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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10 - Q x
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
   o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
  Commission file number 0-28180 SPECTRALINK CORPORATION  Delaware
(State or other jurisdiction of incorporation or organization)
    
    84-1141188
(IRS Employer
Identification Number)
 5755 Central Avenue, Boulder, Colorado
(Address of principal executive office)
    
    80301-2848
(Zip code)
 303-440-5330
(Issuers telephone number) (Former name, former address and former fiscal year, if changed from last report) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes   x   
No    o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes   x   
No    o Applicable only to corporate issuers:
As of April 30, 2004, there were 19,041,349 shares outstanding of SpectraLink Corporations Common Stock - par value per share $0.01.




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SPECTRALINK CORPORATION AND SUBSIDIARY
INDEX PagePart I Financial InformationItem 1 Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets at
March 31, 2004 and December 31, 2003 (Unaudited)
    
    
    3Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2004 and 2003 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 and 2003 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    10Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4 Controls and Procedures
    
    
    26Part II Other InformationItem 1 Legal Proceedings
    
    
    27Item 6 Exhibits and Reports on Form 8-K(a) Exhibits
    
    
    28(b) Form 8-K
    
    
    28Signatures
    
    
    30Certifications
    
    
    32Certification by John H. Elms - Section 302Certification by David I. Rosenthal - Section 302Certification by John H. Elms - Section 906Certification by David I. Rosenthal - Section 906
  2




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PART I  - ITEM 1 
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SPECTRALINK CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except
per share amounts)

(Unaudited)
 March 31,
    
    December 31,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    52,569
    
    
    $
    51,861Trade accounts receivable, net of allowance of $351 and $341, respectively
    
    
    14,371
    
    
    
    14,470Income taxes receivable
    
    
    
    
    
    
    204Inventories, net
    
    
    9,267
    
    
    
    7,653Deferred income taxes - current portion
    
    
    1,649
    
    
    
    1,562Other
    
    
    933
    
    
    
    800Total current assets
    
    
    78,789
    
    
    
    76,550PROPERTY AND EQUIPMENT, at cost:Furniture and fixtures
    
    
    2,651
    
    
    
    2,312Equipment
    
    
    9,390
    
    
    
    9,245Leasehold improvements
    
    
    1,016
    
    
    
    98913,057
    
    
    
    12,546Less - accumulated depreciation
    
    
    (8,849
    )
    
    
    (8,463
    )Net property and equipment
    
    
    4,208
    
    
    
    4,083DEFERRED INCOME TAXES, net of current portion
    
    
    153
    
    
    
    151OTHER
    
    
    401
    
    
    
    387TOTAL ASSETS
    
    $
    83,551
    
    
    $
    81,171LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    1,991
    
    
    $
    1,453Accrued payroll, commissions and employee benefits
    
    
    1,991
    
    
    
    3,114Accrued sales, use and property taxes
    
    
    733
    
    
    
    724Accrued warranty expenses
    
    
    594
    
    
    
    493Other accrued expenses
    
    
    2,434
    
    
    
    2,269Income taxes payable
    
    
    875
    
    
    
    Deferred revenue
    
    
    6,691
    
    
    
    6,319Total current liabilities
    
    
    15,309
    
    
    
    14,372LONG-TERM LIABILITIES
    
    
    249
    
    
    
    250TOTAL LIABILITIES
    
    
    15,558
    
    
    
    14,622STOCKHOLDERS EQUITY:Preferred stock, 5,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 50,000 shares authorized, 22,932 and 22,800 shares
issued, respectively, and 19,003 and 18,871 shares outstanding, respectively
    
    
    229
    
    
    
    227Additional paid-in capital
    
    
    72,251
    
    
    
    71,010Retained earnings
    
    
    24,907
    
    
    
    24,706Treasury stock, 3,929 shares, at cost
    
    
    (29,394
    )
    
    
    (29,394
    )TOTAL STOCKHOLDERS EQUITY
    
    
    67,993
    
    
    
    66,549TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    83,551
    
    
    $
    81,171
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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SPECTRALINK CORPORATION AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (In thousands except per share amounts)
 (Unaudited)
 Three Months EndedMarch 31,2004
    
    2003SALES:Product Sales, net
    
    $
    15,206
    
    
    $
    11,276Service Sales
    
    
    4,107
    
    
    
    3,292Net Sales
    
    
    19,313
    
    
    
    14,568COST OF SALES:Cost of Product Sales
    
    
    4,325
    
    
    
    3,205Cost of Service Sