs, which could result in significant expenditures as we seek to remedy the problems, delays in the purchase of the products or cancelled orders. We may also encounter delays in the manufacturing and production of the new products. Additionally, the new products may not be commercially successful. Demand for existing products may decrease upon the announcement of new or improved products. Further, since products under development are often announced before introduction, these announcements may cause customers to delay purchases of any products, even if newly introduced, until the new or improved versions of those products are available. If customer orders decrease or are delayed during the product transition, we may experience a decline in revenue and have excess inventory on hand which could decrease gross profit margins. Our gross margins might decrease if customers, who may otherwise choose to purchase existing products, instead choose to purchase lower priced models of new products. Delays or deficiencies in the development, manufacturing, and delivery of, or demand for, new or improved products could have a negative effect on our business, operating results or financial condition.
· If we are unable to cross-sell the SpectraLink and KIRK products to each other’s channels, we may not realize the value expected from the acquisition. We acquired KIRK to extend market presence in workplace wireless telephony by adding another technology standard offering and provide a platform for international growth. If we do not successfully add each other’s products to our product offerings, we will not add incremental growth nor realize the effects of leveraging KIRK’s distribution channels, causing less than expected revenue growths and potentially lowering future cash flow forecasts such that our acquisition goodwill may be impaired.
· Our ability to manage potential expansion of operations outside of North America, Australia and Europe. We intend to expand our existing domestic and international operations, and to enter new markets. This expansion will require significant management attention and financial resources. We currently have limited experience in marketing and distributing our products outside of North America, Australia and Europe and in developing versions of products that comply with local standards. We may also not be able to maintain or increase international market demand for our products. International operations are subject to other inherent risks, including foreign government regulation of technology or unexpected changes in regulatory and customs requirements, difficulty and delays in accounts receivable collection, difficulties and costs of staffing and managing foreign operations, reduced protection for intellectual property rights, foreign currency exchange rate fluctuations, and taxation consequences.
· We face increasing competition in the on-premises wireless telephone system market. The on-premises wireless telephone system industry is competitive and influenced by the introduction of new products and new entrants into the industry. The competitive factors affecting the market for our systems include product functions and features, frequency band of operation, ease-of-use, quality of support, product quality and performance, price, network and application integration capabilities, distribution channels, and the effectiveness of marketing and sales efforts. Most of our competitors have significantly greater financial, technical, research and development, and marketing resources than us. As a result, our competitors may respond more quickly to new or emerging technologies and changes in customer requirements, or may devote greater resources to the development, promotion, sale and support of their products than us. In addition, mature DECT standard-based products previously marketed by large telecom companies in markets outside the U.S. are being introduced in the U.S. which is our largest market and may be lower-priced than the Link and NetLink offerings. Enterprise adoption of standards for wireless LAN and VoIP may lead to the commoditization of wireless telephone technology and the availability of low-cost alternative products. Other purchasers may prefer to buy their 802.11 wireless telephone systems from a single source provider of wireless local area networks, or LANs, such as Cisco Systems, who provides 802.11 wireless infrastructure and wireless telephones. Because we focus on wireless on-premises telephone communications, we cannot serve as the sole source for a complete telephone or data communications system. There is no assurance that we will be able to compete successfully in the future. Further, if a potential customer is already using a competing product or system, that potential customer may not be willing or able to make the investment necessary to replace such a system with our wireless telephone system. In addition, there may be potential customers who choose another technology because of cost or their belief that their needs do not require the full function provided by our wireless telephone systems.
· The certification and approval process for our NetLink product for use in countries that support the 802.11 standard. Foreign countries, which support the 802.11 standard, could provide future markets for our NetLink products. However, countries’ certification and approval processes for 802.11 compatible products, such as ours, are typically time consuming and costly. If we have difficulty obtaining certification and approval by foreign countries for our NetLink wireless telephone product, then we and/or our distributor channels may not be able to gain access to the markets in these countries in a timely fashion, if at all, which would limit international growth of our business.
· Our ability to protect or enforce our intellectual property rights. Our future success depends, in part, upon our proprietary technology. We rely on a combination of patent, copyright, trade secret and trademark laws, confidentiality procedures, and nondisclosure and other contractual provisions to protect our proprietary rights. These legal protections provide only limited protection and may be time consuming and expensive to obtain and enforce. There can be no assurance that our issued patents will not be challenged or circumvented by competitors or provide meaningful protection against competition. If challenged, our patents might not be upheld or their claims could be narrowed. If we fail to protect our proprietary rights adequately, our competitors might gain access to our technology. As a result, our competitors might offer similar products and we might not be able to compete successfully in our market. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. Also, our competitors may independently develop similar, but not infringing, technology, duplicate our products, or design around our patents or our other intellectual property. In addition, other parties may breach confidentiality agreements or other protective contracts with us, and we may not be able to enforce our rights in the event of these breaches. Furthermore, we expect that we will increase our international operations in the future, and the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. We may be required to spend significant resources to monitor and protect our intellectual property rights. Any litigation surrounding our rights could force us to divert important financial and other resources from our business operations.
· The assertion of intellectual property infringement claims against us. Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. We cannot be certain that our products do not and will not infringe upon issued patents, patents to be issued in the future, or other intellectual property rights of others. We may in the future be notified that we are infringing upon certain patent and/or other intellectual property rights of others. Although there are no such pending lawsuits against us that we are infringing upon intellectual property rights of others, there can be no assurance that infringement claims will not occur in the future. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related methods that are important to us. Litigation may be necessary in the future to defend against claims of infringement or invalidity, to determine the validity and scope of the proprietary rights of others, to enforce our intellectual property rights, or to protect our trade secrets. We may also be subject to claims from customers for indemnification. Any resulting litigation, regardless of our resolution, could result in substantial costs and diversion of resources. If it were determined that our products infringe upon the intellectual property rights of others, we would need to obtain licenses from these parties or reengineer our products in order to avoid infringement. We might not be able to obtain the necessary licenses on acceptable terms or at all, or to reengineer our products successfully. Moreover, if we are sued for infringement and lose the suit, we could be required to pay substantial damages or be enjoined from licensing or using the infringing products or technology. Any of the foregoing could cause us to incur significant costs and prevent us from selling our products.
· We rely on the availability of third-party licenses. Many of our products are designed to include software or other intellectual property licensed from third parties, especially through our OEM agreements. If we terminate OEM or technology partner relationships, it may be necessary in the future to seek or renew licenses relating to various aspects of these products. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could harm our business, operating results, and financial condition.
· Changes in securities laws and regulations have increased our costs. The Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as new rules related to executive compensation, has required changes in some of our corporate governance, public disclosure and compliance practices. The Act also required the SEC to implement additional new rules on a variety of subjects. In addition to rules made by the SEC, the Nasdaq Stock Market has adopted revisions to its requirements for companies, such as us, that are Nasdaq-listed. These developments have increased our legal and financial compliance costs, and made some activities, like SEC reporting obligations, more expensive and difficult. In addition, these developments may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur
substantially higher costs to obtain coverage. These developments could make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.
· The historic volatility of our stock price, which may make it more difficult to resell shares at prices attractive to sellers. The market price of our common stock has been volatile and is likely to remain subject to wide fluctuations in the future. For example, during the year ended December 31, 2006, the closing price of our common stock has ranged from a high of $13.83 per share to a low of $7.43 per share. Many factors could cause the market price of our common stock to fluctuate, including:
· variations in our actual or anticipated quarterly or annual results;
· market conditions in our industry, the industries of our customers and the economy as a whole;
· announcements of technological innovations by us or by our competitors;
· introduction of new products or product enhancements or new pricing policies by us or by our competitors;
· government regulation;
· acquisitions or strategic alliances by us or by our competitors;
· recruitment or departure of key personnel;
· the gain or loss of significant orders;
· changes in the market valuations of other telecommunications companies;
· the amount of liquid financial resources available to us;
· the gain or loss of significant customers including OEMs; and
· changes in the estimates of our operating performance or changes in recommendations by securities analysts.
In addition, the stock market in general, and the market for technology-related stocks in particular could decline, which could cause the market price of our common stock to fall for reasons not necessarily related to our business, results of operations or financial condition. The market price of our stock also might decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid. Securities class action litigation is often brought against a company following a period of volatility in the market price of its securities, and we have previously been sued in several purported securities class action lawsuits. Further, certain of our management and directors were also sued in purported stockholder derivative actions. The consolidated class action suit and derivative actions have all been settled.
Item 2. Properties.
Our corporate headquarters and research and development activities are located in Boulder, Colorado, in 37,050 square feet of leased building space at 5755 Central Avenue, 15,083 square feet of office space at 5744 Central Avenue, 14,966 square feet of office space at 5766 Central Avenue, and 15,328 square feet of office space at 2545 Central Avenue. In addition, we lease 36,125 square feet of manufacturing space at 6175 Longbow Drive in Boulder, Colorado, and we lease 18,654 square feet of manufacturing space primarily for component assembly in Empalme, Sonora, Mexico. The length of these leases is as follows: (i) the lease for the 5755 Central Avenue facility runs through April 2012, (ii) the lease for the 5744 Central Avenue facility runs through December 2012, (iii) the lease for the 5766 Central Avenue facility runs through June 2012, (iv) the lease for 7,055 square feet of the 2545 Central Avenue facility runs through September 2012, and 8,273 square feet of the 2545 Central Avenue facility runs through December 2010, (v) the lease for 36,125 square feet of the 6175 Longbow facility runs through May 2012, and (vi) the lease through the Offshore Group who provides final assembly services at Empalme, Sonora, Mexico facility runs through August 2009. We enter into short-term leases for our domestic and international sales offices, with the exception of our sales offices in the United Kingdom, for which we have a long-term lease obligation. We lease 5,461 square feet of office space in the United Kingdom under a lease agreement expiring in January 2011. We believe that the combination of our existing facilities together with the availability of additional space for lease in Boulder and other real estate markets will be adequate to meet our current and foreseeable facilities needs.
The corporate headquarters of KIRK telecom, which houses administration, research and development, manufacturing and sales and marketing activities, is located at Langmarksvej 34, 8700 Horsens, Denmark. This facility consists of 102,037 square feet, and the lease for this property runs through September 2009 with KIRK telecom’s option to extend through September 2014. KIRK scantel is located at Radhustorvet 2, 8700 Horsens, Denmark, and houses administration, sales and marketing activities. The KIRK scantel facility consists of 1,147 square feet of leased office and storage space. The KIRK scantel lease is cancellable with six months’ notice.
Item 3. Legal Proceedings.
We are not presently a party to any material pending legal proceedings of which we are aware.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities.
Our common stock is traded on the Nasdaq National Market under the symbol “SLNK”. The following table sets forth for the quarterly periods indicated, the high and low bid prices for our common stock as reported by Nasdaq. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.
On February 28, 2007, we had approximately 89 stockholders of record.
Dividends
We are not permitted to pay cash dividends under the terms of our Credit Facility (see Note 6 to the Consolidated Financial Statements in Item 8) and did not pay any cash dividends in 2006. We paid quarterly cash dividends of $0.10 per share totaling $7.7 million and $7.6 million during 2005 and 2004, respectively.
Equity Compensation Plan Information
(1) Represents 3,110,000 shares available for issuance pursuant to our 2006 Equity Incentive Plan, and 500,000 shares available for issuance pursuant to our 2006 Employee Stock Purchase Plan and our 2006 International Employee Stock Purchase Plan.
(2) Shares available under our 2006 Equity Incentive Plan include 1,500,000 shares registered on Form S-8 on August 22, 2006; plus shares reserved, but unallocated under previous equity incentive plans, and shares forfeited or repurchased by the Company. Shares available under our 2006 Employee Stock Purchase Plan and our 2006 International Employee Stock Purchase Plan include 500,000 shares registered on Form S-8 on August 22, 2006.
The following illustrates the performance of our common stock, as compared to our peer group and the Nasdaq market group:
Item 6. Selected Financial Data.
The selected, consolidated financial information presented below for each of the five years in the period ended December 31, 2006, is derived from our accompanying Consolidated Financial Statements in Item 8 of this report. This information should be read in conjunction with the Consolidated Financial Statements in Item 8 and Notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this report. Historical results may not be indicative of future results.
(1) KIRK was acquired on January 3, 2006, and its results of operations have been consolidated from that date.
(2) On November 19, 2003, our Board of Directors declared our initial quarterly cash dividend of $0.10 per share of SpectraLink common stock. The terms of the Credit Facility (Note 6 to the accompanying Consolidated Financial Statements in Item 8) prevented us from paying dividends or repurchasing our stock in 2006.
(3) We incurred debt in December 2005 in order to purchase KIRK. See Note 2 in Item 8.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Certain statements about future events and expectations in this Form 10-K, as well as statements made by us in periodic press releases, oral statements made by our officials to analysts and stockholders in the course of presentations about SpectraLink, and conference calls following earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include statements we make regarding future prospects for growth in the on-premise wireless telephone system and phone market, our ability to maintain or increase our market share, our ability to introduce new products successfully, success in integrating the KIRK acquisition and our future operating results. In addition, words such as “believes,” “anticipates,” “expects,” “plans,” “estimates,” “intends,” “could,” “might,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on assumptions, which are believed reasonable but, by their nature, are all inherently uncertain and involve risk. In all cases, results could differ materially from those projected. Certain risks and uncertainties relating to forward-looking statements are set forth below in “Management’s Discussion and Analysis of Financial Condition” and in Item 1A
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are primarily exposed to market risk due to changes in interest rates and foreign currency fluctuations. These exposures are directly related to our normal operating and funding activities.
Currency Risk
As of December 31, 2005, we entered into foreign currency forward contracts to reduce the foreign currency exposure related to our anticipated acquisition of KIRK. Under the terms of the stock purchase agreement, the purchase price was to be payable in Danish Kroner at the closing. The forward contracts were not designated as accounting hedges and the carrying amount of the forward contracts was the fair value, which was determined by obtaining quoted market prices, and recognized as either assets or liabilities. In the year ended December 31, 2006, we recognized a net realized gain of $0.2 million that was included in other income (expense) in the consolidated statements of operations, which was offset by the related unrealized losses recorded as of December 31, 2005, from the changes in the fair value of these forward contracts of $0.2 million.
KIRK enters into foreign currency contracts from time-to-time to reduce its exposure to foreign currency-denominated inventory purchases. For the year ended December 31, 2006, gains from KIRK’s foreign currency contracts were insignificant. Changes in fair value of forward contracts are recognized in other income (loss), net at the end of each period.
We have not entered into any derivative contracts that qualify for hedge accounting treatment under SFAS 133 “Accounting for Derivative Instruments and Hedging Activities, as amended.”
Interest Rate Risk
Our primary interest rate risk is related to our borrowings under our Credit Facility. As of December 31, 2006, we had $13.6 million outstanding under the Credit Facility, which consisted of a term loan and a revolving line of credit. We can borrow at the JP Morgan prime rate plus 1% or at the LIBO rate plus 1.75%. We have elected to borrow at the LIBO rate plus 1.75% or 7.13% for the term loan and 7.13% for the revolving line of credit as of December 31, 2006. Based upon borrowings outstanding at the end of December 2006, an increase in variable interest rates of 100 basis points would have an effect on our annual results of operations and cash flows of approximately $0.1 million.
Item 8.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Operations and Other Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
SpectraLink Corporation:
We have audited the accompanying consolidated balance sheets of SpectraLink Corporation and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations and other comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. In connection with our audit of the consolidated financial statements, we have also audited financial statement Schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SpectraLink Corporation and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of SpectraLink Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
SpectraLink Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
SpectraLink Corporation and Subsidiaries
Consolidated Statements of Operations and Other Comprehensive Income
(In thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
SpectraLink Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2006, 2005 and 2004
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SpectraLink Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SpectraLink Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements have been prepared from the books and records of SpectraLink Corporation and its wholly owned subsidiaries: SpectraLink International Corporation, SpectraLink Denmark ApS, and KIRK telecom A/S (“KIRK”) (together “SpectraLink” or “the Company”). SpectraLink designs, manufactures and sells on-premises wireless telephone systems to customers worldwide that complement existing telephone systems by providing mobile communications in a building or campus environment. SpectraLink wireless telephone systems increase the efficiency of employees by enabling them to remain in telephone contact while moving throughout the workplace.
Merger with Polycom (the Polycom Acquisition)
On February 7, 2007, SpectraLink Corporation entered into an Agreement and Plan of Merger (the Merger Agreement) with Polycom, Inc. (Polycom). Pursuant to the Merger Agreement, Polycom commenced a cash tender offer for all outstanding shares of SpectraLink common stock at a purchase price of $11.75 per share. Following the consummation of the tender offer, SpectraLink will become a wholly-owned subsidiary of Polycom.
As a condition to consummating the tender offer, SpectraLink stockholders must have validly tendered (and not withdrawn) shares constituting at least a majority of the outstanding shares of SpectraLink common stock (taking into account the potential exercise of stock options). In addition, the obligation of Polycom to consummate the tender offer is subject to several additional conditions described in the Merger Agreement, including among others, no material adverse effect on SpectraLink’s business having occurred. If more than a majority of the outstanding shares, but fewer than 90% of the outstanding shares, are validly tendered (and not withdrawn) in the tender offer, Polycom will be obligated to purchase the tendered shares but may elect to conduct a subsequent offering period in order to achieve ownership of 90% of the outstanding shares, in order to effect a short-form merger. We have granted Polycom an option (a “top-up option”) to purchase shares of SpectraLink common stock such that, if Polycom receives at least 80% of the outstanding shares through the tender offer, the additional shares purchased by exercising the option would enable Polycom to achieve ownership of 90% of the outstanding shares of SpectraLink common stock.
The closing of the merger is also subject to customary closing conditions. In particular, if Polycom owns fewer than 90% of the outstanding shares of SpectraLink common stock following the tender offer (and following exercise of the top-up option, if applicable), then SpectraLink will be required to hold a special stockholders meeting to obtain stockholder approval of the merger.
Tender and Voting Agreement
In order to induce Polycom to enter into the Merger Agreement, all directors and executive officers of the Company (in their capacities as stockholders of the Company), consisting of Carl D. Carman, Anthony V. Carollo, Jr., John H. Elms, Masood Garahi, John A. Kelley, Gerald J. Laber, Ole Lysgaard Madsen, Leah Maher, Ernest J. Sampias and Werner P. Schmücking, entered into Tender and Voting Agreements with Polycom concurrently with the execution and delivery of the Merger Agreement. Subject to the terms and conditions of these agreements, each director and executive officer of the Company agreed to tender the shares held by them in the tender offer and to vote such shares in favor of adoption of the Merger Agreement.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated.
Foreign Currency Translation
The Company’s foreign operating subsidiaries use as their functional currency the local currency of the countries in which they operate. Their assets (including intangibles and goodwill) and liabilities are translated into U.S. Dollars at the exchange rates in effect at the balance sheet date. Revenue, expenses, and cash flows are translated at the average rates of exchange prevailing during the period. Translation gains and losses are included in accumulated other comprehensive income (loss) within stockholders’ equity. Realized and unrealized transaction gains and losses resulting from the remeasurement of non-functional currency financial instruments are included in the determination of net income (loss). Net foreign currency transaction gains (losses) for each of the three years ended December 31, 2006, were insignificant.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Significant estimates used in the accompanying financial statements include: allowance for doubtful accounts, reserve for obsolete or otherwise unrealizable inventory, estimated warranty costs, SFAS 123R assumptions and valuations of tangible and intangible assets acquired and liabilities assumed.
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.
Change in Fiscal Year
On May 22, 2006, our management made the decision to change our fiscal year-end from December 31 of each year to January 31 of each year. We believe that this change in our fiscal year will help align the seasonal patterns of demand in our business with our reporting cycle, and better align the Company’s sales with those of our key customers and vertical markets, notably the retail market and our distribution channels. We have elected to report information with respect to the one month transition period beginning on January 1, 2007, and ending on January 31, 2007, on our Form 10-Q for the quarter ending April 30, 2007, pursuant to Rule 13A-10(D). The first changed fiscal year shall be from February 1, 2007, to January 31, 2008.
Cash and Cash Equivalents
Cash equivalents represent highly liquid investments with original maturities of 90 days or less. The fair value of these investments approximates their carrying value. We classify cash flows from the sale of our products as operating cash flows. The following presents our supplemental cash flow information:
Investments in Marketable Securities
We invest in marketable securities for other than trading purposes, classifying our marketable investments as either available-for-sale or held-to-maturity. We determine the appropriate classification of our investments in debt and equity securities at the time of purchase and re-evaluate such determination at each balance sheet date. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, we consider whether the Company has the ability and intent to hold the investment until a market price recovery and consider whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, and forecasted performance of the issuer of the security. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned. The following are our investments in marketable securities:
Available-for-sale securities - Marketable equity securities not classified as trading and marketable debt securities not classified as held-to-maturity or as trading, are classified as available-for-sale, and are carried at fair value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in stockholders’ equity. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. The fair value of securities is determined by quoted market prices. Our available-for-sale securities and unrealized (losses) in other comprehensive income consisted of the following:
We classified our available-for-sale marketable securities as current in the accompanying balance sheets as we expect the available-for-sale marketable securities to be sold during the operating cycle of the business, typically within one year.
During 2006, we received $7.2 million from the sale of available-for-sale securities and realized a loss of approximately $56,000. During 2005, we received $14.4 million from the sale of available-for-sale securities and realized a loss of approximately
$64,000. Unrealized net losses on investments in available for sale securities at December 31, 2005 and 2006, are caused by interest rate increases. Because the Company has the ability and intent to hold these investments until a market price recovery, these investments are not considered other-than-temporarily impaired.
Trading securities - Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. We had no trading securities in 2006, 2005 or 2004.
Held to maturity securities - Debt securities are classified as held-to-maturity when we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded as either short-term or long-term on the balance sheet based on contractual maturity dates and are stated at amortized cost.
The Company’s held-to-maturity marketable securities consisted of the following:
Held-to-maturity securities totaling $8.1 million matured in 2006. We reinvested $2.5 million of the proceeds in available-for-sale securities and $5.6 million into cash equivalents.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We record an allowance to state net trade accounts receivables at their estimated net realizable value, which represents our best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Bad debt reserves are maintained based on a variety of factors, including the length of time receivables are past due, macro economic conditions, significant one time events and historical experience. A specific reserve for individual accounts is recorded when the Company becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or significant deterioration in the customer’s operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables are further adjusted. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The provisions for bad debts were insignificant in the three years ended December 31, 2006.
Inventories
Inventories include the cost of raw materials, direct labor and manufacturing overhead, and are stated at the lower of cost (first-in, first-out) or market. Market is determined based on estimated net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other estimated factors in evaluating net realizable value. Inventories at December 31, 2006 and 2005, consist of the following:
For the years ended December 31, 2006, 2005 and 2004, the provision for obsolete or otherwise unrealizable inventory was approximately $1.8 million, $0.7 million and $1.2 million, respectively.
Impairment of Long-Lived Assets
We review our 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 if impairment was indicated. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on our assessment, there were no impairments of the carrying value of property and equipment or intangible assets for the years ended December 31, 2006, 2005 and 2004, respectively.
Rent Obligation
The Company has entered into operating lease agreements for its corporate office and warehouses, some of which contain provisions for future rent increases or periods in which rent payments are reduced (abated). In accordance with generally accepted accounting principles, the Company records monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease term. The difference between rent expense recorded and the amount paid is credited or charged as deferred rent obligation, which is reflected in long-term liabilities and other accrued expenses in the accompanying balance sheets.
Revenue Recognition and Deferred Revenue
We derive our revenue principally from the sale of products and/or services for wireless telephone systems. For multiple element arrangements, we establish the fair value of these products and services based primarily on sales prices when the products and services are sold separately. We recognize revenue on each element of an arrangement when there is persuasive evidence of an arrangement, delivery has occurred, collection is probable, and the fee is fixed or determinable. Revenue from product sales is recorded upon transfer of title, which is generally upon shipment of product. Revenue is deferred if there are significant post delivery obligations, if collection is not reasonably assured at the time of sale, or if the fee is not fixed or determinable. When significant post delivery obligations exist, revenue is deferred until such obligations are fulfilled. We offer products and services such as installation, support, education and training, maintenance and extended warranty coverage. Revenue from installation and training services is deferred and recognized when the services are performed. Revenue from maintenance services is deferred and recognized over the term of the maintenance agreement. We recognize amounts billed to customers for shipping and handling costs as revenue when the related products are shipped. We net amounts charged to customers for sales and other taxes based upon their purchases against sales revenues in the statement of operations. Amounts collected from customers for sales and other taxes are recorded as liabilities until remitted to the appropriate taxing authorities. Costs of shipping and handling are included in cost of sales.
Concentrations of Credit Risk
We operate in the telecommunications industry, selling primarily to original equipment manufacturers (OEM’s), distributors and resellers. Our products operate across different frequencies, that are dependent upon government licenses in different countries. For that reason, our SpectraLink segment’s Link product is sold in North America. Our KIRK segment’s DECT product is based upon a more widely accepted frequency and is sold worldwide. Our Wi-Fi products are sold in most markets, because they are based upon internet technologies.
In fiscal years 2006 and 2004 one customer comprised more than 10% of total net sales with sales of $17.5 million and $9.2 million, respectively. We had no customers comprising more than 10% of net sales in 2005. As of December 31, 2005, one customer comprised more than 10% of net trade accounts receivable, representing 15.7% of trade accounts receivable. No customer represented greater than 10% of accounts receivable as of December 31, 2006. If the financial condition or operations of our third-party business partners deteriorate substantially, our operating results could be adversely affected. A meaningful portion of revenue is generated from the healthcare and retail industries; therefore, we may be exposed to credit risk associated with these industries as well as credit risks from various customers affected by a weak economy. We do not require collateral or security from our customers, although we do screen customers’ credit worthiness and apply credit limits when prudent to do so. KIRK obtains credit insurance on the majority of its receivables.
We could see a material adverse effect on our operations if demand for our products considerably exceeds what is anticipated by component manufacturers. We maintain, or require suppliers to at certain times maintain, inventory to allow us to fill customer orders without significant interruption during the period that we believe would be required to obtain alternate supplies of many replacement components. However, there is no assurance that we will have sufficient inventory supply to meet every possible contingency. Any shortage or discontinuation of, or manufacturing defect in, these components would have a material adverse effect on our operations.
Our KIRK segment has exposure to foreign currency fluctuations from payables resulting from inventory purchases and other expenses denominated in currencies other than the Danish Krone. We mitigate this risk through the purchase of forward currency contracts to hedge against significant inventory orders. The amount of such contracts is not significant at December 31, 2006, and they did not have a significant impact on our results of operations for the year then ended.
We have $13.6 million of debt outstanding as of December 31, 2006, that is subject to variable interest rates. This provides interest rate risk to the Company, as we have not hedged against this risk. Further, $6.1 million of our debt is subject to monthly borrowing base calculations, in which our available credit under the revolving credit portion of the credit facility is limited by qualifying amounts of receivables and inventories. As of December 31, 2006, our risks under the credit facility are
mitigated by our ability to repay the debt with $20.7 of cash and short-term investments.
Derivative Financial Instruments
We do not hold or issue derivative financial instruments for speculative trading purposes. We account for derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) as amended by SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 133 requires that all derivative instruments be recorded on the consolidated balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument is dependent upon whether the derivative has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in the results of operations. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the gain or loss on the derivative instrument is recorded in the results of operations immediately. For the three years ended December 31, 2006, we did not have any derivative financial instruments that qualified for hedge accounting treatment, therefore, all gains or losses were recognized in our results of operations immediately.
Fair Value of Financial Instruments
We estimate fair value amounts by using available market information and commonly accepted valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company or holders of the instruments could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair values.
We consider the carrying values of our working capital assets to approximate their fair values, as they will be realized within one year. The fair value of investments in marketable securities is discussed above. We value our noncurrent financial instruments based upon the amount at which the instruments could be exchanged in a current transaction between willing parties:
Long-term debt
The carrying amount of our long-term debt approximates fair value as it bears interest on a variable interest rate basis.
Forward currency contracts
We value our forward currency contracts against currency spot rates at the balance sheet date. For the year ended December 31, 2006, we recognized a gain of approximately $0.2 million related to a forward contract entered into as an economic hedge against the purchase price of KIRK. The same contract resulted in a $0.2 million loss in the year ended December 31, 2005. Other foreign currency contract gains and losses were insignificant for each of the three years ended December 31, 2006.
Research and Development Costs
Research and development costs are expensed as incurred. These costs consist primarily of salaries, parts, supplies and contract services.
Advertising Costs
The Company expenses all advertising costs as they are incurred. Advertising expense for the years ended December 31, 2006, 2005 and 2004, was approximately $1.3 million, $0.6 million and $0.7 million, respectively.
Adoption of New Accounting Pronouncements
The adoption of the following accounting pronouncements in the year ended December 31, 2006, did not have a material impact on our results of operations, financial condition, or cash flows:
· Statement of Financial Accounting Standards (“SFAS”) 151, “Inventory Costs - An Amendment of ARB No. 43, Chapter 4”;
· SFAS No. 153, “Exchanges of Nonmonetary Assets”;
· SFAS No. 154, “Accounting Changes and Error Corrections, which replaces APB Opinion 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion No. 28”;
· Emerging Issues Task Force (“EITF”) Issue 05-06, “Determining the Amortization Period for Leasehold Improvements”;
· FASB Staff Positions 115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”; and
· SEC Staff Accounting Bulletin No. 108 (SAB 108), “Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements.”
Stock-Based Compensation
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R requires measurement of all employee stock-based compensation awards using a fair-value method and the recording of such expense in the consolidated financial statements. In addition, the adoption of SFAS 123R requires additional accounting related to the income tax effects and disclosure regarding the cash flow effects resulting from share-based payment arrangements. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, which provides supplemental guidance for the implementation of SFAS 123R. On January 1, 2006 (the first day of our 2006 fiscal year), we adopted SFAS 123R using the modified prospective method as permitted under SFAS 123R. Under this transition method, compensation cost recognized in the year ended December 31, 2006, includes: (a) compensation cost for all share-based payments granted prior to but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123, and (b) compensation cost for all share-based payments granted or modified subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with the modified prospective method of adoption, our results of operations and financial position for prior periods have not been restated.
We used the graded attribution method to recognize expense for all options granted prior to the adoption of SFAS 123R. Upon adoption of SFAS 123R on January 1, 2006, we adopted the straight-line attribution method to recognize expense for options granted after December 31, 2005. The expense associated with the unvested portion of the pre-adoption grants will continue to be expensed using the graded attribution method.
The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. Based on an analysis of historical forfeitures, we have applied an annual forfeiture rate of 9% to all unvested options as of December 31, 2006. This analysis is re-evaluated quarterly and the forfeiture rate is adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest. Forfeited or otherwise cancelled options are returned to the pool of options authorized for issuance under our stock-based compensation plans. It is our policy to issue new shares, as opposed to treasury shares upon exercise or purchase under our stock-based compensation plans. See Note 9.
Recently Issued Accounting Pronouncements
FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109”
FIN 48 was issued in July 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. The new standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only income tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 would be reported as an adjustment to the opening balance of retained earnings for that fiscal year. We have not completed our analysis of the effect of adoption of FIN 48. We expect to complete our FIN 48 implementation in the January 2008 reporting period, which will be included in our first quarterly report for fiscal 2008.
SFAS No. 155 (SFAS 155), “Accounting for Certain Hybrid Financial Instruments, an Amendment of FASB Statements No. 133 and 140”
SFAS 155 was issued in February 2006 and will be effective for us after our year ending December 31, 2006. Among other things, SFAS 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. We do not believe that the adoption of SFAS 155 will have a material impact on our financial statements.
SFAS No. 157 (SFAS 157), “Fair Value Measurements”
SFAS 157 was issued in September 2006 and will be effective for us after our year ending December 31, 2006. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. We will adopt SFAS 157 on a prospective basis in our fiscal 2008, and depending upon the context, believe that SFAS 157 could materially impact the way we perform valuations in the future.
SFAS No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Liabilities”
SFAS 159 was issued in February 2007 and will be effective for us after our year ending January 31, 2007. SFAS 159 provides the option to report certain financial assets and liabilities at fair value, with the intent to mitigate volatility in financial reporting that can occur when related assets and liabilities are recorded on different bases. SFAS 159 also amends SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” by providing the option to record unrealized gains and losses on held-for-sale and held-to-maturity securities currently. We are reviewing the impact that SFAS 159 could have on our financial reporting, particularly related to our held-for-sale securities, but we have not determined the significance of a change in accounting for our financial assets and liabilities as a result of implementing this new standard.
2. Acquisition of KIRK telecom A/S
On January 3, 2006, pursuant to a stock purchase agreement dated December 12, 2005, SpectraLink acquired KIRK from the stockholders of KIRK by purchasing 100% of its outstanding common stock. KIRK, based in Denmark, is a manufacturer of onsite wireless communications products. Additionally, through its subsidiary, KIRK scantel, KIRK designs and sells phones for residential customers. The purchase price for the transaction was approximately 389 million Danish Kroner or approximately U.S. $62 million, which was paid in cash, and approximately $2 million of acquisition costs. We funded the acquisition price with approximately $31 million of our own cash and funds provided by a credit facility (Note 6). We escrowed $55.1 million in December 2005, which was released to the selling stockholders on January 3, 2006, along with an additional $6.9 million, which was the balance of the purchase price.
Reasons for the Acquisition
With the addition of KIRK’s DECT-based products, we now offer a complete product portfolio that incorporates all major enterprise wireless voice technologies: Wi-Fi, DECT and proprietary systems. The acquisition of KIRK also significantly increases our international reach and augments our distribution channels and geographical market penetration, further extending our leadership in workplace wireless telephony. Furthermore, the acquisition enables us to compete in new small to medium business markets in the Americas with KIRK’s DECT products. As a result of these factors, we paid a premium (i.e. goodwill) over the fair value of intangibles and identified intangible assets acquired.
Pro Forma Results
The results of KIRK have been included in the consolidated financial statements since January 3, 2006. The following pro forma information shows the results of our operations, as if the acquisition had occurred at the beginning of each period presented:
We reported in our Form 8-K/A filed on March 17, 2006, that the functional currency for our Danish holding company would be the Danish Krone based upon the expectations we had at that time of the future activities of the holding company. Upon further review, we have concluded that the holding company will be used solely for the purpose of holding our investment in KIRK and the functional currency for the holding company is U.S. Dollars.
Purchase Accounting
The following represents the allocation of the aggregate purchase price to the net assets of KIRK acquired on January 3, 2006, in thousands, translated to U.S. Dollars at the exchange rates in effect on that date:
Identifiable intangible assets acquired on January 3, 2006, represent technology owned by KIRK plus other identifiable intangible assets such as acquired contractual relationships which are subject to amortization over various periods of time, using methods which approximate the pattern in which the economic benefits of the related intangible assets are consumed, with the weighted average amortization period being 8 years. Since these assets are deductible for financial reporting purposes but not tax purposes, a deferred tax liability was recorded as of the acquisition date. Future estimated amortization expense is shown in Note 4. The following table summarizes the identifiable intangible assets:
In addition, we acquired approximately $2.0 million of in-process research and development from KIRK. In-process purchased research and development (IPRD) represents research and development regarding internet protocol technology development efforts which had not reached technological feasibility and have no alternative future use as of the acquisition date. IPRD was expensed in accordance with Financial Accounting Standards Board Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.” Consideration was given to the stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development, costs already incurred, and the expected cost to complete the project in determining the value assigned to the acquired IPRD.
Goodwill was allocated to our KIRK segment (see Note 4) and will not be tax deductible.
The valuation of intangible assets was determined using the excess earnings method, replacement cost approach, or relief-from-royalty approach, depending upon the type of asset. KIRK’s net tangible assets were valued at their respective fair values.
Note 3. Property and Equipment
Property and equipment consist of the following:
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation and amortization are provided over the estimated useful lives of the related assets, as indicated below, using the straight-line method for financial statement purposes. The Company uses
other depreciation methods (generally accelerated) for tax purposes where appropriate.
The estimated useful lives for significant property and equipment categories are as follows:
4. Goodwill and Other Intangibles
The following table presents details of our intangible assets, other than goodwill, as of December 31, 2006:
The following table presents details of our intangible assets, as of December 31, 2005:
The estimated future amortization expense of intangible assets is as follows (assuming an exchange rate of 5.65 Danish Kroner to 1.00 U.S. Dollar):
Amortization expense of intangible assets was $4.9 million, $83,000 and $76,000 for the years ended December 31, 2006, 2005 and 2004, respectively. As a result of acquiring KIRK (Note 2), we allocated $23.9 million to goodwill, which was completely allocated to our KIRK segment at December 31, 2006. See Note 2 for the detailed listing of values assigned to KIRK intangibles and goodwill. We tested our goodwill balances for impairment in the fourth quarter of 2006 and found no impairment. We have insignificant intangibles with indefinite lives and do not test these assets for impairment, unless a triggering event occurs.
The following summarizes the change in goodwill:
5. Other accrued expenses and liabilities
Other accrued expenses and liabilities consist of the following:
6. Debt
Our debt consists of the following:
On December 9, 2005, we entered into a credit facility (the “Credit Facility”) with a group of banks, led by JP Morgan, to provide funds for the acquisition of KIRK in 2006 (Note 2). The Credit Facility consisted of a three-year term loan of $15.0 million and a revolving line of credit commitment for borrowings up to $25.0 million of which $20.0 million was available prior to July 1, 2006, that also matures in three years. As of March 28, 2006, we repaid the original term loan in its entirety, and $0.3 million of related debt issuance costs were expensed immediately. Effective June 30, 2006, we borrowed $10.0 million as a new term loan under our Credit Facility which we used to reduce our revolver balance.
Borrowings under the revolving line of credit and the new term loan bear interest at either the JP Morgan Prime rate plus 1% or at a LIBO rate plus a spread determined by our leverage ratio, which was 1.75% at December 31, 2006. At December 31, 2006, the Company’s interest rate on the revolving line of credit was based upon LIBO plus 1.75% (7.13%). At December 31, 2005, our interest was based upon the JP Morgan prime plus 1% (8.25%). The amount available for borrowings under the revolving line of credit is determined based on the borrowing base calculation as defined in the Credit Facility beginning with the month ended June 2006. As of December 31, 2006, approximately $11.4 million was available for additional borrowings under the line of credit. We are obligated to pay annual commitment fees of up to a maximum of 0.5% of the unused amount of the revolving credit line. Amounts due under the Credit Facility are secured by a first security interest in substantially all of the Company’s assets.
The new term loan must be repaid in quarterly installments of $1.25 million, beginning on September 30, 2006, and can be prepaid without penalty. The revolving line of credit may also be prepaid at any time without penalty. We repaid $2.0 million of the revolving line of credit balance in the year ended December 31, 2006. It is management’s intention to repay $1.0 million of the outstanding line of credit with funds available in addition to the term loan installments totaling $5.0 million over the next twelve months. Therefore, $6.0 million of our total debt balance has been classified as current as of December 31, 2006.
Under the Credit Facility, we are required to comply with certain financial and non-financial covenants. Among the financial covenants are requirements related to consolidated net worth, a quarterly leverage ratio and a quarterly fixed charge ratio. The Credit Facility also limits our ability to: enter into secured and unsecured borrowing arrangements, issue dividends to stockholders (the Company was permitted to pay a dividend in December 2005), repurchase our stock, acquire and dispose of businesses, and issue additional shares of our stock, among other requirements, as defined in the Credit Facility. We were in compliance with all covenants related to the Credit Facility at December 31, 2006, and as of March 15, 2007.
We have bank overdraft facilities in Denmark totaling approximately $8.8 million (50.0 million DKK) at December 31, 2006 which bear interest at variable market rates. We had no bank overdraft balances at December 31, 2006.
Future maturities of long-term debt (reflecting contractual maturities and management’s intent) are as follows as of December 31, 2006:
7. Income Taxes
The pre-tax income (loss) on which the provision for income taxes was computed is as follows:
The expense for income taxes for the years ended December 31, 2006, 2005 and 2004, is as follows:
The Company recorded a reduction in its income taxes payable equal to the benefit for tax deductible compensation related to exercises of stock options of approximately $0.4 million, $0.7 million and $1.0 million for the years ended December 31, 2006, 2005 and 2004, respectively. The reduction in income taxes payable that results from stock options is accounted for as additional proceeds from the exercise of the options and is credited directly to additional paid-in-capital. The benefit does not reduce income tax expense charged to income.
The following reconciles the Company’s effective tax expense to the federal statutory expense for the years ended December 31, 2006, 2005 and 2004:
Our 2006 effective tax rate is negatively impacted by the mix of domestic versus foreign income, stock-based compensation recorded under SFAS 123R that is not deductible for tax purposes, and a nondeductible in-process research and development write-off in the first quarter of 2006 associated with our acquisition of KIRK. Excluding the impact of the non-deductible in-process research and development charge and the SFAS 123R expense, our 2006 effective tax rate would have been approximately 33%. The decrease in the effective tax rate for fiscal 2005 compared with fiscal 2004 was due to a new tax deduction for qualified manufacturing expenses enacted as part of the American Job Creation Act of 2004 and a higher research and development tax credit due to higher spending in research and development.
The Company’s deferred income taxes are summarized as follows:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible, or through recovery of taxes previously paid during available carry back periods. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the period are reduced.
We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109). Judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are numerous transactions for which the ultimate tax outcome is uncertain. Additionally, our income tax provision is based on calculations and assumptions that are subject to examination by many different tax authorities. We adjust our income tax provision in the period it is probable that actual results will differ from our estimates. Tax law and rate changes are reflected in the income tax provision in the period in which such changes are enacted.
As discussed in Note 2, we formed a Danish holding company, SpectraLink Denmark ApS in December of 2005, for the purposes of acquiring KIRK. Under the accounting guidance of APB 23 and SFAS 109, we have elected to treat the holding company’s earnings as permanently reinvested.
8. Stock-Based Compensation
We have recognized expense related to five equity incentive plans under SFAS 123R in 2006: the 2006 Equity Incentive Plan (the “2006 EIP”), the 2006 Employee Stock Purchase Plan (the “2006 ESPP”), the 2006 International Employee Stock Purchase Plan (the “2006 IESPP), the 2000 Stock Option Plan (a successor to the Company’s original option plan and collectively called the (“Previous Option Plans”) and the Employee Stock Purchase Plan (the “previous ESPP”). On May 23, 2006, our stockholders approved the 2006 equity incentive plans, which became effective with the filing of a Form S-8 on August 22, 2006. No grants were made under the Previous Plans subsequent to May 23, 2006, and shares available for future grants under the Previous Plans on May 23, 2006, became eligible for future grants under the 2006 plans.
The Previous Option Plans
The Previous Option Plans provided selected employees, officers, directors, agents, consultants and independent contractors of the Company options to purchase shares of the Company’s common stock. Under the terms of the Previous Option Plans, the purchase price per share of a non-qualified stock option was not less than par value per share of the Company’s common stock at the time of grant. The purchase price per share of an incentive stock option was not less than 100% of the market value per share of the Company’s common stock at the time of grant. If the grantee of an incentive stock option owned more than 10% of the total combined voting power of all classes of stock on the date of grant, the purchase price was set to at least 110% of the market value of a share of the Company’s common stock at the date of grant. Options granted under the Previous Option Plans are exercisable for periods ranging from 8 to 10 years from date of grant. Options generally vest 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. We have not issued any options under the 2006 EIP, and no options were issued after the second quarter of 2006. Rather, we have issued restricted stock.
The weighted-average grant date fair value of options granted was $6.50 and $7.82 during the second and first quarters of 2006, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004 was $0.8 million, $1.3 million and $1.8 million, respectively. As of December 31, 2006, there was $4.6 million of total unrecognized compensation cost from share-based compensation granted under the Previous Options Plans, related to unvested options. This compensation is expected to be recognized over a weighted-average period of approximately 1.24 years. (See Note 1 for the expected impact of Polycom acquisition on our stock compensation expense in 2007).
We selected the Black-Scholes option-pricing model as the most appropriate valuation method for our stock option awards. 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. Note that for 2006 grants under the Previous Option Plans, we have separated the optionees into three groups: Non-employee Directors, Executive Officers, and Management/Staff. We have determined that the exercise behavior of the three groups is distinct and, therefore, the assumptions are different for purposes of valuing their options using the Black-Scholes model. During 2006, volatility for the three groups is estimated to range from 67% to 72%. The risk-free interest rate and expected terms (without regard to forfeitures) is 4.82% to 5.09% and 4 to 5 years, respectively, for all groups and the dividend yield is 0%. We assumed a forfeiture rate of approximately 9% in 2006.
Stock options outstanding at December 31, 2006, changes during the three years ended December 31, 2006, and shares available for grant under the 2000 Stock Option Plan are presented below:
(1) Shares unused under the Previous Option Plans are available for grant under the 2006 EIP.
A summary of additional information related to the options outstanding as of December 31, 2006, is as follows:
The 2006 Equity Incentive Plan
The 2006 EIP provides for various equity compensation arrangements that the Compensation Committee may approve for grant to selected employees, executive officers, directors, agents, consultants and independent contractors of the Company. Under the terms of the 2006 EIP, the Compensation Committee may grant either non-qualified or incentive stock options, as defined by the Internal Revenue Service, restricted stock awards, stock appreciation rights, and restricted stock units. On August 30, 2006, the Compensation Committee approved a restricted stock award program under the 2006 EIP that replaces the Previous Option Plans. Restricted stock awards under the 2006 EIP program follow the same vesting schedule and are granted with a purchase price per share of $0.01. Note that Board of Directors’ equity grants vest at a rate of 50% after 12 months and ratably thereafter with full vesting at 24 months. The total intrinsic value of restricted stock awards granted during 2006 was $0.7 million. As of December 31, 2006, there was $0.5 million of total unrecognized compensation cost from share-based compensation granted under the 2006 EIP, related to unvested restricted stock. This compensation is expected to be recognized over a weighted-average period of approximately 1.7 years. We assumed a forfeiture rate for our restricted stock grants in 2006 of approximately 9%.
Restricted stock awards outstanding at December 31, 2006, changes during the year ended December 31, 2006, and shares available for grant under the 2006 EIP are presented below:
(1) In accordance with the terms of our 2006 EIP, each restricted share awarded serves to reduce shares available for grant by 4 shares.
2006 ESPP, 2006 IESPP, and previous ESPP Plan (the “ESPP Plans”)
Subject to certain maximum stock ownership restrictions, employees are eligible to participate in the ESPP Plans 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 ESPP Plans. The 2006 IESPP terms vary as needed to comply with foreign tax laws. Common stock purchased under the ESPP Plans is equal to 85% of the lower of the market value on the commencement date or termination date of each offering period (usually six months). We completed two offering periods in 2006 under the previous ESPP Plan in which 57,593 and 78,000 shares were purchased at $8.80 a share and $6.69 a share and with intrinsic values of $234 thousand and $92 thousand, respectively. A new, seven-month offering period under the 2006 ESPP and 2006 IESPP Plans began on August 16, 2006. Total expense recognized during the offering period for all ESPP Plans was $0.4 million.
We do not separate our employees into groups for purposes of valuing the ESPP Plan awards. The assumptions we used to value the 2006 ESPP and 2006 IESPP shares under the new offering period are as follows: Interest rate -4.8%; Dividend yield - 0%; Expected term - 7 months; Volatility -41%. At December 31, 2006, there was $0.1 million of total unrecognized compensation cost related to our 2006 ESPP and 2006 IESPP, which will be recognized over the remaining offering period, through March 15, 2007.
The following table sets forth the total stock-based compensation expense resulting from stock-based compensation included in our Consolidated Statements of Operations (in thousands):
(1) Tax effected at statutory rate of 38%.
(2) Represents value of options vested in 2006. Options vested in 2005 and 2004 had values of $6.5 million and $2.5 million, net of tax respectively.
(3) ESPP expense was $0.2 million in both 2005 and 2004.
Prior to adoption of SFAS 123R, we applied SFAS 123, amended by SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS 148), which allowed companies to apply the existing accounting rules under APB 25, “Accounting for Stock Issued to Employees,” and related interpretations. In general, no compensation expense was recognized in periods prior to the adoption of SFAS 123R for our plans; however, as required by SFAS 148 prior to the adoption of SFAS 123R, we provided pro forma net income (loss) and pro forma net income (loss) per common share disclosures for stock-based awards, as if the fair-value-based method defined in SFAS 123 had been applied.
The following table illustrates the effect on net income (loss) after tax and net income (loss) per common share as if we had applied the fair value recognition provisions of SFAS 123 to stock-based compensation during the years ended December 31, 2005 and 2004 (in thousands, except per share amounts):
(1) Includes compensation expense (net of related tax effect) resulting from the acceleration of vesting of certain outstanding stock options, as described below.
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: risk-free interest rates of 3.88% and 2.23%; expected lives (net of forfeitures) of 3.63 years and 4.04 years; a $0.10 per share quarterly dividend; and expected volatility of 72% and 75%, respectively, for the years ended December 31, 2005 and 2004. The fair value of each purchase right under the employee stock purchase plan is estimated, for disclosure purposes, on the date of grant using the Black-Scholes model with the following assumptions: a $0.10 per share quarterly dividend; an expected life of 6 months and 8.5 months for the offering period beginning July 1, 2005; expected volatility of 45% and 71%; and a risk-free interest rate of 3.79% and 2.82%, respectively, for the years ended December 31, 2005 and 2004, respectively.
On June 21, 2005, the Board of Directors authorized the acceleration of the vesting of stock options outstanding under the Company’s 2000 Stock Option Plan and the Company’s prior equity compensation plans that had an exercise price per share higher than the closing price of the Company’s stock on June 21, 2005, which was $10.75. Options held by directors, including John Elms, the Company’s president and CEO, were not eligible in the vesting acceleration. Options to purchase approximately 1.1 million shares of the Company’s common stock became exercisable immediately.
The primary purpose of the accelerated vesting was to eliminate future compensation expense the Company would otherwise recognize in its statement of operations with respect to these accelerated options upon the adoption SFAS 123R. These options were not “in-the-money” at that time, and therefore, there was no compensation expense recorded in accordance with APB No. 25 as a result of this modification. However, in accordance with SFAS No. 123, the Company included the remaining unamortized compensation expense of approximately $3.9 million (net of tax) related to the accelerated options in its pro forma net income (loss) and earnings (loss) per share for the three months ended June 30, 2005. Had this acceleration not been taken, the unamortized fair value-based compensation expense would have been recorded in future periods through 2009, under vesting schedules in place prior to the acceleration, which generally would have resulted in fair value-based compensation expense of $1.5 million in 2006, $0.8 million in 2007, $0.3 million in 2008 and $14,000 in 2009, all without regard to the effect of forfeitures.
Cash proceeds from the exercise of stock options totaled $1.7 million, $3.3 million and $4.8 million for the years ended December 31, 2006, 2005 and 2004, respectively. Net cash proceeds from employee stock purchases were $1.0 million, $0.4 million and $0.6 million for the years ended December 31, 2006, 2005 and 2004, respectively. In accordance with SFAS 123R, we present excess tax benefits from the exercise of stock options, if any, as financing cash flows in 2006 rather than operating cash flows, as presented previously.
9. Commitments and Contingencies
We have various commitments and contingencies including non-cancelable leases, interest and principal repayments related to our Credit Facility, purchase commitments, guarantees and other commitments as described below and in Note 6:
Leases
We have entered into leases for our facilities under noncancelable operating lease arrangements that expire at various dates through 2012. We record lease expense on a straight-line basis over the lease term. We have other obligations for office equipment that expire at various dates through 2012. Total rent expense for noncancelable, cancelable and month-to-month operating leases for the years ended December 31, 2006, 2005 and 2004, was approximately $2.5 million, $1.5 million and $1.4 million, respectively.
As of December 31, 2006, expected future cash payments related to noncancelable leases are as follows:
Other Purchase Commitments
We incur various purchase obligations with vendors and suppliers for the purchase of inventory, as well as goods and services, in the normal course of business. These obligations are generally evidenced by purchase orders with delivery dates from six to twelve months from the purchase date, and in certain cases, purchase orders that contain non-cancelable/non-returnable terms and conditions associated with these purchase arrangements. We are committed to accept delivery of such materials pursuant to such purchase orders subject to various contract provisions which allow us to delay receipt of such orders. Such orders may or may not include cancellation costs payable by us. In the past, we have been required to take delivery of materials from suppliers that were in excess of demand requirements and we have previously recognized charges and expenses related to such excess material, related primarily to engineering changes. If we are not able to adequately manage our supply chain and adjust such commitments for changes in demand, we may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on the Company’s business, financial condition and results of operations.
We enter into various license agreements, some of which require royalty payments and non-refundable licensing fees. For the years ended December 31, 2006, 2005 and 2004, respectively, we incurred expenses of approximately $0.9 million, $0.5 million and $0.5 million for license and other fees relating to these agreements.
Indemnifications
We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of the Company’s products. We evaluate estimated losses for such indemnifications under SFAS 5, Accounting for Contingencies, as interpreted by FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered material costs as a result of such obligations and have not accrued any liabilities related to such indemnifications in the Company’s financial statements.
Change of Control and Severance Arrangements.
The following executive officers of the Company entered into change of control agreements with the Company on the dates listed in the following table:
These change of control agreements for each officer named above other than Mr. Madsen, provide that upon the involuntary termination (including resigning for good reason) or termination of such officer’s employment as a result of disability or death within 12 months following a change of control of the Company, such officer will be entitled to (i) severance pay equal to one times the sum of his or her annual base salary, (ii) 100% of such officer’s target annual incentive compensation (including any applicable quarterly incentives assuming 100% achievement), (iii) for the year in which the date of termination occurs, continued coverage under the Company’s health, life, dental and other insurance programs for the 12-month severance pay period, (iv) immediate accelerated vesting of all stock options to purchase Common Stock and any repurchase right of the Company shall lapse with respect to shares of restricted stock held by him or her at the time of termination, and (v) if any of the payments above constitute “parachute payments” within the meaning of 280G of the Internal Revenue Code, then such officer will receive a payment sufficient to pay such excise tax (“280G gross-up payment”) and an additional payment sufficient to pay any Section 280G excise taxes and federal or state income taxes arising from the 280G gross-up payment. The Service Agreement entered into by Mr. Madsen provides that in the event of a change of control, Mr. Madsen will receive an additional three (3) months notice prior to the termination of such agreement. The consummation of the Polycom acquisition would constitute a change of control under each of these officers’ change of control agreements. Certain executives entered into retention arrangements with Polycom in addition to the above-mentioned change of control agreements. The aggregate potential payments and benefits payable to each of the Company’s officers under above agreements are approximately as follows: Mr. Elms, $1.1 million; Mr. Kelley, $0.4 million; Mr. Garahi, $0.4 million; Mr. Sampias, $0.6 million; Ms. Maher, $0.6 million and Mr. Madsen, $0.6 million. We have contracts with other employees relative to termination from employment with our Company, both with and without a change in control. Polycom also entered into retention agreements with certain executives. See Note 14.
Our equity compensation plans provide for accelerated vesting of 50% of all outstanding, unvested options to purchase shares of SpectraLink stock upon a change in control for all option holders. However, upon the consummation of the Polycom acquisition, all options will vest. Polycom will pay option holders for the difference between the exercise price of their outstanding options and $11.75 on the acquisition date. Options that are exercisable at prices above $11.75 will be cancelled and extinguished without consideration.
Restricted stock outstanding when the acquisition is consummated will continue to vest according to its terms and will be settled in cash at $11.75 per share as vesting occurs. Outstanding purchase rights under our employee stock purchase plans upon the consummation of the acquisition will be converted into rights to receive cash from Polycom equal to the number of shares that would have been acquired at the market price for SpectraLink stock immediately prior to the acquisition multiplied by $11.75.
Legal Proceedings
SpectraLink is not presently a party to any material pending legal proceedings of which it is aware.
Product Warranties and Service
The Company provides warranties against defects in materials and workmanship for products for periods ranging from 90 days to 15 months, but in limited cases up to 18 months. At the time the product is shipped, the Company establishes a provision for estimated expenses of providing service under these warranties based on historical warranty experience. A summary of activity for accrued product warranty and service is as follows:
Retirement Plan
The Company has a 401(k) Profit Sharing Plan (the 401(k) Plan) which covers all eligible U.S. employees beginning the first of the month following the employee’s date of hire, as defined in the 401(k) Plan, and are age 18 or older. Participants may defer up 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 3% 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 or Company profitability. The Company has made discretionary matching contributions of approximately $0.7 million, $0.6 million and $0.5 million to the 401(k) Plan for the years ended December 31, 2006, 2005 and 2004, respectively.
10. Segment Information
In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” we define operating segments as components of an enterprise for which separate financial information is available. This information is reviewed regularly by our chief operating decision-maker, to evaluate performance and to make operating decisions. We have identified our Chief Executive Officer as our chief operating decision-maker. The chief operating decision-maker reviews revenue and overall results of operations by segment.
During the year ended December 31, 2006, we operated our business across two operating segments, based on the legal structures of SpectraLink and KIRK. Prior to the fiscal year 2006, and the acquisition of KIRK, we operated as one segment.
The SpectraLink segment primarily consists of our Americas operations and corporate activities, including ongoing global corporate support functions such as executive offices, legal, finance and treasury. The SpectraLink segment also includes branch sales and sales support personnel located in the United Kingdom and Australia.
The KIRK segment is comprised of the operations and corporate activities of KIRK acquired on January 3, 2006 (See Note 2). KIRK designs, manufactures and sells wireless onsite adjunct communication solutions. KIRK also
includes two subsidiaries: KIRK telecom, Inc., a distribution sales and support subsidiary in the United States; and KIRK scantel A/S, which designs, contract manufactures and sells wired and wireless telephones under the KIRK brand name to the residential market, primarily in the Scandinavian countries. KIRK telecom, Inc. had minimal activity in 2006, as its staff was hired by SpectraLink and was dissolved in 2007.
Unallocated costs primarily consist of costs incident to the acquisition of KIRK, including debt service, amortization of intangible assets, purchased in-process research and development and foreign currency changes.
The following summarizes our results and total assets by segment (in thousands):
(1) Sales commenced between segments in the second quarter of 2006.
(2) Intercompany balances have been eliminated.
(3) Includes fixed assets, goodwill and intangibles.
The following table reflects sales and long-lived assets by geographic segment:
(1) Principally sales through our office in the United Kingdom and fixed assets in that office.
(2) In 2005 and 2004, principally sales through our office in Australia and fixed assets in that office.
(3) Legacy KIRK sales to countries outside of Denmark, the United Kingdom, Australia and the Americas.
11. Earnings Per Share and Other Stockholder Matters
Basic earnings per share is computed by dividing the income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is determined by dividing the income by the sum of the weighted average number of common shares outstanding, and if not anti-dilutive, the effect of outstanding stock options and/or other common stock equivalents as determined utilizing the treasury stock method. Potentially dilutive common stock options, totaling 2.9 million, 1.7 million and 0.9 million for the years ended December 31, 2006, 2005 and 2004, respectively, have been omitted from the diluted calculations because they are anti-dilutive. Weighted average options, restricted stock awards, and rights to purchase 112,000 shares of common stock were excluded from the diluted share calculation for the year ended December 31, 2006, as their effect would have been anti-dilutive as a result of the net loss for the period. A reconciliation of the numerators and denominators used in computing earnings per share is as follows:
Dividends
During 2005 and 2004, we paid a quarterly cash dividend of $0.10 per share totaling $7.7 million and $7.6 million to holders of common stock.
Treasury Stock
During 2005 and 2004, the Company repurchased 462,900, and 340,445, respectively, shares of outstanding common stock (now classified as treasury stock) at a cost of $5.0 million, and $3.0 million, respectively. In accordance with the Credit Facility, we were prohibited from repurchasing our stock in 2006.
12. Quarterly Financial Information (Unaudited)
The following summarizes selected quarterly financial information for each of the two years ended December 31, 2006:
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of SpectraLink Corporation:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that SpectraLink Corporation maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). SpectraLink Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that SpectraLink Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, SpectraLink Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of SpectraLink Corporation and subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated March 16, 2007 expressed an unqualified opinion on those consolidated financial statements.
KPMG LLP
Boulder, Colorado
March 16, 2007
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Our chief executive officer and chief financial officer, based on their evaluation of our disclosure controls and procedures as of the end of the period covered by this report (the Evaluation Date), concluded that our disclosure controls and procedures were effective as of the Evaluation Date for this purpose.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, which is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2006.
Our independent registered public accounting firm, KPMG LLP, issued an attestation report on management’s assessment and the effectiveness of our internal control over financial reporting as of December 31, 2006. KPMG LLP’s report is included at the end of Part II, Item 8 of this Form 10-K.
Changes in Internal Controls over Financial Reporting
Regulations under the Securities Exchange Act of 1934 require public companies to evaluate any change in “internal control over financial reporting,” which is defined as a process to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. In connection with their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our chief executive officer and chief financial officer did not identify any change in our internal control over financial reporting during the three-month period ended December 31, 2006, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our chief executive officer and our chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART III
Item 10. Directors and Executive Officers of the Registrant.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the name, age and position of each director and executive officer of the Company as of February 7, 2007.
Name
Age
Position(s)
Anthony V. Carollo, Jr.
Chairman of the Board
John H. Elms
President, Chief Executive Officer and Director
Carl D. Carman
Director
Werner P. Schmücking
Director
Gerald J. Laber
Director
Masood Garahi
Chief Technology Officer and Executive Vice President, Engineering
John A. Kelley
Executive Vice President, Operations
Ole Lysgaard Madsen
Executive Vice President, International
Leah Maher
Executive Vice President and General Counsel
Ernest J. Sampias
Chief Financial Officer and Executive Vice President, Finance and Administration
The following are brief biographies of each current director and executive officer of the Company (including present principal occupation or employment, and material occupations, positions, offices or employment for the past five years). Unless otherwise indicated, to the knowledge of the Company, no current director or executive officer of the Company has been convicted in a criminal proceeding during the last five years and no director or executive officer of the Company was a party to any judicial or administrative proceeding during the last five years (except for any matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws. There are no family relationships between any of the directors and executive officers of the Company.
Anthony V. Carollo, Jr. has served as a member of the Company Board since January 1998 and Chairman of the Board since April 2004. From June 2000 until December 2002, Mr. Carollo served as Chairman and Chief Executive Officer of Syntellect Corporation, a provider of self-service speech and advanced call-center solutions. Mr. Carollo is currently an independent investor.
John H. Elms has served as a member of the Company Board since September 2003. Mr. Elms has served as the President and Chief Executive Officer of the Company since September 2003 and as Vice President of Operations of the Company from 1999 to September 2003.
Carl D. Carman has served as a member of the Company Board since 1990. From 1989 until 2002, Mr. Carman served as a general partner of Hill, Carman Ventures, a venture capital firm. Mr. Carman is currently retired.
Werner P. Schmücking has served as a member of the Company Board since March 2004. From 1989 until April 2000, Mr. Schmücking was a director of Siemens AG Information and Communication Networks. Mr. Schmücking was a consultant to SAP AG from 2001 until 2003. He has also served as president of the German Telecommunication Manufacturers Association (ZVEI) and vice president of the German Association for Information Technology, Telecommunications and New Media (BITKOM). Mr. Schmücking currently serves as a director of OCE Printing Systems and SWYX Solutions AG.
Gerald J. Laber has served as a member of the Company Board since April 2004. Since 2000, Mr. Laber has been a consultant and community volunteer. From 1980 to 2000, Mr. Laber served as a partner with Arthur Andersen LLP. Mr. Laber serves as a director of Qualmark Corporation, Boulder Specialty Brands, Inc. and Scott’s Liquid Gold, Inc. Mr. Laber is a Certified Public Accountant in the State of Colorado.
Masood Garahi has served as Chief Technology Officer and Executive Vice President, Engineering of the Company since October 2005. His prior positions were Chief Technology Officer of Roving Planet Inc. from November 2004 to June 2005 and Chairman and Chief Executive Officer and Independent advisor of MeshNetworks Inc. (now part of Motorola) from June 2000 to May 2004.
John A. Kelley has served as Executive Vice President, Operations, of the Company since August 2004, Vice President of Operations of the Company since October 2003. From September 2002 to September 2003, Mr. Kelley served as President of JK Associates. From January 2000 to August 2003, Mr. Kelley served as Vice President, Global Services Operations, of Compaq Computer Corporation.
Ole Lysgaard Madsen has served as Executive Vice President, International for the Company since January 2006. From February 2000 to January 2006, Mr. Madsen served as Senior Vice President of Global Sales, Marketing and Technical Support for KIRK telecom A/S.
Leah Maher has served as Executive Vice President, General Counsel and Assistant Secretary since June 2006, Vice President and General Counsel from September 2005 to June 2006, and Corporate Counsel from September 2004 to September 2005. Prior to joining the Company, Ms. Maher served as Senior Counsel for American Tower Corporation from September 2001 to October 2003, and Associate General Counsel of PictureTel Corporation from May 1994 to September 2001.
Ernest J. Sampias has served as Chief Financial Officer, Treasurer and Executive Vice President, Finance and Administration and Secretary since May 2006. Mr. Sampias served as Chief Financial Officer for Local Matters, Inc. from July 2005 to April 2006, and McDATA Corp. from September 2001 to July 2005. Mr. Sampias is a member of the board of directors and the audit committee chairman for Xyratex Limited.
None of the Company’s directors or officers are involved in a material legal proceeding where such director or officer is a party adverse to the Company or any of its subsidiaries.
CORPORATE GOVERNANCE PRINCIPLES AND COMPANY BOARD MATTERS
Board Structure and Committee Composition
As of the date of this Information Statement, the Company Board has five directors. The Company Board follows NASDAQ Stock Market (“NASDAQ”) Marketplace Rule 4200 for director independence standards. In accordance with these standards, the Company Board has determined that, except for Mr. Elms, as President and Chief Executive Officer of the Company, each of the members of the Company Board has no relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and is otherwise “independent” in accordance with the applicable listing standards of the NASDAQ as currently in effect. Committees of the Company Board include: an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee. The current membership of these committees (which was the same at all times in fiscal 2006) and the function of each of these committees are described below. Each committee operates under a written charter adopted by the Company Board. All of the committee charters are available on the Company’s website at www.spectralink.com/consumer/company/corporate_governance.jsp. Below is a summary of our current committee membership.
During fiscal year 2006, the Company Board held six meetings. Each director attended or participated in at least 75% of the aggregate of (i) the total number of meetings of the Company Board and (ii) the total number of meetings held by all committees of the Company Board on which each such director served (in each case referring to the number of meetings of the board or committees, as applicable, that occurred while such director was a member of the board or such committees). During fiscal year 2006, the Audit Committee held seven meetings, the Compensation Committee held six meetings and the Nominating and Corporate Governance Committee held two meetings. The Company Board and committees of the Company Board also approved certain matters by unanimous written consent.
Audit Committee. The Audit Committee reviews, acts upon and reports to the Company Board with respect to various auditing and accounting matters, including retention of the Company’s independent registered public accounting firm, pre-approval of audit and non-audit services to be provided by such firm and the related fees paid. The Audit Committee makes such examinations as are necessary to monitor the corporate financial reporting and the internal and external audits of the Company and its subsidiaries, provides to the Company Board the results of its examinations and recommendations derived therefrom, outlines to the Company Board improvements made, or to be made, in internal accounting controls, and provides the Company Board such additional information and materials as it may deem necessary to make the Company Board aware of significant financial matters that require Company Board attention.
The Company Board has determined that each member of the Audit Committee meets the independence criteria set forth in the applicable rules of NASDAQ and the SEC for audit committee membership. In addition, the Company Board has also determined that all members of the Audit Committee possess the level of financial literacy required by applicable NASDAQ and SEC rules and, that in accordance with Section 407 of the Sarbanes-Oxley Act of 2002, at least one member of the Audit Committee, Mr. Laber, is qualified as an “audit committee financial expert.”
Compensation Committee. The Compensation Committee has a written charter which is evaluated on at least an annual basis. Based on its current charter, the Compensation Committee’s responsibilities are to evaluate management’s recommendations and make its own recommendations to the Company Board concerning the compensation of the Company’s executive officers. It is also responsible for the formulation of the Company’s executive compensation policy and the research, analysis and subsequent recommendation regarding the establishment and administration of the Company’s stock plans. Each of the members of the Compensation Committee is independent for purposes of the NASDAQ rules.
Compensation Committee Policies and Procedures. During the first quarter of each fiscal year, the Compensation Committee reviews management’s recommendations for compensation and benefits for executive officers. The Compensation Committee recommends to the Company Board an amount and composition of executive compensation to be paid to the executive officers, including the Chief Executive Officer. The Company Board reviews and considers such compensation recommendations.
The Compensation Committee annually reviews and evaluates base salary and bonuses for all executive officers, and in conducting such reviews places primary consideration upon the recommendations by the Chief Executive Officer, along with the rationale for such recommendations, with the exception of the compensation review of the Chief Executive Officer himself. The Chief Executive Officer does not participate in the Compensation Committee’s review or decision as to his compensation package. In establishing individual compensation levels, the Compensation Committee considers the Company’s overall strategic objectives and performance, the Company’s stock performance, peer group comparisons and individual performance. No formula is used to determine an executive’s salary. The Company’s overall performance and the achievement of financial and business objectives are considered.
Management’s Role in the Compensation-Setting Process. Management, including named executive officers, plays some role in the compensation-setting process. The most significant aspects of management’s role are: (1) evaluating employee performance, (2) assisting in establishing performance
targets and objectives, and (3) recommending salary levels and option awards. The Chief Executive Officer works with the Compensation Committee in establishing the agenda for Compensation Committee meetings. Management also prepares meeting information for each Compensation Committee meeting.
Use of Compensation Consultants. The Compensation Committee has in the past engaged compensation consultants to conduct a review and analysis of how the Company’s compensation practices compare with its peer group of companies. However, no compensation consultants were employed by the Company in 2006.
Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee evaluates and recommends candidates for Company Board positions to the Company Board, and recommends to the Company Board policies on Company Board composition and criteria for Company Board membership. The Nominating and Corporate Governance Committee also recommends to the Company Board, and reviews on a periodic basis, the Company’s succession plan, including policies and principles for selection and succession of the Chief Executive Officer in the event of an emergency or the resignation or retirement of the Company’s Chief Executive Officer. The Nominating and Corporate Governance Committee also reviews the Company’s compliance with NASDAQ corporate governance listing requirements. The members of the Nominating and Corporate Governance Committee are Messrs. Carollo, Laber and Schmücking. Each of the members of the Nominating and Corporate Governance Committee is independent for purposes of the NASDAQ rules as well as the Company’s standards of independence as published on the Company’s website.
Prior to inquiring whether each director is willing to continue in service, the Nominating and Corporate Governance Committee evaluates all directors on an annual basis both for their contribution and participation on the Company Board and each committee for which they serve in order to determine whether to recommend to the Company Board such directors for election at the annual meeting. The Nominating and Corporate Governance Committee considers the following factors in any such evaluation:
· the appropriate size of the Company Board and its committees;
· the perceived needs of the Company Board for particular skills, background, and business experience;
· the relevant skills, background, reputation, and business experience of nominees compared to the skills, background, reputation, and business experience already possessed by other members of the Company Board;
· nominees’ independence from management;
· applicable regulatory and listing requirements including independence requirements;
· the benefits of a constructive working relationship among directors; and
· the desire to balance the considerable benefit of continuity with the periodic injection of the fresh perspective provided by new members.
The Nominating and Corporate Governance Committee’s goal is to assemble a Company Board that brings to the Company a variety of perspectives and skills derived from high quality business and professional experience. Directors should possess the highest personal and professional ethics, integrity, and values, and be committed to representing the best interests of the Company’s shareholders. They must also have an inquisitive and objective perspective and mature judgment. Director candidates must have sufficient time available in the judgment of the Nominating and Corporate Governance Committee to perform all Company Board and committee responsibilities. Company Board members are expected to prepare for, attend, and participate in all Company Board and applicable committee meetings.
Other than the foregoing, there are no stated minimum criteria for director nominees, although the Nominating and Corporate Governance Committee may also consider such other factors as it may deem, from time to time, are in the best interests of the Company and its shareholders. The Nominating and Corporate Governance Committee believes that at least one member of the Company Board should meet the criteria for an “audit committee financial expert” as defined by SEC rules. Under applicable listing requirements, at least a majority of the members of the Company Board must meet the definition of
“independent” director. The Nominating and Corporate Governance Committee also believes it appropriate for one or more key members of the Company’s management to participate as members of the Company Board. The Company Board also has designated its chairman, Mr. Carollo, as its “Lead Independent Director.”
The Nominating and Corporate Governance Committee will consider the criteria and policies set forth above in determining if the Company Board requires additional candidates for director. The Nominating and Corporate Governance Committee will consider candidates for directors proposed by directors or management, may poll directors and management for suggestions, or conduct research to identify possible candidates, and may engage, if the Nominating and Corporate Governance Committee believes it is appropriate, a third-party search firm to assist in identifying qualified candidates. All such candidates will be evaluated against the criteria and pursuant to the policies and procedures set forth above. All director nominees, including incumbents, must submit a completed form of directors’ and officers’ questionnaire as part of the nominating process. The evaluation process may also include interviews and additional background and reference checks for non-incumbent nominees at the discretion of the Nominating and Corporate Governance Committee.
The Nominating and Corporate Governance Committee will also evaluate any recommendation for director nominee proposed by a shareholder, provided that any such recommendation is sent in writing to the Corporate Secretary at 5755 Central Avenue, Boulder, Colorado 80301 at least 120 days prior to the anniversary of the date proxy statements were mailed to shareholders in connection with the prior year’s annual meeting of shareholders, and contain the following information:
· the candidate’s name, age, contact information and present principal occupation or employment;
· the number of shares of the Company’s common stock beneficially owned by the candidate; and
· a description of the candidate’s qualifications, skills, background, and business experience during, at a minimum, the last five years, including his/her principal occupation and employment, and the name and principal business of any corporation or other organization in which the candidate was employed or served as a director.
The Nominating and Corporate Governance Committee will evaluate any candidates recommended by shareholders against the same criteria and pursuant to the same policies and procedures applicable to the evaluation of all other proposed candidates, including incumbents, and will select the nominees that in the Nominating and Corporate Governance Committee’s judgment best suit the needs of the Company Board at that time.
Code of Business Conduct and Ethics
The Company Board has adopted a Code of Conduct and Business Ethics (the “Code”) that outlines the principles of legal and ethical business conduct under which the Company does business. The Code, which is applicable to all directors, employees, and officers of the Company, is available on the Company’s website at www.spectralink.com/consumer/company/corporate_governance.jsp. Any substantive amendment or waiver of this Code may be made only by the Company Board upon a recommendation of the Audit Committee, and will be disclosed on the Company’s website.
On February 7, 2007, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Polycom, Inc. (Polycom) pursuant to which Polycom commenced a cash tender offer for all outstanding shares of the Company’s common stock. As the parties agreed to in the Merger Agreement, if Polycom accepts tendered shares of common stock for payment, Polycom will be entitled to designate certain members of the Company’s Board of Directors without input from the Company’s Nominating and Corporate Governance Committee, as described more fully in the Merger Agreement.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our officers and directors and persons who own more than 10% of a registered class of our equity securities to file certain reports regarding ownership of, and transactions in, our securities with the SEC. Such officers, directors and 10% stockholders are also required by SEC rules to furnish us with copies of all Section 16(a) forms that they file.
Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all filing requirements applicable to our executive officers, directors and more than 10% stockholders were complied with during the fiscal year ended December 31, 2006.
Item 11. Executive Compensation.
Compensation Committee Report
The Compensation Committee oversees the Company’s equity compensation plans, establishes the level of base salary and benefit plans payable to the Chief Executive Officer and other executive officers and key employees of the Company, and has the responsibility of approving the non-equity incentive programs for the Chief Executive Officer and the other executive officers. The Compensation Committee also recommends grants of stock awards, stock options, stock appreciation rights and other awards to be made under existing incentive compensation plans. The Compensation Committee of the Board is comprised of non-employee directors, each of whom is independent for purposes of the Nasdaq rules.
The compensation committee has reviewed and discussed the Compensation Discussion and Analysis with management and based on the review and discussion, it has recommended to the board of directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.
COMPENSATION COMMITTEE
Carl D. Carman, Chairman
Anthony V. Carollo
Gerald J. Laber
COMPENSATION DISCUSSION AND ANALYSIS
The Compensation Committee has discussed and reviewed the following Compensation Discussion and Analysis, or CD&A, with management. Based on this review, the Compensation Committee recommended to the Company Board that this CD&A be included in this Form 10-K.
This CD&A, provides information regarding the compensation program in place for the Company’s chief executive officer, chief financial officer and three other most highly-compensated executive officers during 2006. We refer to these individuals in this Form 10-K as the “named executive officers.” This CD&A includes information regarding, among other things, the objectives of the Company’s compensation program, the achievements that the compensation program is designed to reward, the elements of the compensation program (including the reasons why the Company employs each element and how it determines amounts paid) and how each element fits into its overall compensation objectives.
The Compensation Committee operates within the policies established by the Company Board and has the authority to create and approve the executive officer compensation plan. The Compensation Committee administers the Company’s executive compensation programs, monitors corporate performance and its relationship to compensation of executive officers, and makes approves annual adjustments to executive compensation as needed. The members of the Compensation Committee are Carl D. Carman, chairman, Anthony V. Carollo, Jr. and Gerald J. Laber.
Objectives of Our Named Executive Officer Compensation Programs
Our success depends heavily upon the contributions of our key management and technical personnel, whose knowledge, leadership and technical expertise would be difficult to replace. Our executive compensation program is designed to attract and retain individuals with the talents and skills necessary for us to achieve our business plan and to reward those individuals who make that happen. Our fundamental compensation objective is to align compensation for our executives with their contribution to the development and financial success of the Company’s business objectives and performance. We believe that we achieve this objective by first, providing adequate compensation, incentives and awards to attract and retain talented and skilled executives whose contributions are necessary for the long-term success of the Company. Secondly, we achieve our objective by compensating the named executive officer based on both the Company’s performance as well as their own individual performance.
Named Executive Officer Compensation Elements
Compensation packages for our named executive officers are comprised of three primary elements: base salary, which is based on level of responsibility, professional expertise and experience; cash performance bonuses (non-equity incentives), which are directly tied to the Company’s financial performance; and equity awards, which are primarily tied to individual objectives and performance. However, the compensation package for one of our named executive officers who held an interim position from April 10, 2006 to May 15, 2006 consisted of two elements: base salary and cash bonus. The cash bonus for Carolyn A. Smyth, Vice President of Finance and Corporate Controller of the Company, was under a separate bonus arrangement designed for our non-executives that was not reviewed by the Compensation Committee and is tied to individual performance rather than the Company’s performance.
Base Salary
The base salary is intended to provide our named executive officers with a level of cash compensation that reflects the experience, skills, knowledge and responsibilities required of the named executive officers in their roles.
The base salary for each named executive officer is reviewed annually by the Compensation Committee and adjustments are made on the basis of experience and personal performance, taking into account the average salary levels for comparable positions with companies having similar total revenues both within and outside the Company’s industry. The weight given to each of these factors differs from individual to individual, as the Compensation Committee deems appropriate. Each individual’s base pay is positioned relative to their total compensation package, including non-equity incentives and long-term equity compensation incentives. The base salary is designed to be competitive and comparable to the market but leave room for a significant portion of the overall compensation to be tied to personal and Company performance.
The decision of whether or not to adjust base salary from year to year is not only based on an evaluation of personal performance but also relates to cost of living changes and an annual evaluation relative to comparable executive positions in the region and the industry. During 2006, our named executive officers received increases in base salary over 2005 ranging from 0% to 10.6% as a result of an evaluation by the Compensation Committee of the factors discussed above (except for a named executive officer who held an interim position who had a salary increase of 18.8% based on a review by the Chief Executive Officer only).
Non-Equity Incentive Plan Compensation for Named Executive Officers
We believe that executive performance that results in improved Company performance should be rewarded. Our non-equity incentive plan consists of cash bonuses for specific financial metrics. Annual cash (non-equity) incentive awards are intended to reward our named executive officers for the achievement of specific financial metrics that they have the ability to influence. For example, named executive officers that are able to directly influence top line revenue have their cash incentive tied to revenue growth while other named executive officers are only measured based on pre-tax profitability as they have the ability to manage costs and improve efficiency. Two of our named executive officers have cash incentives that are tied to both revenue and pre-tax profitability based on their ability to influence both. The Compensation Committee establishes financial metrics to which the cash incentives should be tied based on the Company’s annual operating plan. The cash incentive for all but one named executive officer is calculated as a percentage of their salary, which is then adjusted based on the percentage achievement of the financial metric targeted. The incentive, as a percentage of salary, ranges from 35% to 70%. Named executive officers whose incentive was strictly based on pre-tax profitability for 2006 did not receive a cash incentive bonus in 2006 as the threshold targets were not achieved, and the Compensation Committee did not exercise its discretion to pay a cash incentive. Based on the achievement of pre-determined revenue targets during 2006, Mr. Kelley, the Company’s EVP, Operations, received a cash incentive of $57,200. In addition, Mr. Madsen, EVP, International, earned a cash incentive of $82,840, which was based on both pre-tax profitability and revenue metrics for KIRK telecom. Ms. Smyth did not receive a non-equity incentive plan bonus in 2006, as described above. The Compensation Committee strives to establish Company financial targets that are both challenging and achievable in order to adequately motivate management while improving shareholder value.
Each year, in the process of establishing the named executive officers performance goals, the Compensation Committee evaluates the prior year financial metrics and the methodology used in setting the cash incentives. The Compensation Committee may from time to time award cash incentive at its discretion even if the Company does not meet the performance goals that were established.
Equity Awards
We believe that equity incentive awards are the best way to create incentives and reward the performance of our named executive officers that improves Company performance and increases shareholder value thereby strengthening the mutual interests between named executive officers and shareholders. By providing equity awards to our named executive officers, they are not only rewarded for past performance but also have long-term incentive to continue to promote the Company’s success.
The Compensation Committee makes discretionary stock option grants and restricted stock awards to named executive officers of the Company based on a number of factors including each named executive officer’s personal performance; criticality of the individual to the future success of the Company; and overall contribution to the Company’s success. The Compensation Committee also grants equity awards to newly hired executive officers as a way of promoting long-term incentive in the Company as the stock awards are earned over a long term period, typically four years. Typically, the size of grants are set at a level that is deemed appropriate to create a meaningful opportunity for stock ownership based upon the named executive officer’s performance, position, potential for future responsibility and promotion, and overall expected contribution to the Company’s success. The Compensation Committee also considers other factors in determining the size of the grant such as the amount of unvested options or restricted stock awards held by the individual from prior grants, the length of time that the employee has been with the Company and the amount of other compensation earned by the named executive officer. The relative weight given to each of these factors varies from individual to individual.
During 2006, there were a total of 455,000 options granted to the named executive officers of the Company under the Company’s 2000 Stock Option Plan. No restricted stock awards were made to any named executive officer under the 2006 Equity Incentive Plan in 2006. The Company’s Chief Executive Officer, Mr. Elms, presented performance reviews of each of the named executive officers (other than himself) who were currently serving as executive officers in February 2006 outlining their performance relative to their 2005 objectives. Based on the information presented by Mr. Elms and other factors discussed earlier, the Compensation Committee granted options in varying amounts from 35,000 to 100,000 with an exercise price of $12.63. The Company also granted 100,000 options with an exercise price of $10.43 to Mr. Sampias, our EVP, Finance and Administration and CFO, upon beginning his employment with the Company. The exercise price of option grants is based on the closing price on the date of grant as approved by the Compensation Committee. For newly hired executive officers, the grant date is based on the first day of employment. In no case is the option grant or exercise price backdated.
Options and restricted stock awards generally vest over four years, subject to acceleration upon certain events if an acquirer does not assume the option plan, and vesting of such options and restricted stock awards are subject to the named executive officer’s continued employment with the Company.
Severance and Change in Control
At the recommendation of the Compensation Committee, on April 12, 2006 the Company entered into a change of control severance agreement (the “Agreement”) with each of John Elms (the Company’s President, Chief Executive Officer and a director), John Kelley (the Company’s Executive Vice President of Operations), and Masood Garahi (the Company’s Executive Vice President of Engineering and Chief Technology Officer). In February 2007, the Company amended the Agreements with each of the above mentioned individuals to clarify the terms of the Agreements with respect to the Section 280G gross-up contained in the Agreement. Effective May 15, 2006, Ernest Sampias, who became the Company’s Executive Vice President of Finance and Administration, Chief Financial Officer, Secretary and Treasurer, entered into a change of control severance agreement that was similar to the Agreement, except that his options could be exercised over a three year period upon a change of control. According to the terms of the Agreement, in the event a change of control of the Company occurs and a named executive officer’s
employment is terminated or constructively terminated within twelve months following the change of control, the affected named executive officer’s outstanding options will fully vest and the affected executive will be entitled to twelve months of the affected named executive officer’s annual salary plus the affected named executive officer’s target bonus (which assumes 100% of the target bonus plan is met for the year). Additionally, in the preceding circumstance, such named executive officers will receive benefits until the earlier of one year following termination or the date such executive receives comparable benefits from another employer. Under the Agreement, the Company is obligated to gross-up any tax payments such as Section 280G of the Internal Revenue Code or similar tax provision, if applicable. The Company previously agreed to a change of control provision with Ole Lysgaard Madsen (Executive Vice President, International, and President and Managing Director of KIRK telecom A/S) upon the Company’s acquisition of KIRK telecom A/S on January 3, 2006, under different terms than the Agreement, which terms are set forth in his employment agreement with the Company dated January 3, 2006, as amended January 31, 2007. In 2006, David Rosenthal and Carolyn Smyth were not offered an Agreement.
Income Tax Considerations
Section 162(m) of the Internal Revenue Code limits tax deductions for certain executive compensation over $1,000,000. Certain types of compensation are deductible only if they are performance-based and approved by the shareholders. Stock option grants made under the 2000 Stock Option Plan currently do not meet the requirements for performance-based grants as defined in Section 162(m) and are, therefore, not exempt from the limitations on deductibility. Cash compensation for 2005 for any of our named executive officers was not in excess of $1,000,000 and the Company does not expect cash compensation for 2006 to any of our named executive officers to be more than $1,000,000 or consequently affected by the requirements of Section 162(m). The 2006 Stock Option Plan is designed to meet the requirements of Section 162(m). The Compensation Committee’s present intention is to structure compensation arrangements to maximize the Company’s available deductions consistent with Section 162(m) unless the Compensation Committee reasonably believes that the best interests of the Company and its shareholders will be served by structuring compensation for a given executive officer, or executive officers, differently.
Compensation Determination Process
We determine the appropriate level for each compensation component based in part, but not exclusively, on competitive benchmarking consistent with our recruiting and retention goals, our view of internal equity and consistency, overall company performance and other considerations we deem relevant. To this end, we review a number of executive compensation surveys of similar companies when making a crucial executive officer hiring decision and annually when we review executive compensation. Our Compensation Committee performs a strategic review of our named executive officers’ overall compensation packages on an annual basis to determine whether they provide adequate incentives and motivation and whether they adequately compensate our named executive officers relative to comparable officers in other companies. Our Chief Executive Officer, Mr. Elms, takes an active role in evaluating and providing analysis to the Compensation Committee and typically participates in a portion of each meeting along with our general counsel. Mr. Elms is not present in the meetings whenever a discussion and decisions are taking place that pertain to his own compensation.
In determining the 2006 executive compensation plan, Mr. Elms took an active role in evaluating and presenting the Compensation Committee with a proposal of the 2006 compensation for the executive team serving the Company at the time in February 2006. Mr. Elms presented survey and benchmark information from multiple sources including the AEA survey, Salary.com, Mercer, and Culpepper relating to typical compensation packages offered to executives considering differences such as regional variation, the size of the company and the specific high-technology industry.
Executive Compensation and Related Information
2006 SUMMARY COMPENSATION
The following table sets forth, for the twelve months ended December 31, 2006, the cash compensation earned by or paid to named executive officers.
(1) The amounts shown in this column are based on the dollar amount recognized for financial statement reporting purposes for the 2006 fiscal year in accordance with SFAS No. 123(R), “Share-Based
Payment.” There were two sets of assumptions used to compute the fair value of the stock option amounts shown granted in fiscal year 2006, using the Black-Scholes model, based on a February grant date to all named executive officers with the exception of Mr. Sampias whose option grant date was his start date of May 15, 2006. The assumptions used for all named executive officers with the exception of Mr. Sampias were: weighted average exercise price of $12.63; volatility of 71.9%; expected term of 5.3 years; risk-free rate of 4.8%; and an expected dividend yield of 0.0%. The assumptions used for the grant to Mr. Sampias were: weighted average exercise price of $10.43; volatility of 69.3%; expected term of 5.3 years; risk-free rate of 5.1%; and an expected dividend yield of 0.0%. Assumptions used in the calculation of this amount for options granted during fiscal years ended December 31, 2003, 2004 and 2005 are included in footnote 4 to the Company’s audited financial statements for the fiscal year ended December 31, 2005, which is included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2006. Assumptions used in the calculation of this amount for options granted during fiscal year ended December 31, 2002, are included in footnote 3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 4, 2005.
(2) Consists of a 401(k) matching contribution and Company paid premiums for health, dental, life and disability insurance.
(3) Mr. Sampias became Executive Vice President of Finance and Administration and Chief Financial Officer on May 15, 2006.
(4) Consists of Company-paid premiums for health, dental, life and disability insurance.
(5) Mr. Rosenthal resigned as Executive Vice President and Chief Financial Officer on April 10, 2006, but remained with the Company in a non-executive and non-decision making role until September 10, 2006. Included in this salary amount is $108,333 paid pursuant to a five-month severance and release agreement. On September 10, 2006, Mr. Rosenthal forfeited 45,000 stock options granted on February 6, 2006.
(6) Ms. Smyth served as the Interim Chief Financial Officer from April 10, 2006 until May 15, 2006 and is currently the Vice President of Finance and Corporate Controller.
(7) Cash bonus earned was based on the achievement of established goals relating to personal performance.
(8) Non-equity incentive amounts were earned based on the 2006 executive bonus plan.
(9) Consists of a 401(k) matching contribution and Company-paid premiums for life and disability insurance.
(10) With the exception of equity compensation, Mr. Madsen’s compensation is denominated in Danish Kroner and has been translated into U.S. Dollars at the average exchange rate for fiscal year 2006 of 5.9 to 1. Mr. Madsen became Executive Vice President, International on January 13, 2006 in connection with the acquisition of KIRK telecom A/S.
(11) Includes various perquisites paid by the Company including automobile related expenses of $39,011 and retirement plan contributions of $25,232.
2006 GRANTS OF PLAN-BASED AWARDS(1)
The following table sets forth information concerning plan-based grants to the named executive officers during the fiscal year ended December 31, 2006 as well as estimated future payouts under the Company’s incentive plans:
(1) The awards set forth in the table were granted during the 2006 fiscal year.
(2) For additional information concerning the 2006 executive bonus targets, see “Compensation Discussion and Analysis.”
(3) For additional information concerning the vesting schedule and other terms of equity awards granted to the Company’s named executive officers during 2006, see the “Outstanding Equity Awards at Fiscal Year-End” table.
(4) The Compensation Committee approved target objectives for the 2006 executive bonus plan for Messrs. Elms, Rosenthal and Garahi based on the Company’s 2006 objective for consolidated net income before income taxes, excluding SFAS 123(R) expense. The target award for Mr. Elms represented 70% of his base salary, and for Messrs. Rosenthal and Garahi represented 35% of their base salaries, based on achievement of 100% of such 2006 objective. Achievement of less than 50% of such 2006 objective would result in no incentive payment.
(5) Pursuant to the terms of the 2006 executive bonus plan, achievement of greater than 100% of the Company’s 2006 objective for consolidated net income before income taxes, excluding SFAS 123(R) expenses, results in additional incentive payment. Accordingly, there was not a maximum stated for potential payments under the 2006 executive bonus plan.
(6) Pursuant to the terms of his offer letter, Mr. Sampias was given his target objectives under the 2006 executive bonus plan. Mr. Sampias was eligible for a target award of 35% of his base salary, pro-rated from his start date of May 15, 2006. The target of $65,625 was based on achievement of 100% of the Company’s 2006 objective related to consolidated net income before income taxes, excluding SFAS 123(R) expense. Achievement of less than 50% of the Company’s 2006 objective would result in no incentive payment.
(7) The Compensation Committee approved a target award under the 2006 executive bonus plan for Mr. Kelley of $117,000, or 45% of his base salary, based on achievement of 100% of the Company’s 2006 objectives for consolidated net income before income taxes, excluding SFAS 123(R) expense and service revenue. The $117,000 target award was comprised of $91,000, or 35% of his base salary, based on the 2006 objective for consolidated net income before income taxes, excluding SFAS 123(R) expense and $26,000, or 10% of his base salary, based on the Company’s 2006 objective for service revenue. Achievement of less than 50% of the consolidated net income before income taxes, excluding SFAS 123(R) expense, would result in no incentive payment on the $91,000 of target award, while achievement of less than 91% of the service revenue would result in no incentive payment on the $26,000 of target award.
(8) Pursuant to the terms of the 2006 executive bonus plan, achievement of greater than 100% of the Company’s 2006 objective for consolidated net income before income taxes, excluding SFAS 123(R) expenses, results in additional incentive payment. Overachievement related to the Company’s 2006 objective for service revenue would result in an additional payment to Mr. Kelley of 1% of base salary for each percentage point of service revenue over the Company’s 2006 objective. Accordingly, there is not a maximum stated for potential payments under the 2006 executive bonus plan.
(9) The Compensation Committee approved a target award under the 2006 executive bonus plan for Mr. Madsen of $83,333, or 33% of his base salary, based on achievement of 100% of the Company’s 2006 objectives for international sales and KIRK telecom operating income. The $83,333 target award was comprised of 50% based on quarterly achievement of international revenue and 50% on achievement of KIRK telecom operating income. Achievement of less than 50% of the KIRK telecom operating income target would result in no incentive payment on the corresponding target award, while any achievement of the international revenue would result in a pro-rated incentive payment on the corresponding target award.
(10) Pursuant to the terms of the 2006 executive bonus plan, achievement of greater than 100% of the 2006 objectives results in additional incentive payment. Accordingly, there was not a maximum stated for potential payments under the 2006 executive bonus plan.
(11) Ms. Smyth served as the interim principal financial officer from April 10, 2006 to May 15, 2006 and was not part of the 2006 executive bonus plan. Ms. Smyth was under a separate bonus arrangement designed for our non-executives that was not reviewed by the Compensation Committee and is tied to individual performance rather than the Company’s performance.
OUTSTANDING EQUITY AWARDS
The following table sets forth information concerning equity awards held by the named executive officers at December 31, 2006:
(1) Each of these awards vests as to one-fourth of the underlying shares on the first anniversary of the grant, and in equal installments monthly thereafter through the fourth anniversary of the grant date. Each of these awards expires 10 years from the date of grant.
(2) Effective September 10, 2006, Mr. Rosenthal was no longer employed by the Company.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
Current Named Executive Officers
Change of Control Agreements between Named Executive Officers and the Company.
The following table sets forth information concerning change of control agreements between the Company and named executive officers:
Name
Position
Date of Agreement
John H. Elms
President and Chief Executive Officer
April 12, 2006, amended and restated on February 7,
John A. Kelley
Executive Vice President, Operations
April 12, 2006, amended and restated on February 7,
Masood Garahi
Executive Vice President, Engineering and Chief Technology Officer
April 12, 2006, amended and restated on February 5,
Ernest J. Sampias
Chief Financial Officer and Executive Vice President, Finance and Administration
May 15, 2006
Ole Lysgaard Madsen
Executive Vice President, International
January 3, 2006, amended on January 31, 2007
These change of control agreements provide that upon the involuntary termination (including resigning for good reason) or termination of such officer’s employment as a result of disability or death within 12 months following a change of control of the Company, such officer will be entitled to (i) severance pay equal to one times the sum of his annual base salary, (ii) 100% of officer’s target annual incentive compensation (including any applicable quarterly incentives assuming 100% achievement), (iii) for the year in which the date of termination occurs, continued coverage under the Company’s health, life, dental and other insurance programs for the 12-month severance pay period, (iv) immediate accelerated vesting of all stock options to purchase Common Stock and any repurchase right of the Company shall lapse with respect to shares of restricted stock held by him at the time of termination and (v) if any of the payments above constitute “parachute payments” within the meaning of 280G of the Internal Revenue Code, then such officer will receive a payment sufficient to pay such excise tax (“280G gross-up payment”) and an additional payment sufficient to pay any Section 280G excise taxes and federal or state income taxes arising from the Section 280G gross-up payment. The Service Agreement entered into by Mr. Madsen provides that in the event of a change of control, Mr. Madsen will receive an additional three (3) months notice prior to the termination of such agreement. The consummation of the Offer and Merger would constitute a change of control under each of these named executive officers’ change of control agreements. The change of control agreement entered into by each of Messrs. Elms, Kelley and Garahi, is substantially similar to the form of the change of control agreement filed as Exhibit (e)(4) to the Schedule 14D-9 filed by the Company on February 20, 2007, and the above description of their change of control agreements is qualified in its entirety by reference to such exhibit which is incorporated herein by reference. The change of control agreement entered into by Mr. Sampias is filed as Exhibit (e)(5) to the Schedule 14D-9 filed by the Company on February 20, 2007, and the above description of his change of control agreement is qualified in its entirety by reference to such exhibit, which is incorporated herein by reference. The employment agreement entered into by Mr. Madsen is filed as Exhibit (e)(6) to the Schedule 14D-9 filed by the Company on February 20, 2007, and the above description of his employment agreement is qualified in its entirety by reference to such exhibit, which is incorporated herein by reference.
In February 2007, the Company amended the above-mentioned change of control agreements (except for the agreement with each of Mr. Sampias and Mr. Madsen) to clarify the terms of the Section 280G gross-up payment contained in the agreements.
The aggregate potential payments and benefits payable to each of the Company’s named executive officers upon the involuntary termination (including resigning for good reason) or termination of such officers’ employment as a result of disability or death within 12 months following a change of control of the Company, assuming that the employment of such officer terminated on December 31, 2006 are as
follows: Mr. Elms, $1,136,396; Mr. Kelley, $449,850; Mr. Garahi, $413,147, Mr. Sampias, $601,069 and Mr. Madsen, $550,265.
Employment Agreements between Named Executive Officers and Polycom
John H. Elms entered into an offer letter with Polycom dated February 5, 2007, for continued employment for three months following the closing of the Merger between the Company and the Offeror at his current base salary and a bonus in an amount equal to 70% of his base salary, prorated during the continued employment term. The offer letter provides that Mr. Elms acknowledges that during his employment term he will not invoke the involuntary termination for good reason provision in his amended and restated change of control agreement with the Company, dated February 7, 2007. In addition to his current base salary earned during the continued employment term, Mr. Elms will receive a retention bonus in an amount equal to 50% of his daily base salary for every day of service to Parent during the continued employment term. At the end of the employment term or if Parent terminates Mr. Elms’ employment for reasons other than cause prior to the end of the employment term, Mr. Elms will be entitled to benefits similar to the benefits described in his amended and restated change of control agreement with the Company, dated February 7, 2007.
John A. Kelley entered into an offer letter with Polycom dated February 5, 2007 for continued employment through December 31, 2007 at his current base salary and a bonus in an amount equal to 45% of his base salary, prorated during the continued employment term. The offer letter provides that Mr. Kelley acknowledges that during his employment term he will not invoke the involuntary termination for good reason provision in his amended and restated change of control agreement with the Company, dated February 7, 2007. In addition to his current base salary earned during the continued employment term, Mr. Kelley will receive a retention bonus in an amount equal to 50% of daily base salary for every day of service to Parent during the continued employment term. At the end of the employment term or if Parent terminates Mr. Kelley’s employment for reasons other than cause prior to the end of the employment term, Mr. Kelley will be entitled to benefits similar to the benefits described in his amended and restated change of control agreement with the Company, dated February 7, 2007.
Masood Garahi entered into an offer letter with Parent dated February 15, 2007 for continued employment for three months following the closing of the Merger between the Company and the Offeror. The offer letter provides that Mr. Garahi acknowledge that during his employment term he will not invoke the involuntary termination for good reason provision in his amended and restated change of control agreement with the Company, dated February 5, 2007. At the end of the employment term or if Parent terminates Mr. Garahi’s employment for reasons other than cause prior to the end of the employment term, Mr. Garahi will be entitled to benefits similar to the benefits described in his amended and restated change of control agreement with the Company, dated February 5, 2007. In addition to his current base salary earned during the continued employment term, and a bonus in an amount equal to 35% of his base salary, prorated during the continued employment term, Mr. Garahi will earn a bonus in an amount equal to 100% of his daily base salary for every day of service to Parent. Mr. Garahi and Parent expect to sign a Termination of Employment Agreement and Release at the conclusion of Mr. Garahi’s three-month employment term with Parent. The Termination of Employment Agreement and Release contains a non-competition and non-solicitation clause, restricting Mr. Garahi’s ability to provide services to other parties for a one-year period following the termination of his employment with Parent.
Ernest J. Sampias entered into an offer letter with Polycom dated February 5, 2007 for continued employment for three months at his current base salary and a bonus in an amount equal to 35% of his base salary, prorated during the continued employment term, following the closing of the Merger between the Company and the Offeror. The offer letter provides that Mr. Sampias acknowledges that during his employment term he will not invoke the involuntary termination for good reason provision in his change of control agreement with the Company, dated May 15, 2006. In addition to his current base salary earned during the continued employment term, Mr. Sampias will receive a retention bonus in an amount equal to 50% of his daily base salary for every day of service to Parent during the continued employment term. At the end of the employment term or if Parent terminates Mr. Sampias’s employment for reasons other than cause prior to the end of the employment term, Mr. Sampias will be entitled to benefits similar to the benefits described in his change of control agreement with the Company, dated May 15, 2006.
Ole Lysgaard Madsen entered into a Stay-on and Severance Agreement with Parent on February 7, 2007 for continued employment for the three-month period following the closing of the Merger between the Company and the Offeror. Immediately following the close of the Merger, Mr. Madsen will receive 21 months salary in a lump-sum payment. Mr. Madsen agreed to refrain from any competitive activity for twelve months following the three-month period of continued employment. Following the expiration of the additional three-month period, Mr. Madsen’s employment will be terminated. Mr. Madsen had an employment agreement with the Company dated January 3, 2006, as amended, with similar terms.
Former Named Executive Officers
Mr. Rosenthal and Ms. Smyth did not have employment agreements with the Company. Mr. Rosenthal resigned from his executive position on April 10, 2006, but remained with the Company in a non-executive and non-decision making role until September 10, 2006 pursuant to a five-month separation agreement and general release based on his then-current base salary of $260,000. Upon appointment of a new chief financial officer on May 15, 2006, Ms. Smyth resumed her prior role with the Company as a non-executive officer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company’s Compensation Committee is currently composed of Messrs. Carman, Carollo, Jr. and Laber. None of the individuals serving on the Compensation Committee is an officer or employee of the Company, nor have any of these individuals served as an officer of the Company at any other time. None of these individuals had any “Related Party Transaction” with the Company of the type required to be disclosed under Item 404 of Regulation S-K. During 2006, no named executive officer of the Company served as a member of the board of directors or compensation committee of any entity that had one or more executive officers serving as a member of the Company Board or the Company’s Compensation Committee.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial ownership of our Common Stock as of February 7, 2007 for:
· each person who we know beneficially owns more than 5% of the Common Stock;
· each of our directors;
· each named executive officer in the Summary Compensation Table; and
· all current directors and executive officers as a group.
* less than 1%
(1) Based upon a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2007, indicating that AMVESCAP PLC and its subsidiaries AIM Capital Management, Inc. and AIM Funds Management, Inc. (“AMVESCAP”) collectively beneficially own 2,349,651 shares and AMVESCAP has sole voting power and sole dispositive power over all such shares. 2,349,062 of such shares are held by AIM Funds Management, Inc. and 589 of such shares are held by AIM Capital Management, Inc.
(2) Based upon a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2007, indicating that Lord, Abbett & Co. LLC beneficially owns 1,997,145 shares and has sole voting power of 1,681,837 and sole dispositive power of 1,997,145 with respect to all such shares.
(3) Based upon a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2007, indicating that Ronald J. Juvonen is deemed to beneficially own 1,057,356 shares and has sole power to vote and direct the disposition with respect to all such shares. The shares are held by Downtown Associates I, L.P., Downtown Associates II, L.P., Downtown Associates III, L.P. and Downtown Associates V, L.P. Ronald J. Juvonen is the Managing Member of the General Partner of the Downtown funds.
(4) Includes 53,750 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(5) Includes 47,500 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(6) Includes 58,750 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(7) Includes 58,750 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(8) Includes 395,621 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(9) Includes no shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(10) Includes 18,341 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(11) Includes 196,875 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(12) Includes 47,707 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(13) Includes 29,166 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(14) Includes 925,626 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
On February 7, 2007, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Polycom, Inc. (Polycom) pursuant to which Polycom commenced a cash tender offer for all outstanding shares of the Company’s common stock. In order to induce Polycom to enter into the Merger Agreement, all directors and executive officers of the Company (in their capacities as stockholders of the Company), consisting of Carl D. Carman, Anthony V. Carollo, Jr., John H. Elms, Masood Garahi, John A. Kelley, Gerald J. Laber, Ole Lysgaard Madsen, Leah Maher, Ernest J. Sampias and Werner P. Schmücking, entered into Tender and Voting Agreements with Polycom concurrently with the execution and delivery of the Merger Agreement. Subject to the terms and conditions of these agreements, each director and executive officer of the Company agreed to tender the shares held by them in the tender offer and to vote such shares in favor of adoption of the Merger Agreement. The Company may undergo a change of control in the future as a result of the Merger Agreement between Polycom and the Company and the Tender and Voting Agreements between Polycom and the Company’s directors and executive officers.
Item 13. Certain Relationships and Related Transactions.
At the beginning of each fiscal year, SpectraLink distributes questionnaires to each of its officers and directors. These questionnaires include questions designed to elicit responses with respect to potential related party transactions or relationships. Upon a review of these questionnaires, members of our senior management bring to the attention of the Audit Committee any potential related party transaction or relationship. The Audit Committee then considers whether to approve any related party transaction or relationship in accordance with law. The Audit Committee approves all direct or indirect related-party transactions that do not involve compensation of employees, as evidenced in their charter posted on our website. All officers and directors stockholders are expected to inform representatives of SpectraLink of any potential related party transaction or relationship.
There were no related party transactions in 2006. The Company has adopted provisions in its bylaws that provide for indemnification of its officers and directors and the advancement of expenses for defending a lawsuit to the full extent permitted under Delaware law. In addition, the Company has entered into agreements to indemnify its directors and executive officers. These agreements provide for indemnification of the Company’s directors and executive officers for some types of expenses, including attorney’s fees, judgments, fines, and settlement amounts incurred by persons in any action or proceeding, including any action by or in the right of the Company, arising out of their services as the Company’s director or executive officer. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.
Item 14. Principal Accountant Fees and Services.
KPMG LLP has been the principal independent registered public accounting firm that audits the financial statements of the Company since August 2002. In accordance with standing policy, KPMG LLP periodically changes the personnel who work on the audit. The Company has no current consulting agreements with KPMG LLP.
The following table sets forth the aggregate fees billed to the Company for the fiscal years ended December 31, 2006 and 2005, by the Company’s principal independent registered accounting firm, KPMG LLP:
(1) Audit fees consist of fees billed, or expected to be billed, for professional services rendered for the audits of the Company’s consolidated financial statements and management’s assessment that it maintained effective internal controls over financial reporting, along with reviews of interim condensed consolidated financial statements included in quarterly reports, and services that are normally provided by KPMG LLP in connection with statutory and regulatory filings or engagements, and attestation services. Audit fees in 2006 include fees related to the KIRK business.
(2) Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “Audit Fees.” Services rendered by KPMG LLP related to an audit of the Company’s 401(k) as required by ERISA. KIRK acquisition related services accounted for approximately $82,000 and $295,000 of audit-related fees for 2006 and 2005, respectively.
(3) Tax fees consist of tax compliance/preparation and other tax services. Tax compliance/preparation consists of fees billed for tax return preparation, claims for refunds, and tax payment planning services related to federal, state, and international taxes. Other tax services consist of fees billed for services including tax advice, tax strategy, and other miscellaneous tax consulting and planning.
(4) All other fees consist of fees for all services other than those reported above. The Company’s intent is to minimize services in this category.
PART IV
Item 15. Exhibits, Financial Statements and Financial Statement Schedules.
(a) (1) Financial Statements.
The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements on page.
(3) Exhibits.
Exhibit
Number
Description
2.0
Agreement and Plan of Merger by and among Polycom, Inc., Spyglass Acquisition Corp. and SpectraLink Corporation (1)
2.1
Stock Purchase Agreement between SpectraLink Corporation and SpectraLink Denmark ApS and each of the stockholders of KIRK telecom A/S.* (2)
2.2
Form of Tender and Voting Agreement by and between each director and executive officer of SpectraLink Corporation. (1)
3.0
Restated Certificate of Incorporation of the Registrant. (4)
3.1
Amended and Restated Bylaws of the Registrant. (3)
4.0
Specimen common stock certificate. (3)
10.0
Service Agreement entered into by KIRK telecom A/S and Ole Lysgaard Madsen January 3, 2006, as amended January 31, 2007. (5) **
10.1
Form of Amended and Restated Change of Control and Severance Agreement entered into by SpectraLink Corporation with certain executive officers, including John Elms, John Kelley, Masood Garahi and Leah Maher. (5) **
10.2
Separation Agreement and General Release (6) **
10.3
Change of Control and Severance Agreement entered into by SpectraLink Corporation and Ernest Sampias on May 15, 2006. (5) **
10.4
Form of Indemnification Agreement with directors and executive officers of the Registrant.(3) **
10.5
Stock Restriction Agreement dated September 5, 1995, between SpectraLink and Wellington Trust. (3)
10.6
Form of Consultant Non-Disclosure Agreement used between SpectraLink and consultants.(3) **
10.7
Form of Employee Non-Disclosure Agreement used between SpectraLink and its employees. (3) **
10.8
SpectraLink Corporation 2006 Incentive Compensation Plan. (4) **
10.9
SpectraLink Corporation 2006 Employee Stock Purchase Plan. (4) **
10.10
SpectraLink Corporation 2006 International Employee Stock Purchase Plan. (4) **
10.11
SpectraLink Corporation 2000 Stock Option Plan, including the Form of Incentive Stock Option and Non-Qualified Stock Option Agreements.(7) **
10.12
SpectraLink Corporation Employee Stock Purchase Plan, as amended.(7) **
10.13
SpectraLink Corporation Stock Option Plan, as amended. (3) **
10.14
Form of Incentive Stock Option Agreement under SpectraLink’s Stock Option Plan. (3) **
10.15
Form of Non-Qualified Stock Option Agreement under SpectraLink’s Stock Option Plan. (3) **
10.16
Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated December 9, 2005. (2)
10.17
Waiver and Second Amendment to Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated March 28, 2006. (6)
10.18
Consent and Third Amendment to Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated May 17, 2006. (8)
10.19
Fourth Amendment to Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated June 30, 2006. (8)
10.20
Lease Agreement dated April 15, 2003 between SpectraLink Corporation and 2545 Central, LLC. (9)
10.21
Lease Agreement dated April 15, 2003 between SpectraLink Corporation and Flatiron Industrial Park Company. (9)
10.22
Lease Agreement dated April 15, 2003 between SpectraLink Corporation and Flatiron Industrial Park Company. (9)
10.23
Lease Agreement dated September 30, 2003 between SpectraLink Corporation and 2545 Central, LLC. (10)
10.24
Lease Agreement between SpectraLink Corporation and Longbarrel Property Limited Partnership, dated September 30, 2005. *
10.25
Lease Agreement between SpectraLink International Corporation and Legal and General Assurance Society Limited, dated November 23, 2005. *
21.1
Subsidiaries of the Company. *
23.1
Consent of KPMG LLP *
31.1
Certification by John H. Elms pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.***
31.2
Certification by Ernest J. Sampias pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.***
32.1
Certification by John H. Elms pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
32.2
Certification by Ernest J. Sampias pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
* Filed with the Securities and Exchange Commission with this Annual Report on Form 10-K.
** Indicates a management contract or compensatory plan or arrangement.
*** This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
(1) Incorporated by reference from the Registrant’s Current Report on Form 8-K, dated February 8, 2007.
(2) Incorporated by reference from the Registrant’s Annual Report on Form 10-K, dated March 16, 2006.
(3) Incorporated by reference from the Registrant’s Registration Statement on Form SB-2 (Registration No. 333-2696-D).
(4) Incorporated by reference from the Registrant’s Registration Statement on Form S-8 (Registration No. 333-132920).
(5) Incorporated by reference from the Registrant’s Form 14D-9, dated February 20, 2007.
(6) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, dated May 15, 2006.
(7) Incorporated by reference from the Registrant’s Definitive Proxy Statement for the fiscal year ended December 31, 1999.
(8) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, dated August 9, 2006.
(9) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, dated June 30, 2003.
(10) Incorporated by reference from the Registrant’s Annual Report on Form 10-K, dated December 31, 2003.
(c) Schedule II - Valuation and qualifying accounts
SpectraLink Corporation and Subsidiaries
Schedule II -Valuation and Qualifying Accounts
(In thousands)
(1) We acquired a foreign operation on January 3, 2006, KIRK telecom A/S and subsidiaries, for which the Danish Krone is the functional currency.
(2) Write-offs of uncollectible accounts, claims or obsolete inventories and supplies.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPECTRALINK CORPORATION
By:
/s/ JOHN H. ELMS
John H. Elms,
President and CEO
Date: March 16, 2007
POWER OF ATTORNEY
By signing this Form 10-K below, I hereby appoint each of John H. Elms and Ernest J. Sampias, as my attorney-in-fact to sign all amendments to this Form 10-K on my behalf, and to file this Form 10-K (including all exhibits and other documents related to the Form 10-K) with the Securities and Exchange Commission. I authorize each of my attorneys-in-fact to (1) appoint a substitute attorney-in-fact for himself and (2) perform any actions that he or she believes are necessary or appropriate to carry out the intention and purpose of this Power of Attorney. I ratify and confirm all lawful actions taken directly or indirectly by my attorneys-in-fact and by any properly appointed substitute attorneys-in-fact.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ JOHN H. ELMS
Principal Executive Officer
March 16, 2007
John H. Elms
and Director
/s/ ERNEST J. SAMPIAS
Principal Financial Officer
March 16, 2007
Ernest J. Sampias
and Principal Accounting Officer
/s/ ANTHONY V. CAROLLO, JR.
Chairman of the Board of Directors
March 16, 2007
Anthony V. Carollo, Jr.
/s/ CARL D. CARMAN
Director
March 16, 2007
Carl D. Carman
/s/ GERALD J. LABER
Director
March 16, 2007
Gerald J. Laber
/s/ WERNER P. SCHMÜCKING
Director
March 16, 2007
Werner P. Schmücking
EXHIBIT INDEX
Exhibit
Number
Description
2.0
Agreement and Plan of Merger by and among Polycom, Inc., Spyglass Acquisition Corp. and SpectraLink Corporation (1)
2.1
Stock Purchase Agreement between SpectraLink Corporation and SpectraLink Denmark ApS and each of the stockholders of KIRK telecom A/S.* (2)
2.2
Form of Tender and Voting Agreement by and between each director and executive officer of SpectraLink Corporation. (1)
3.0
Restated Certificate of Incorporation of the Registrant. (4)
3.1
Amended and Restated Bylaws of the Registrant. (3)
4.0
Specimen common stock certificate. (3)
10.0
Service Agreement entered into by KIRK telecom A/S and Ole Lysgaard Madsen January 3, 2006, as amended January 31, 2007. (5) **
10.1
Form of Amended and Restated Change of Control and Severance Agreement entered into by SpectraLink Corporation with certain executive officers, including John Elms, John Kelley, Masood Garahi and Leah Maher. (5) **
10.2
Separation Agreement and General Release (6) **
10.3
Change of Control and Severance Agreement entered into by SpectraLink Corporation and Ernest Sampias on May 15, 2006. (5) **
10.4
Form of Indemnification Agreement with directors and executive officers of the Registrant.(3) **
10.5
Stock Restriction Agreement dated September 5, 1995, between SpectraLink and Wellington Trust. (3)
10.6
Form of Consultant Non-Disclosure Agreement used between SpectraLink and consultants.(3) **
10.7
Form of Employee Non-Disclosure Agreement used between SpectraLink and its employees. (3) **
10.8
SpectraLink Corporation 2006 Incentive Compensation Plan. (4) **
10.9
SpectraLink Corporation 2006 Employee Stock Purchase Plan. (4) **
10.10
SpectraLink Corporation 2006 International Employee Stock Purchase Plan. (4) **
10.11
SpectraLink Corporation 2000 Stock Option Plan, including the Form of Incentive Stock Option and Non-Qualified Stock Option Agreements.(7) **
10.12
SpectraLink Corporation Employee Stock Purchase Plan, as amended.(7) **
10.13
SpectraLink Corporation Stock Option Plan, as amended. (3) **
10.14
Form of Incentive Stock Option Agreement under SpectraLink’s Stock Option Plan. (3) **
10.15
Form of Non-Qualified Stock Option Agreement under SpectraLink’s Stock Option Plan. (3) **
10.16
Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated December 9, 2005. (2)
10.17
Waiver and Second Amendment to Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated March 28, 2006. (6)
10.18
Consent and Third Amendment to Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated May 17, 2006. (8)
10.19
Fourth Amendment to Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated June 30, 2006. (8)
10.20
Lease Agreement dated April 15, 2003 between SpectraLink Corporation and 2545 Central, LLC. (9)
10.21
Lease Agreement dated April 15, 2003 between SpectraLink Corporation and Flatiron Industrial Park Company. (9)
10.22
Lease Agreement dated April 15, 2003 between SpectraLink Corporation and Flatiron Industrial Park Company. (9)
10.23
Lease Agreement dated September 30, 2003 between SpectraLink Corporation and 2545 Central, LLC. (10)
10.24
Lease Agreement between SpectraLink Corporation and Longbarrel Property Limited Partnership, dated September 30, 2005. *
10.25
Lease Agreement between SpectraLink International Corporation and Legal and General Assurance Society Limited, dated November 23, 2005. *
21.1
Subsidiaries of the Company. *
23.1
Consent of KPMG LLP *
31.1
Certification by John H. Elms pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.***
31.2
Certification by Ernest J. Sampias pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.***
32.1
Certification by John H. Elms pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
32.2
Certification by Ernest J. Sampias pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
* Filed with the Securities and Exchange Commission with this Annual Report on Form 10-K.
** Indicates a management contract or compensatory plan or arrangement.
*** This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
(1) Incorporated by reference from the Registrant’s Current Report on Form 8-K, dated February 8, 2007.
(2) Incorporated by reference from the Registrant’s Annual Report on Form 10-K, dated March 16, 2006.
(3) Incorporated by reference from the Registrant’s Registration Statement on Form SB-2 (Registration No. 333-2696-D).
(4) Incorporated by reference from the Registrant’s Registration Statement on Form S-8 (Registration No. 333-132920).
(5) Incorporated by reference from the Registrant’s Form 14D-9, dated February 20, 2007.
(6) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, dated May 15, 2006.
(7) Incorporated by reference from the Registrant’s Definitive Proxy Statement for the fiscal year ended December 31, 1999.
(8) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, dated August 9, 2006.
(9) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, dated June 30, 2003.
(10) Incorporated by reference from the Registrant’s Annual Report on Form 10-K, dated December 31, 2003.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Our chief executive officer and chief financial officer, based on their evaluation of our disclosure controls and procedures as of the end of the period covered by this report (the Evaluation Date), concluded that our disclosure controls and procedures were effective as of the Evaluation Date for this purpose.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, which is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2006.
Our independent registered public accounting firm, KPMG LLP, issued an attestation report on management’s assessment and the effectiveness of our internal control over financial reporting as of December 31, 2006. KPMG LLP’s report is included at the end of Part II, Item 8 of this Form 10-K.
Changes in Internal Controls over Financial Reporting
Regulations under the Securities Exchange Act of 1934 require public companies to evaluate any change in “internal control over financial reporting,” which is defined as a process to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. In connection with their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our chief executive officer and chief financial officer did not identify any change in our internal control over financial reporting during the three-month period ended December 31, 2006, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our chief executive officer and our chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the name, age and position of each director and executive officer of the Company as of February 7, 2007.
Name
Age
Position(s)
Anthony V. Carollo, Jr.
Chairman of the Board
John H. Elms
President, Chief Executive Officer and Director
Carl D. Carman
Director
Werner P. Schmücking
Director
Gerald J. Laber
Director
Masood Garahi
Chief Technology Officer and Executive Vice President, Engineering
John A. Kelley
Executive Vice President, Operations
Ole Lysgaard Madsen
Executive Vice President, International
Leah Maher
Executive Vice President and General Counsel
Ernest J. Sampias
Chief Financial Officer and Executive Vice President, Finance and Administration
The following are brief biographies of each current director and executive officer of the Company (including present principal occupation or employment, and material occupations, positions, offices or employment for the past five years). Unless otherwise indicated, to the knowledge of the Company, no current director or executive officer of the Company has been convicted in a criminal proceeding during the last five years and no director or executive officer of the Company was a party to any judicial or administrative proceeding during the last five years (except for any matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws. There are no family relationships between any of the directors and executive officers of the Company.
Anthony V. Carollo, Jr. has served as a member of the Company Board since January 1998 and Chairman of the Board since April 2004. From June 2000 until December 2002, Mr. Carollo served as Chairman and Chief Executive Officer of Syntellect Corporation, a provider of self-service speech and advanced call-center solutions. Mr. Carollo is currently an independent investor.
John H. Elms has served as a member of the Company Board since September 2003. Mr. Elms has served as the President and Chief Executive Officer of the Company since September 2003 and as Vice President of Operations of the Company from 1999 to September 2003.
Carl D. Carman has served as a member of the Company Board since 1990. From 1989 until 2002, Mr. Carman served as a general partner of Hill, Carman Ventures, a venture capital firm. Mr. Carman is currently retired.
Werner P. Schmücking has served as a member of the Company Board since March 2004. From 1989 until April 2000, Mr. Schmücking was a director of Siemens AG Information and Communication Networks. Mr. Schmücking was a consultant to SAP AG from 2001 until 2003. He has also served as president of the German Telecommunication Manufacturers Association (ZVEI) and vice president of the German Association for Information Technology, Telecommunications and New Media (BITKOM). Mr. Schmücking currently serves as a director of OCE Printing Systems and SWYX Solutions AG.
Gerald J. Laber has served as a member of the Company Board since April 2004. Since 2000, Mr. Laber has been a consultant and community volunteer. From 1980 to 2000, Mr. Laber served as a partner with Arthur Andersen LLP. Mr. Laber serves as a director of Qualmark Corporation, Boulder Specialty Brands, Inc. and Scott’s Liquid Gold, Inc. Mr. Laber is a Certified Public Accountant in the State of Colorado.
Masood Garahi has served as Chief Technology Officer and Executive Vice President, Engineering of the Company since October 2005. His prior positions were Chief Technology Officer of Roving Planet Inc. from November 2004 to June 2005 and Chairman and Chief Executive Officer and Independent advisor of MeshNetworks Inc. (now part of Motorola) from June 2000 to May 2004.
John A. Kelley has served as Executive Vice President, Operations, of the Company since August 2004, Vice President of Operations of the Company since October 2003. From September 2002 to September 2003, Mr. Kelley served as President of JK Associates. From January 2000 to August 2003, Mr. Kelley served as Vice President, Global Services Operations, of Compaq Computer Corporation.
Ole Lysgaard Madsen has served as Executive Vice President, International for the Company since January 2006. From February 2000 to January 2006, Mr. Madsen served as Senior Vice President of Global Sales, Marketing and Technical Support for KIRK telecom A/S.
Leah Maher has served as Executive Vice President, General Counsel and Assistant Secretary since June 2006, Vice President and General Counsel from September 2005 to June 2006, and Corporate Counsel from September 2004 to September 2005. Prior to joining the Company, Ms. Maher served as Senior Counsel for American Tower Corporation from September 2001 to October 2003, and Associate General Counsel of PictureTel Corporation from May 1994 to September 2001.
Ernest J. Sampias has served as Chief Financial Officer, Treasurer and Executive Vice President, Finance and Administration and Secretary since May 2006. Mr. Sampias served as Chief Financial Officer for Local Matters, Inc. from July 2005 to April 2006, and McDATA Corp. from September 2001 to July 2005. Mr. Sampias is a member of the board of directors and the audit committee chairman for Xyratex Limited.
None of the Company’s directors or officers are involved in a material legal proceeding where such director or officer is a party adverse to the Company or any of its subsidiaries.
CORPORATE GOVERNANCE PRINCIPLES AND COMPANY BOARD MATTERS
Board Structure and Committee Composition
As of the date of this Information Statement, the Company Board has five directors. The Company Board follows NASDAQ Stock Market (“NASDAQ”) Marketplace Rule 4200 for director independence standards. In accordance with these standards, the Company Board has determined that, except for Mr. Elms, as President and Chief Executive Officer of the Company, each of the members of the Company Board has no relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and is otherwise “independent” in accordance with the applicable listing standards of the NASDAQ as currently in effect. Committees of the Company Board include: an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee. The current membership of these committees (which was the same at all times in fiscal 2006) and the function of each of these committees are described below. Each committee operates under a written charter adopted by the Company Board. All of the committee charters are available on the Company’s website at www.spectralink.com/consumer/company/corporate_governance.jsp. Below is a summary of our current committee membership.
During fiscal year 2006, the Company Board held six meetings. Each director attended or participated in at least 75% of the aggregate of (i) the total number of meetings of the Company Board and (ii) the total number of meetings held by all committees of the Company Board on which each such director served (in each case referring to the number of meetings of the board or committees, as applicable, that occurred while such director was a member of the board or such committees). During fiscal year 2006, the Audit Committee held seven meetings, the Compensation Committee held six meetings and the Nominating and Corporate Governance Committee held two meetings. The Company Board and committees of the Company Board also approved certain matters by unanimous written consent.
Audit Committee. The Audit Committee reviews, acts upon and reports to the Company Board with respect to various auditing and accounting matters, including retention of the Company’s independent registered public accounting firm, pre-approval of audit and non-audit services to be provided by such firm and the related fees paid. The Audit Committee makes such examinations as are necessary to monitor the corporate financial reporting and the internal and external audits of the Company and its subsidiaries, provides to the Company Board the results of its examinations and recommendations derived therefrom, outlines to the Company Board improvements made, or to be made, in internal accounting controls, and provides the Company Board such additional information and materials as it may deem necessary to make the Company Board aware of significant financial matters that require Company Board attention.
The Company Board has determined that each member of the Audit Committee meets the independence criteria set forth in the applicable rules of NASDAQ and the SEC for audit committee membership. In addition, the Company Board has also determined that all members of the Audit Committee possess the level of financial literacy required by applicable NASDAQ and SEC rules and, that in accordance with Section 407 of the Sarbanes-Oxley Act of 2002, at least one member of the Audit Committee, Mr. Laber, is qualified as an “audit committee financial expert.”
Compensation Committee. The Compensation Committee has a written charter which is evaluated on at least an annual basis. Based on its current charter, the Compensation Committee’s responsibilities are to evaluate management’s recommendations and make its own recommendations to the Company Board concerning the compensation of the Company’s executive officers. It is also responsible for the formulation of the Company’s executive compensation policy and the research, analysis and subsequent recommendation regarding the establishment and administration of the Company’s stock plans. Each of the members of the Compensation Committee is independent for purposes of the NASDAQ rules.
Compensation Committee Policies and Procedures. During the first quarter of each fiscal year, the Compensation Committee reviews management’s recommendations for compensation and benefits for executive officers. The Compensation Committee recommends to the Company Board an amount and composition of executive compensation to be paid to the executive officers, including the Chief Executive Officer. The Company Board reviews and considers such compensation recommendations.
The Compensation Committee annually reviews and evaluates base salary and bonuses for all executive officers, and in conducting such reviews places primary consideration upon the recommendations by the Chief Executive Officer, along with the rationale for such recommendations, with the exception of the compensation review of the Chief Executive Officer himself. The Chief Executive Officer does not participate in the Compensation Committee’s review or decision as to his compensation package. In establishing individual compensation levels, the Compensation Committee considers the Company’s overall strategic objectives and performance, the Company’s stock performance, peer group comparisons and individual performance. No formula is used to determine an executive’s salary. The Company’s overall performance and the achievement of financial and business objectives are considered.
Management’s Role in the Compensation-Setting Process. Management, including named executive officers, plays some role in the compensation-setting process. The most significant aspects of management’s role are: (1) evaluating employee performance, (2) assisting in establishing performance
targets and objectives, and (3) recommending salary levels and option awards. The Chief Executive Officer works with the Compensation Committee in establishing the agenda for Compensation Committee meetings. Management also prepares meeting information for each Compensation Committee meeting.
Use of Compensation Consultants. The Compensation Committee has in the past engaged compensation consultants to conduct a review and analysis of how the Company’s compensation practices compare with its peer group of companies. However, no compensation consultants were employed by the Company in 2006.
Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee evaluates and recommends candidates for Company Board positions to the Company Board, and recommends to the Company Board policies on Company Board composition and criteria for Company Board membership. The Nominating and Corporate Governance Committee also recommends to the Company Board, and reviews on a periodic basis, the Company’s succession plan, including policies and principles for selection and succession of the Chief Executive Officer in the event of an emergency or the resignation or retirement of the Company’s Chief Executive Officer. The Nominating and Corporate Governance Committee also reviews the Company’s compliance with NASDAQ corporate governance listing requirements. The members of the Nominating and Corporate Governance Committee are Messrs. Carollo, Laber and Schmücking. Each of the members of the Nominating and Corporate Governance Committee is independent for purposes of the NASDAQ rules as well as the Company’s standards of independence as published on the Company’s website.
Prior to inquiring whether each director is willing to continue in service, the Nominating and Corporate Governance Committee evaluates all directors on an annual basis both for their contribution and participation on the Company Board and each committee for which they serve in order to determine whether to recommend to the Company Board such directors for election at the annual meeting. The Nominating and Corporate Governance Committee considers the following factors in any such evaluation:
· the appropriate size of the Company Board and its committees;
· the perceived needs of the Company Board for particular skills, background, and business experience;
· the relevant skills, background, reputation, and business experience of nominees compared to the skills, background, reputation, and business experience already possessed by other members of the Company Board;
· nominees’ independence from management;
· applicable regulatory and listing requirements including independence requirements;
· the benefits of a constructive working relationship among directors; and
· the desire to balance the considerable benefit of continuity with the periodic injection of the fresh perspective provided by new members.
The Nominating and Corporate Governance Committee’s goal is to assemble a Company Board that brings to the Company a variety of perspectives and skills derived from high quality business and professional experience. Directors should possess the highest personal and professional ethics, integrity, and values, and be committed to representing the best interests of the Company’s shareholders. They must also have an inquisitive and objective perspective and mature judgment. Director candidates must have sufficient time available in the judgment of the Nominating and Corporate Governance Committee to perform all Company Board and committee responsibilities. Company Board members are expected to prepare for, attend, and participate in all Company Board and applicable committee meetings.
Other than the foregoing, there are no stated minimum criteria for director nominees, although the Nominating and Corporate Governance Committee may also consider such other factors as it may deem, from time to time, are in the best interests of the Company and its shareholders. The Nominating and Corporate Governance Committee believes that at least one member of the Company Board should meet the criteria for an “audit committee financial expert” as defined by SEC rules. Under applicable listing requirements, at least a majority of the members of the Company Board must meet the definition of
“independent” director. The Nominating and Corporate Governance Committee also believes it appropriate for one or more key members of the Company’s management to participate as members of the Company Board. The Company Board also has designated its chairman, Mr. Carollo, as its “Lead Independent Director.”
The Nominating and Corporate Governance Committee will consider the criteria and policies set forth above in determining if the Company Board requires additional candidates for director. The Nominating and Corporate Governance Committee will consider candidates for directors proposed by directors or management, may poll directors and management for suggestions, or conduct research to identify possible candidates, and may engage, if the Nominating and Corporate Governance Committee believes it is appropriate, a third-party search firm to assist in identifying qualified candidates. All such candidates will be evaluated against the criteria and pursuant to the policies and procedures set forth above. All director nominees, including incumbents, must submit a completed form of directors’ and officers’ questionnaire as part of the nominating process. The evaluation process may also include interviews and additional background and reference checks for non-incumbent nominees at the discretion of the Nominating and Corporate Governance Committee.
The Nominating and Corporate Governance Committee will also evaluate any recommendation for director nominee proposed by a shareholder, provided that any such recommendation is sent in writing to the Corporate Secretary at 5755 Central Avenue, Boulder, Colorado 80301 at least 120 days prior to the anniversary of the date proxy statements were mailed to shareholders in connection with the prior year’s annual meeting of shareholders, and contain the following information:
· the candidate’s name, age, contact information and present principal occupation or employment;
· the number of shares of the Company’s common stock beneficially owned by the candidate; and
· a description of the candidate’s qualifications, skills, background, and business experience during, at a minimum, the last five years, including his/her principal occupation and employment, and the name and principal business of any corporation or other organization in which the candidate was employed or served as a director.
The Nominating and Corporate Governance Committee will evaluate any candidates recommended by shareholders against the same criteria and pursuant to the same policies and procedures applicable to the evaluation of all other proposed candidates, including incumbents, and will select the nominees that in the Nominating and Corporate Governance Committee’s judgment best suit the needs of the Company Board at that time.
Code of Business Conduct and Ethics
The Company Board has adopted a Code of Conduct and Business Ethics (the “Code”) that outlines the principles of legal and ethical business conduct under which the Company does business. The Code, which is applicable to all directors, employees, and officers of the Company, is available on the Company’s website at www.spectralink.com/consumer/company/corporate_governance.jsp. Any substantive amendment or waiver of this Code may be made only by the Company Board upon a recommendation of the Audit Committee, and will be disclosed on the Company’s website.
On February 7, 2007, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Polycom, Inc. (Polycom) pursuant to which Polycom commenced a cash tender offer for all outstanding shares of the Company’s common stock. As the parties agreed to in the Merger Agreement, if Polycom accepts tendered shares of common stock for payment, Polycom will be entitled to designate certain members of the Company’s Board of Directors without input from the Company’s Nominating and Corporate Governance Committee, as described more fully in the Merger Agreement.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our officers and directors and persons who own more than 10% of a registered class of our equity securities to file certain reports regarding ownership of, and transactions in, our securities with the SEC. Such officers, directors and 10% stockholders are also required by SEC rules to furnish us with copies of all Section 16(a) forms that they file.
Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all filing requirements applicable to our executive officers, directors and more than 10% stockholders were complied with during the fiscal year ended December 31, 2006.
Item 11.
Item 11. Executive Compensation.
Compensation Committee Report
The Compensation Committee oversees the Company’s equity compensation plans, establishes the level of base salary and benefit plans payable to the Chief Executive Officer and other executive officers and key employees of the Company, and has the responsibility of approving the non-equity incentive programs for the Chief Executive Officer and the other executive officers. The Compensation Committee also recommends grants of stock awards, stock options, stock appreciation rights and other awards to be made under existing incentive compensation plans. The Compensation Committee of the Board is comprised of non-employee directors, each of whom is independent for purposes of the Nasdaq rules.
The compensation committee has reviewed and discussed the Compensation Discussion and Analysis with management and based on the review and discussion, it has recommended to the board of directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.
COMPENSATION COMMITTEE
Carl D. Carman, Chairman
Anthony V. Carollo
Gerald J. Laber
COMPENSATION DISCUSSION AND ANALYSIS
The Compensation Committee has discussed and reviewed the following Compensation Discussion and Analysis, or CD&A, with management. Based on this review, the Compensation Committee recommended to the Company Board that this CD&A be included in this Form 10-K.
This CD&A, provides information regarding the compensation program in place for the Company’s chief executive officer, chief financial officer and three other most highly-compensated executive officers during 2006. We refer to these individuals in this Form 10-K as the “named executive officers.” This CD&A includes information regarding, among other things, the objectives of the Company’s compensation program, the achievements that the compensation program is designed to reward, the elements of the compensation program (including the reasons why the Company employs each element and how it determines amounts paid) and how each element fits into its overall compensation objectives.
The Compensation Committee operates within the policies established by the Company Board and has the authority to create and approve the executive officer compensation plan. The Compensation Committee administers the Company’s executive compensation programs, monitors corporate performance and its relationship to compensation of executive officers, and makes approves annual adjustments to executive compensation as needed. The members of the Compensation Committee are Carl D. Carman, chairman, Anthony V. Carollo, Jr. and Gerald J. Laber.
Objectives of Our Named Executive Officer Compensation Programs
Our success depends heavily upon the contributions of our key management and technical personnel, whose knowledge, leadership and technical expertise would be difficult to replace. Our executive compensation program is designed to attract and retain individuals with the talents and skills necessary for us to achieve our business plan and to reward those individuals who make that happen. Our fundamental compensation objective is to align compensation for our executives with their contribution to the development and financial success of the Company’s business objectives and performance. We believe that we achieve this objective by first, providing adequate compensation, incentives and awards to attract and retain talented and skilled executives whose contributions are necessary for the long-term success of the Company. Secondly, we achieve our objective by compensating the named executive officer based on both the Company’s performance as well as their own individual performance.
Named Executive Officer Compensation Elements
Compensation packages for our named executive officers are comprised of three primary elements: base salary, which is based on level of responsibility, professional expertise and experience; cash performance bonuses (non-equity incentives), which are directly tied to the Company’s financial performance; and equity awards, which are primarily tied to individual objectives and performance. However, the compensation package for one of our named executive officers who held an interim position from April 10, 2006 to May 15, 2006 consisted of two elements: base salary and cash bonus. The cash bonus for Carolyn A. Smyth, Vice President of Finance and Corporate Controller of the Company, was under a separate bonus arrangement designed for our non-executives that was not reviewed by the Compensation Committee and is tied to individual performance rather than the Company’s performance.
Base Salary
The base salary is intended to provide our named executive officers with a level of cash compensation that reflects the experience, skills, knowledge and responsibilities required of the named executive officers in their roles.
The base salary for each named executive officer is reviewed annually by the Compensation Committee and adjustments are made on the basis of experience and personal performance, taking into account the average salary levels for comparable positions with companies having similar total revenues both within and outside the Company’s industry. The weight given to each of these factors differs from individual to individual, as the Compensation Committee deems appropriate. Each individual’s base pay is positioned relative to their total compensation package, including non-equity incentives and long-term equity compensation incentives. The base salary is designed to be competitive and comparable to the market but leave room for a significant portion of the overall compensation to be tied to personal and Company performance.
The decision of whether or not to adjust base salary from year to year is not only based on an evaluation of personal performance but also relates to cost of living changes and an annual evaluation relative to comparable executive positions in the region and the industry. During 2006, our named executive officers received increases in base salary over 2005 ranging from 0% to 10.6% as a result of an evaluation by the Compensation Committee of the factors discussed above (except for a named executive officer who held an interim position who had a salary increase of 18.8% based on a review by the Chief Executive Officer only).
Non-Equity Incentive Plan Compensation for Named Executive Officers
We believe that executive performance that results in improved Company performance should be rewarded. Our non-equity incentive plan consists of cash bonuses for specific financial metrics. Annual cash (non-equity) incentive awards are intended to reward our named executive officers for the achievement of specific financial metrics that they have the ability to influence. For example, named executive officers that are able to directly influence top line revenue have their cash incentive tied to revenue growth while other named executive officers are only measured based on pre-tax profitability as they have the ability to manage costs and improve efficiency. Two of our named executive officers have cash incentives that are tied to both revenue and pre-tax profitability based on their ability to influence both. The Compensation Committee establishes financial metrics to which the cash incentives should be tied based on the Company’s annual operating plan. The cash incentive for all but one named executive officer is calculated as a percentage of their salary, which is then adjusted based on the percentage achievement of the financial metric targeted. The incentive, as a percentage of salary, ranges from 35% to 70%. Named executive officers whose incentive was strictly based on pre-tax profitability for 2006 did not receive a cash incentive bonus in 2006 as the threshold targets were not achieved, and the Compensation Committee did not exercise its discretion to pay a cash incentive. Based on the achievement of pre-determined revenue targets during 2006, Mr. Kelley, the Company’s EVP, Operations, received a cash incentive of $57,200. In addition, Mr. Madsen, EVP, International, earned a cash incentive of $82,840, which was based on both pre-tax profitability and revenue metrics for KIRK telecom. Ms. Smyth did not receive a non-equity incentive plan bonus in 2006, as described above. The Compensation Committee strives to establish Company financial targets that are both challenging and achievable in order to adequately motivate management while improving shareholder value.
Each year, in the process of establishing the named executive officers performance goals, the Compensation Committee evaluates the prior year financial metrics and the methodology used in setting the cash incentives. The Compensation Committee may from time to time award cash incentive at its discretion even if the Company does not meet the performance goals that were established.
Equity Awards
We believe that equity incentive awards are the best way to create incentives and reward the performance of our named executive officers that improves Company performance and increases shareholder value thereby strengthening the mutual interests between named executive officers and shareholders. By providing equity awards to our named executive officers, they are not only rewarded for past performance but also have long-term incentive to continue to promote the Company’s success.
The Compensation Committee makes discretionary stock option grants and restricted stock awards to named executive officers of the Company based on a number of factors including each named executive officer’s personal performance; criticality of the individual to the future success of the Company; and overall contribution to the Company’s success. The Compensation Committee also grants equity awards to newly hired executive officers as a way of promoting long-term incentive in the Company as the stock awards are earned over a long term period, typically four years. Typically, the size of grants are set at a level that is deemed appropriate to create a meaningful opportunity for stock ownership based upon the named executive officer’s performance, position, potential for future responsibility and promotion, and overall expected contribution to the Company’s success. The Compensation Committee also considers other factors in determining the size of the grant such as the amount of unvested options or restricted stock awards held by the individual from prior grants, the length of time that the employee has been with the Company and the amount of other compensation earned by the named executive officer. The relative weight given to each of these factors varies from individual to individual.
During 2006, there were a total of 455,000 options granted to the named executive officers of the Company under the Company’s 2000 Stock Option Plan. No restricted stock awards were made to any named executive officer under the 2006 Equity Incentive Plan in 2006. The Company’s Chief Executive Officer, Mr. Elms, presented performance reviews of each of the named executive officers (other than himself) who were currently serving as executive officers in February 2006 outlining their performance relative to their 2005 objectives. Based on the information presented by Mr. Elms and other factors discussed earlier, the Compensation Committee granted options in varying amounts from 35,000 to 100,000 with an exercise price of $12.63. The Company also granted 100,000 options with an exercise price of $10.43 to Mr. Sampias, our EVP, Finance and Administration and CFO, upon beginning his employment with the Company. The exercise price of option grants is based on the closing price on the date of grant as approved by the Compensation Committee. For newly hired executive officers, the grant date is based on the first day of employment. In no case is the option grant or exercise price backdated.
Options and restricted stock awards generally vest over four years, subject to acceleration upon certain events if an acquirer does not assume the option plan, and vesting of such options and restricted stock awards are subject to the named executive officer’s continued employment with the Company.
Severance and Change in Control
At the recommendation of the Compensation Committee, on April 12, 2006 the Company entered into a change of control severance agreement (the “Agreement”) with each of John Elms (the Company’s President, Chief Executive Officer and a director), John Kelley (the Company’s Executive Vice President of Operations), and Masood Garahi (the Company’s Executive Vice President of Engineering and Chief Technology Officer). In February 2007, the Company amended the Agreements with each of the above mentioned individuals to clarify the terms of the Agreements with respect to the Section 280G gross-up contained in the Agreement. Effective May 15, 2006, Ernest Sampias, who became the Company’s Executive Vice President of Finance and Administration, Chief Financial Officer, Secretary and Treasurer, entered into a change of control severance agreement that was similar to the Agreement, except that his options could be exercised over a three year period upon a change of control. According to the terms of the Agreement, in the event a change of control of the Company occurs and a named executive officer’s
employment is terminated or constructively terminated within twelve months following the change of control, the affected named executive officer’s outstanding options will fully vest and the affected executive will be entitled to twelve months of the affected named executive officer’s annual salary plus the affected named executive officer’s target bonus (which assumes 100% of the target bonus plan is met for the year). Additionally, in the preceding circumstance, such named executive officers will receive benefits until the earlier of one year following termination or the date such executive receives comparable benefits from another employer. Under the Agreement, the Company is obligated to gross-up any tax payments such as Section 280G of the Internal Revenue Code or similar tax provision, if applicable. The Company previously agreed to a change of control provision with Ole Lysgaard Madsen (Executive Vice President, International, and President and Managing Director of KIRK telecom A/S) upon the Company’s acquisition of KIRK telecom A/S on January 3, 2006, under different terms than the Agreement, which terms are set forth in his employment agreement with the Company dated January 3, 2006, as amended January 31, 2007. In 2006, David Rosenthal and Carolyn Smyth were not offered an Agreement.
Income Tax Considerations
Section 162(m) of the Internal Revenue Code limits tax deductions for certain executive compensation over $1,000,000. Certain types of compensation are deductible only if they are performance-based and approved by the shareholders. Stock option grants made under the 2000 Stock Option Plan currently do not meet the requirements for performance-based grants as defined in Section 162(m) and are, therefore, not exempt from the limitations on deductibility. Cash compensation for 2005 for any of our named executive officers was not in excess of $1,000,000 and the Company does not expect cash compensation for 2006 to any of our named executive officers to be more than $1,000,000 or consequently affected by the requirements of Section 162(m). The 2006 Stock Option Plan is designed to meet the requirements of Section 162(m). The Compensation Committee’s present intention is to structure compensation arrangements to maximize the Company’s available deductions consistent with Section 162(m) unless the Compensation Committee reasonably believes that the best interests of the Company and its shareholders will be served by structuring compensation for a given executive officer, or executive officers, differently.
Compensation Determination Process
We determine the appropriate level for each compensation component based in part, but not exclusively, on competitive benchmarking consistent with our recruiting and retention goals, our view of internal equity and consistency, overall company performance and other considerations we deem relevant. To this end, we review a number of executive compensation surveys of similar companies when making a crucial executive officer hiring decision and annually when we review executive compensation. Our Compensation Committee performs a strategic review of our named executive officers’ overall compensation packages on an annual basis to determine whether they provide adequate incentives and motivation and whether they adequately compensate our named executive officers relative to comparable officers in other companies. Our Chief Executive Officer, Mr. Elms, takes an active role in evaluating and providing analysis to the Compensation Committee and typically participates in a portion of each meeting along with our general counsel. Mr. Elms is not present in the meetings whenever a discussion and decisions are taking place that pertain to his own compensation.
In determining the 2006 executive compensation plan, Mr. Elms took an active role in evaluating and presenting the Compensation Committee with a proposal of the 2006 compensation for the executive team serving the Company at the time in February 2006. Mr. Elms presented survey and benchmark information from multiple sources including the AEA survey, Salary.com, Mercer, and Culpepper relating to typical compensation packages offered to executives considering differences such as regional variation, the size of the company and the specific high-technology industry.
Executive Compensation and Related Information
2006 SUMMARY COMPENSATION
The following table sets forth, for the twelve months ended December 31, 2006, the cash compensation earned by or paid to named executive officers.
(1) The amounts shown in this column are based on the dollar amount recognized for financial statement reporting purposes for the 2006 fiscal year in accordance with SFAS No. 123(R), “Share-Based
Payment.” There were two sets of assumptions used to compute the fair value of the stock option amounts shown granted in fiscal year 2006, using the Black-Scholes model, based on a February grant date to all named executive officers with the exception of Mr. Sampias whose option grant date was his start date of May 15, 2006. The assumptions used for all named executive officers with the exception of Mr. Sampias were: weighted average exercise price of $12.63; volatility of 71.9%; expected term of 5.3 years; risk-free rate of 4.8%; and an expected dividend yield of 0.0%. The assumptions used for the grant to Mr. Sampias were: weighted average exercise price of $10.43; volatility of 69.3%; expected term of 5.3 years; risk-free rate of 5.1%; and an expected dividend yield of 0.0%. Assumptions used in the calculation of this amount for options granted during fiscal years ended December 31, 2003, 2004 and 2005 are included in footnote 4 to the Company’s audited financial statements for the fiscal year ended December 31, 2005, which is included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2006. Assumptions used in the calculation of this amount for options granted during fiscal year ended December 31, 2002, are included in footnote 3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 4, 2005.
(2) Consists of a 401(k) matching contribution and Company paid premiums for health, dental, life and disability insurance.
(3) Mr. Sampias became Executive Vice President of Finance and Administration and Chief Financial Officer on May 15, 2006.
(4) Consists of Company-paid premiums for health, dental, life and disability insurance.
(5) Mr. Rosenthal resigned as Executive Vice President and Chief Financial Officer on April 10, 2006, but remained with the Company in a non-executive and non-decision making role until September 10, 2006. Included in this salary amount is $108,333 paid pursuant to a five-month severance and release agreement. On September 10, 2006, Mr. Rosenthal forfeited 45,000 stock options granted on February 6, 2006.
(6) Ms. Smyth served as the Interim Chief Financial Officer from April 10, 2006 until May 15, 2006 and is currently the Vice President of Finance and Corporate Controller.
(7) Cash bonus earned was based on the achievement of established goals relating to personal performance.
(8) Non-equity incentive amounts were earned based on the 2006 executive bonus plan.
(9) Consists of a 401(k) matching contribution and Company-paid premiums for life and disability insurance.
(10) With the exception of equity compensation, Mr. Madsen’s compensation is denominated in Danish Kroner and has been translated into U.S. Dollars at the average exchange rate for fiscal year 2006 of 5.9 to 1. Mr. Madsen became Executive Vice President, International on January 13, 2006 in connection with the acquisition of KIRK telecom A/S.
(11) Includes various perquisites paid by the Company including automobile related expenses of $39,011 and retirement plan contributions of $25,232.
2006 GRANTS OF PLAN-BASED AWARDS(1)
The following table sets forth information concerning plan-based grants to the named executive officers during the fiscal year ended December 31, 2006 as well as estimated future payouts under the Company’s incentive plans:
(1) The awards set forth in the table were granted during the 2006 fiscal year.
(2) For additional information concerning the 2006 executive bonus targets, see “Compensation Discussion and Analysis.”
(3) For additional information concerning the vesting schedule and other terms of equity awards granted to the Company’s named executive officers during 2006, see the “Outstanding Equity Awards at Fiscal Year-End” table.
(4) The Compensation Committee approved target objectives for the 2006 executive bonus plan for Messrs. Elms, Rosenthal and Garahi based on the Company’s 2006 objective for consolidated net income before income taxes, excluding SFAS 123(R) expense. The target award for Mr. Elms represented 70% of his base salary, and for Messrs. Rosenthal and Garahi represented 35% of their base salaries, based on achievement of 100% of such 2006 objective. Achievement of less than 50% of such 2006 objective would result in no incentive payment.
(5) Pursuant to the terms of the 2006 executive bonus plan, achievement of greater than 100% of the Company’s 2006 objective for consolidated net income before income taxes, excluding SFAS 123(R) expenses, results in additional incentive payment. Accordingly, there was not a maximum stated for potential payments under the 2006 executive bonus plan.
(6) Pursuant to the terms of his offer letter, Mr. Sampias was given his target objectives under the 2006 executive bonus plan. Mr. Sampias was eligible for a target award of 35% of his base salary, pro-rated from his start date of May 15, 2006. The target of $65,625 was based on achievement of 100% of the Company’s 2006 objective related to consolidated net income before income taxes, excluding SFAS 123(R) expense. Achievement of less than 50% of the Company’s 2006 objective would result in no incentive payment.
(7) The Compensation Committee approved a target award under the 2006 executive bonus plan for Mr. Kelley of $117,000, or 45% of his base salary, based on achievement of 100% of the Company’s 2006 objectives for consolidated net income before income taxes, excluding SFAS 123(R) expense and service revenue. The $117,000 target award was comprised of $91,000, or 35% of his base salary, based on the 2006 objective for consolidated net income before income taxes, excluding SFAS 123(R) expense and $26,000, or 10% of his base salary, based on the Company’s 2006 objective for service revenue. Achievement of less than 50% of the consolidated net income before income taxes, excluding SFAS 123(R) expense, would result in no incentive payment on the $91,000 of target award, while achievement of less than 91% of the service revenue would result in no incentive payment on the $26,000 of target award.
(8) Pursuant to the terms of the 2006 executive bonus plan, achievement of greater than 100% of the Company’s 2006 objective for consolidated net income before income taxes, excluding SFAS 123(R) expenses, results in additional incentive payment. Overachievement related to the Company’s 2006 objective for service revenue would result in an additional payment to Mr. Kelley of 1% of base salary for each percentage point of service revenue over the Company’s 2006 objective. Accordingly, there is not a maximum stated for potential payments under the 2006 executive bonus plan.
(9) The Compensation Committee approved a target award under the 2006 executive bonus plan for Mr. Madsen of $83,333, or 33% of his base salary, based on achievement of 100% of the Company’s 2006 objectives for international sales and KIRK telecom operating income. The $83,333 target award was comprised of 50% based on quarterly achievement of international revenue and 50% on achievement of KIRK telecom operating income. Achievement of less than 50% of the KIRK telecom operating income target would result in no incentive payment on the corresponding target award, while any achievement of the international revenue would result in a pro-rated incentive payment on the corresponding target award.
(10) Pursuant to the terms of the 2006 executive bonus plan, achievement of greater than 100% of the 2006 objectives results in additional incentive payment. Accordingly, there was not a maximum stated for potential payments under the 2006 executive bonus plan.
(11) Ms. Smyth served as the interim principal financial officer from April 10, 2006 to May 15, 2006 and was not part of the 2006 executive bonus plan. Ms. Smyth was under a separate bonus arrangement designed for our non-executives that was not reviewed by the Compensation Committee and is tied to individual performance rather than the Company’s performance.
OUTSTANDING EQUITY AWARDS
The following table sets forth information concerning equity awards held by the named executive officers at December 31, 2006:
(1) Each of these awards vests as to one-fourth of the underlying shares on the first anniversary of the grant, and in equal installments monthly thereafter through the fourth anniversary of the grant date. Each of these awards expires 10 years from the date of grant.
(2) Effective September 10, 2006, Mr. Rosenthal was no longer employed by the Company.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
Current Named Executive Officers
Change of Control Agreements between Named Executive Officers and the Company.
The following table sets forth information concerning change of control agreements between the Company and named executive officers:
Name
Position
Date of Agreement
John H. Elms
President and Chief Executive Officer
April 12, 2006, amended and restated on February 7,
John A. Kelley
Executive Vice President, Operations
April 12, 2006, amended and restated on February 7,
Masood Garahi
Executive Vice President, Engineering and Chief Technology Officer
April 12, 2006, amended and restated on February 5,
Ernest J. Sampias
Chief Financial Officer and Executive Vice President, Finance and Administration
May 15, 2006
Ole Lysgaard Madsen
Executive Vice President, International
January 3, 2006, amended on January 31, 2007
These change of control agreements provide that upon the involuntary termination (including resigning for good reason) or termination of such officer’s employment as a result of disability or death within 12 months following a change of control of the Company, such officer will be entitled to (i) severance pay equal to one times the sum of his annual base salary, (ii) 100% of officer’s target annual incentive compensation (including any applicable quarterly incentives assuming 100% achievement), (iii) for the year in which the date of termination occurs, continued coverage under the Company’s health, life, dental and other insurance programs for the 12-month severance pay period, (iv) immediate accelerated vesting of all stock options to purchase Common Stock and any repurchase right of the Company shall lapse with respect to shares of restricted stock held by him at the time of termination and (v) if any of the payments above constitute “parachute payments” within the meaning of 280G of the Internal Revenue Code, then such officer will receive a payment sufficient to pay such excise tax (“280G gross-up payment”) and an additional payment sufficient to pay any Section 280G excise taxes and federal or state income taxes arising from the Section 280G gross-up payment. The Service Agreement entered into by Mr. Madsen provides that in the event of a change of control, Mr. Madsen will receive an additional three (3) months notice prior to the termination of such agreement. The consummation of the Offer and Merger would constitute a change of control under each of these named executive officers’ change of control agreements. The change of control agreement entered into by each of Messrs. Elms, Kelley and Garahi, is substantially similar to the form of the change of control agreement filed as Exhibit (e)(4) to the Schedule 14D-9 filed by the Company on February 20, 2007, and the above description of their change of control agreements is qualified in its entirety by reference to such exhibit which is incorporated herein by reference. The change of control agreement entered into by Mr. Sampias is filed as Exhibit (e)(5) to the Schedule 14D-9 filed by the Company on February 20, 2007, and the above description of his change of control agreement is qualified in its entirety by reference to such exhibit, which is incorporated herein by reference. The employment agreement entered into by Mr. Madsen is filed as Exhibit (e)(6) to the Schedule 14D-9 filed by the Company on February 20, 2007, and the above description of his employment agreement is qualified in its entirety by reference to such exhibit, which is incorporated herein by reference.
In February 2007, the Company amended the above-mentioned change of control agreements (except for the agreement with each of Mr. Sampias and Mr. Madsen) to clarify the terms of the Section 280G gross-up payment contained in the agreements.
The aggregate potential payments and benefits payable to each of the Company’s named executive officers upon the involuntary termination (including resigning for good reason) or termination of such officers’ employment as a result of disability or death within 12 months following a change of control of the Company, assuming that the employment of such officer terminated on December 31, 2006 are as
follows: Mr. Elms, $1,136,396; Mr. Kelley, $449,850; Mr. Garahi, $413,147, Mr. Sampias, $601,069 and Mr. Madsen, $550,265.
Employment Agreements between Named Executive Officers and Polycom
John H. Elms entered into an offer letter with Polycom dated February 5, 2007, for continued employment for three months following the closing of the Merger between the Company and the Offeror at his current base salary and a bonus in an amount equal to 70% of his base salary, prorated during the continued employment term. The offer letter provides that Mr. Elms acknowledges that during his employment term he will not invoke the involuntary termination for good reason provision in his amended and restated change of control agreement with the Company, dated February 7, 2007. In addition to his current base salary earned during the continued employment term, Mr. Elms will receive a retention bonus in an amount equal to 50% of his daily base salary for every day of service to Parent during the continued employment term. At the end of the employment term or if Parent terminates Mr. Elms’ employment for reasons other than cause prior to the end of the employment term, Mr. Elms will be entitled to benefits similar to the benefits described in his amended and restated change of control agreement with the Company, dated February 7, 2007.
John A. Kelley entered into an offer letter with Polycom dated February 5, 2007 for continued employment through December 31, 2007 at his current base salary and a bonus in an amount equal to 45% of his base salary, prorated during the continued employment term. The offer letter provides that Mr. Kelley acknowledges that during his employment term he will not invoke the involuntary termination for good reason provision in his amended and restated change of control agreement with the Company, dated February 7, 2007. In addition to his current base salary earned during the continued employment term, Mr. Kelley will receive a retention bonus in an amount equal to 50% of daily base salary for every day of service to Parent during the continued employment term. At the end of the employment term or if Parent terminates Mr. Kelley’s employment for reasons other than cause prior to the end of the employment term, Mr. Kelley will be entitled to benefits similar to the benefits described in his amended and restated change of control agreement with the Company, dated February 7, 2007.
Masood Garahi entered into an offer letter with Parent dated February 15, 2007 for continued employment for three months following the closing of the Merger between the Company and the Offeror. The offer letter provides that Mr. Garahi acknowledge that during his employment term he will not invoke the involuntary termination for good reason provision in his amended and restated change of control agreement with the Company, dated February 5, 2007. At the end of the employment term or if Parent terminates Mr. Garahi’s employment for reasons other than cause prior to the end of the employment term, Mr. Garahi will be entitled to benefits similar to the benefits described in his amended and restated change of control agreement with the Company, dated February 5, 2007. In addition to his current base salary earned during the continued employment term, and a bonus in an amount equal to 35% of his base salary, prorated during the continued employment term, Mr. Garahi will earn a bonus in an amount equal to 100% of his daily base salary for every day of service to Parent. Mr. Garahi and Parent expect to sign a Termination of Employment Agreement and Release at the conclusion of Mr. Garahi’s three-month employment term with Parent. The Termination of Employment Agreement and Release contains a non-competition and non-solicitation clause, restricting Mr. Garahi’s ability to provide services to other parties for a one-year period following the termination of his employment with Parent.
Ernest J. Sampias entered into an offer letter with Polycom dated February 5, 2007 for continued employment for three months at his current base salary and a bonus in an amount equal to 35% of his base salary, prorated during the continued employment term, following the closing of the Merger between the Company and the Offeror. The offer letter provides that Mr. Sampias acknowledges that during his employment term he will not invoke the involuntary termination for good reason provision in his change of control agreement with the Company, dated May 15, 2006. In addition to his current base salary earned during the continued employment term, Mr. Sampias will receive a retention bonus in an amount equal to 50% of his daily base salary for every day of service to Parent during the continued employment term. At the end of the employment term or if Parent terminates Mr. Sampias’s employment for reasons other than cause prior to the end of the employment term, Mr. Sampias will be entitled to benefits similar to the benefits described in his change of control agreement with the Company, dated May 15, 2006.
Ole Lysgaard Madsen entered into a Stay-on and Severance Agreement with Parent on February 7, 2007 for continued employment for the three-month period following the closing of the Merger between the Company and the Offeror. Immediately following the close of the Merger, Mr. Madsen will receive 21 months salary in a lump-sum payment. Mr. Madsen agreed to refrain from any competitive activity for twelve months following the three-month period of continued employment. Following the expiration of the additional three-month period, Mr. Madsen’s employment will be terminated. Mr. Madsen had an employment agreement with the Company dated January 3, 2006, as amended, with similar terms.
Former Named Executive Officers
Mr. Rosenthal and Ms. Smyth did not have employment agreements with the Company. Mr. Rosenthal resigned from his executive position on April 10, 2006, but remained with the Company in a non-executive and non-decision making role until September 10, 2006 pursuant to a five-month separation agreement and general release based on his then-current base salary of $260,000. Upon appointment of a new chief financial officer on May 15, 2006, Ms. Smyth resumed her prior role with the Company as a non-executive officer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company’s Compensation Committee is currently composed of Messrs. Carman, Carollo, Jr. and Laber. None of the individuals serving on the Compensation Committee is an officer or employee of the Company, nor have any of these individuals served as an officer of the Company at any other time. None of these individuals had any “Related Party Transaction” with the Company of the type required to be disclosed under Item 404 of Regulation S-K. During 2006, no named executive officer of the Company served as a member of the board of directors or compensation committee of any entity that had one or more executive officers serving as a member of the Company Board or the Company’s Compensation Committee.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial ownership of our Common Stock as of February 7, 2007 for:
· each person who we know beneficially owns more than 5% of the Common Stock;
· each of our directors;
· each named executive officer in the Summary Compensation Table; and
· all current directors and executive officers as a group.
* less than 1%
(1) Based upon a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2007, indicating that AMVESCAP PLC and its subsidiaries AIM Capital Management, Inc. and AIM Funds Management, Inc. (“AMVESCAP”) collectively beneficially own 2,349,651 shares and AMVESCAP has sole voting power and sole dispositive power over all such shares. 2,349,062 of such shares are held by AIM Funds Management, Inc. and 589 of such shares are held by AIM Capital Management, Inc.
(2) Based upon a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2007, indicating that Lord, Abbett & Co. LLC beneficially owns 1,997,145 shares and has sole voting power of 1,681,837 and sole dispositive power of 1,997,145 with respect to all such shares.
(3) Based upon a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2007, indicating that Ronald J. Juvonen is deemed to beneficially own 1,057,356 shares and has sole power to vote and direct the disposition with respect to all such shares. The shares are held by Downtown Associates I, L.P., Downtown Associates II, L.P., Downtown Associates III, L.P. and Downtown Associates V, L.P. Ronald J. Juvonen is the Managing Member of the General Partner of the Downtown funds.
(4) Includes 53,750 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(5) Includes 47,500 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(6) Includes 58,750 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(7) Includes 58,750 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(8) Includes 395,621 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(9) Includes no shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(10) Includes 18,341 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(11) Includes 196,875 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(12) Includes 47,707 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(13) Includes 29,166 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
(14) Includes 925,626 of shares issuable upon exercise of options exercisable as of February 7, 2007, and within 60 days thereafter.
On February 7, 2007, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Polycom, Inc. (Polycom) pursuant to which Polycom commenced a cash tender offer for all outstanding shares of the Company’s common stock. In order to induce Polycom to enter into the Merger Agreement, all directors and executive officers of the Company (in their capacities as stockholders of the Company), consisting of Carl D. Carman, Anthony V. Carollo, Jr., John H. Elms, Masood Garahi, John A. Kelley, Gerald J. Laber, Ole Lysgaard Madsen, Leah Maher, Ernest J. Sampias and Werner P. Schmücking, entered into Tender and Voting Agreements with Polycom concurrently with the execution and delivery of the Merger Agreement. Subject to the terms and conditions of these agreements, each director and executive officer of the Company agreed to tender the shares held by them in the tender offer and to vote such shares in favor of adoption of the Merger Agreement. The Company may undergo a change of control in the future as a result of the Merger Agreement between Polycom and the Company and the Tender and Voting Agreements between Polycom and the Company’s directors and executive officers.
Item 13.
Item 13. Certain Relationships and Related Transactions.
At the beginning of each fiscal year, SpectraLink distributes questionnaires to each of its officers and directors. These questionnaires include questions designed to elicit responses with respect to potential related party transactions or relationships. Upon a review of these questionnaires, members of our senior management bring to the attention of the Audit Committee any potential related party transaction or relationship. The Audit Committee then considers whether to approve any related party transaction or relationship in accordance with law. The Audit Committee approves all direct or indirect related-party transactions that do not involve compensation of employees, as evidenced in their charter posted on our website. All officers and directors stockholders are expected to inform representatives of SpectraLink of any potential related party transaction or relationship.
There were no related party transactions in 2006. The Company has adopted provisions in its bylaws that provide for indemnification of its officers and directors and the advancement of expenses for defending a lawsuit to the full extent permitted under Delaware law. In addition, the Company has entered into agreements to indemnify its directors and executive officers. These agreements provide for indemnification of the Company’s directors and executive officers for some types of expenses, including attorney’s fees, judgments, fines, and settlement amounts incurred by persons in any action or proceeding, including any action by or in the right of the Company, arising out of their services as the Company’s director or executive officer. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.
Item 14.
Item 14. Principal Accountant Fees and Services.
KPMG LLP has been the principal independent registered public accounting firm that audits the financial statements of the Company since August 2002. In accordance with standing policy, KPMG LLP periodically changes the personnel who work on the audit. The Company has no current consulting agreements with KPMG LLP.
The following table sets forth the aggregate fees billed to the Company for the fiscal years ended December 31, 2006 and 2005, by the Company’s principal independent registered accounting firm, KPMG LLP:
(1) Audit fees consist of fees billed, or expected to be billed, for professional services rendered for the audits of the Company’s consolidated financial statements and management’s assessment that it maintained effective internal controls over financial reporting, along with reviews of interim condensed consolidated financial statements included in quarterly reports, and services that are normally provided by KPMG LLP in connection with statutory and regulatory filings or engagements, and attestation services. Audit fees in 2006 include fees related to the KIRK business.
(2) Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “Audit Fees.” Services rendered by KPMG LLP related to an audit of the Company’s 401(k) as required by ERISA. KIRK acquisition related services accounted for approximately $82,000 and $295,000 of audit-related fees for 2006 and 2005, respectively.
(3) Tax fees consist of tax compliance/preparation and other tax services. Tax compliance/preparation consists of fees billed for tax return preparation, claims for refunds, and tax payment planning services related to federal, state, and international taxes. Other tax services consist of fees billed for services including tax advice, tax strategy, and other miscellaneous tax consulting and planning.
(4) All other fees consist of fees for all services other than those reported above. The Company’s intent is to minimize services in this category.
PART IV
Item 15.
Item 15. Exhibits, Financial Statements and Financial Statement Schedules.
(a) (1) Financial Statements.
The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements on page.
(3) Exhibits.
Exhibit
Number
Description
2.0
Agreement and Plan of Merger by and among Polycom, Inc., Spyglass Acquisition Corp. and SpectraLink Corporation (1)
2.1
Stock Purchase Agreement between SpectraLink Corporation and SpectraLink Denmark ApS and each of the stockholders of KIRK telecom A/S.* (2)
2.2
Form of Tender and Voting Agreement by and between each director and executive officer of SpectraLink Corporation. (1)
3.0
Restated Certificate of Incorporation of the Registrant. (4)
3.1
Amended and Restated Bylaws of the Registrant. (3)
4.0
Specimen common stock certificate. (3)
10.0
Service Agreement entered into by KIRK telecom A/S and Ole Lysgaard Madsen January 3, 2006, as amended January 31, 2007. (5) **
10.1
Form of Amended and Restated Change of Control and Severance Agreement entered into by SpectraLink Corporation with certain executive officers, including John Elms, John Kelley, Masood Garahi and Leah Maher. (5) **
10.2
Separation Agreement and General Release (6) **
10.3
Change of Control and Severance Agreement entered into by SpectraLink Corporation and Ernest Sampias on May 15, 2006. (5) **
10.4
Form of Indemnification Agreement with directors and executive officers of the Registrant.(3) **
10.5
Stock Restriction Agreement dated September 5, 1995, between SpectraLink and Wellington Trust. (3)
10.6
Form of Consultant Non-Disclosure Agreement used between SpectraLink and consultants.(3) **
10.7
Form of Employee Non-Disclosure Agreement used between SpectraLink and its employees. (3) **
10.8
SpectraLink Corporation 2006 Incentive Compensation Plan. (4) **
10.9
SpectraLink Corporation 2006 Employee Stock Purchase Plan. (4) **
10.10
SpectraLink Corporation 2006 International Employee Stock Purchase Plan. (4) **
10.11
SpectraLink Corporation 2000 Stock Option Plan, including the Form of Incentive Stock Option and Non-Qualified Stock Option Agreements.(7) **
10.12
SpectraLink Corporation Employee Stock Purchase Plan, as amended.(7) **
10.13
SpectraLink Corporation Stock Option Plan, as amended. (3) **
10.14
Form of Incentive Stock Option Agreement under SpectraLink’s Stock Option Plan. (3) **
10.15
Form of Non-Qualified Stock Option Agreement under SpectraLink’s Stock Option Plan. (3) **
10.16
Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated December 9, 2005. (2)
10.17
Waiver and Second Amendment to Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated March 28, 2006. (6)
10.18
Consent and Third Amendment to Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated May 17, 2006. (8)
10.19
Fourth Amendment to Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated June 30, 2006. (8)
10.20
Lease Agreement dated April 15, 2003 between SpectraLink Corporation and 2545 Central, LLC. (9)
10.21
Lease Agreement dated April 15, 2003 between SpectraLink Corporation and Flatiron Industrial Park Company. (9)
10.22
Lease Agreement dated April 15, 2003 between SpectraLink Corporation and Flatiron Industrial Park Company. (9)
10.23
Lease Agreement dated September 30, 2003 between SpectraLink Corporation and 2545 Central, LLC. (10)
10.24
Lease Agreement between SpectraLink Corporation and Longbarrel Property Limited Partnership, dated September 30, 2005. *
10.25
Lease Agreement between SpectraLink International Corporation and Legal and General Assurance Society Limited, dated November 23, 2005. *
21.1
Subsidiaries of the Company. *
23.1
Consent of KPMG LLP *
31.1
Certification by John H. Elms pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.***
31.2
Certification by Ernest J. Sampias pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.***
32.1
Certification by John H. Elms pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
32.2
Certification by Ernest J. Sampias pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
* Filed with the Securities and Exchange Commission with this Annual Report on Form 10-K.
** Indicates a management contract or compensatory plan or arrangement.
*** This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
(1) Incorporated by reference from the Registrant’s Current Report on Form 8-K, dated February 8, 2007.
(2) Incorporated by reference from the Registrant’s Annual Report on Form 10-K, dated March 16, 2006.
(3) Incorporated by reference from the Registrant’s Registration Statement on Form SB-2 (Registration No. 333-2696-D).
(4) Incorporated by reference from the Registrant’s Registration Statement on Form S-8 (Registration No. 333-132920).
(5) Incorporated by reference from the Registrant’s Form 14D-9, dated February 20, 2007.
(6) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, dated May 15, 2006.
(7) Incorporated by reference from the Registrant’s Definitive Proxy Statement for the fiscal year ended December 31, 1999.
(8) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, dated August 9, 2006.
(9) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, dated June 30, 2003.
(10) Incorporated by reference from the Registrant’s Annual Report on Form 10-K, dated December 31, 2003.
(c) Schedule II - Valuation and qualifying accounts
SpectraLink Corporation and Subsidiaries
Schedule II -Valuation and Qualifying Accounts
(In thousands)
(1) We acquired a foreign operation on January 3, 2006, KIRK telecom A/S and subsidiaries, for which the Danish Krone is the functional currency.
(2) Write-offs of uncollectible accounts, claims or obsolete inventories and supplies.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPECTRALINK CORPORATION
By:
/s/ JOHN H. ELMS
John H. Elms,
President and CEO
Date: March 16, 2007
POWER OF ATTORNEY
By signing this Form 10-K below, I hereby appoint each of John H. Elms and Ernest J. Sampias, as my attorney-in-fact to sign all amendments to this Form 10-K on my behalf, and to file this Form 10-K (including all exhibits and other documents related to the Form 10-K) with the Securities and Exchange Commission. I authorize each of my attorneys-in-fact to (1) appoint a substitute attorney-in-fact for himself and (2) perform any actions that he or she believes are necessary or appropriate to carry out the intention and purpose of this Power of Attorney. I ratify and confirm all lawful actions taken directly or indirectly by my attorneys-in-fact and by any properly appointed substitute attorneys-in-fact.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ JOHN H. ELMS
Principal Executive Officer
March 16, 2007
John H. Elms
and Director
/s/ ERNEST J. SAMPIAS
Principal Financial Officer
March 16, 2007
Ernest J. Sampias
and Principal Accounting Officer
/s/ ANTHONY V. CAROLLO, JR.
Chairman of the Board of Directors
March 16, 2007
Anthony V. Carollo, Jr.
/s/ CARL D. CARMAN
Director
March 16, 2007
Carl D. Carman
/s/ GERALD J. LABER
Director
March 16, 2007
Gerald J. Laber
/s/ WERNER P. SCHMÜCKING
Director
March 16, 2007
Werner P. Schmücking
EXHIBIT INDEX
Exhibit
Number
Description
2.0
Agreement and Plan of Merger by and among Polycom, Inc., Spyglass Acquisition Corp. and SpectraLink Corporation (1)
2.1
Stock Purchase Agreement between SpectraLink Corporation and SpectraLink Denmark ApS and each of the stockholders of KIRK telecom A/S.* (2)
2.2
Form of Tender and Voting Agreement by and between each director and executive officer of SpectraLink Corporation. (1)
3.0
Restated Certificate of Incorporation of the Registrant. (4)
3.1
Amended and Restated Bylaws of the Registrant. (3)
4.0
Specimen common stock certificate. (3)
10.0
Service Agreement entered into by KIRK telecom A/S and Ole Lysgaard Madsen January 3, 2006, as amended January 31, 2007. (5) **
10.1
Form of Amended and Restated Change of Control and Severance Agreement entered into by SpectraLink Corporation with certain executive officers, including John Elms, John Kelley, Masood Garahi and Leah Maher. (5) **
10.2
Separation Agreement and General Release (6) **
10.3
Change of Control and Severance Agreement entered into by SpectraLink Corporation and Ernest Sampias on May 15, 2006. (5) **
10.4
Form of Indemnification Agreement with directors and executive officers of the Registrant.(3) **
10.5
Stock Restriction Agreement dated September 5, 1995, between SpectraLink and Wellington Trust. (3)
10.6
Form of Consultant Non-Disclosure Agreement used between SpectraLink and consultants.(3) **
10.7
Form of Employee Non-Disclosure Agreement used between SpectraLink and its employees. (3) **
10.8
SpectraLink Corporation 2006 Incentive Compensation Plan. (4) **
10.9
SpectraLink Corporation 2006 Employee Stock Purchase Plan. (4) **
10.10
SpectraLink Corporation 2006 International Employee Stock Purchase Plan. (4) **
10.11
SpectraLink Corporation 2000 Stock Option Plan, including the Form of Incentive Stock Option and Non-Qualified Stock Option Agreements.(7) **
10.12
SpectraLink Corporation Employee Stock Purchase Plan, as amended.(7) **
10.13
SpectraLink Corporation Stock Option Plan, as amended. (3) **
10.14
Form of Incentive Stock Option Agreement under SpectraLink’s Stock Option Plan. (3) **
10.15
Form of Non-Qualified Stock Option Agreement under SpectraLink’s Stock Option Plan. (3) **
10.16
Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated December 9, 2005. (2)
10.17
Waiver and Second Amendment to Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated March 28, 2006. (6)
10.18
Consent and Third Amendment to Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated May 17, 2006. (8)
10.19
Fourth Amendment to Credit Agreement among SpectraLink Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent, and lenders, dated June 30, 2006. (8)
10.20
Lease Agreement dated April 15, 2003 between SpectraLink Corporation and 2545 Central, LLC. (9)
10.21
Lease Agreement dated April 15, 2003 between SpectraLink Corporation and Flatiron Industrial Park Company. (9)
10.22
Lease Agreement dated April 15, 2003 between SpectraLink Corporation and Flatiron Industrial Park Company. (9)
10.23
Lease Agreement dated September 30, 2003 between SpectraLink Corporation and 2545 Central, LLC. (10)
10.24
Lease Agreement between SpectraLink Corporation and Longbarrel Property Limited Partnership, dated September 30, 2005. *
10.25
Lease Agreement between SpectraLink International Corporation and Legal and General Assurance Society Limited, dated November 23, 2005. *
21.1
Subsidiaries of the Company. *
23.1
Consent of KPMG LLP *
31.1
Certification by John H. Elms pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.***
31.2
Certification by Ernest J. Sampias pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.***
32.1
Certification by John H. Elms pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
32.2
Certification by Ernest J. Sampias pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
* Filed with the Securities and Exchange Commission with this Annual Report on Form 10-K.
** Indicates a management contract or compensatory plan or arrangement.
*** This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
(1) Incorporated by reference from the Registrant’s Current Report on Form 8-K, dated February 8, 2007.
(2) Incorporated by reference from the Registrant’s Annual Report on Form 10-K, dated March 16, 2006.
(3) Incorporated by reference from the Registrant’s Registration Statement on Form SB-2 (Registration No. 333-2696-D).
(4) Incorporated by reference from the Registrant’s Registration Statement on Form S-8 (Registration No. 333-132920).
(5) Incorporated by reference from the Registrant’s Form 14D-9, dated February 20, 2007.
(6) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, dated May 15, 2006.
(7) Incorporated by reference from the Registrant’s Definitive Proxy Statement for the fiscal year ended December 31, 1999.
(8) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, dated August 9, 2006.
(9) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, dated June 30, 2003.
(10) Incorporated by reference from the Registrant’s Annual Report on Form 10-K, dated December 31, 2003.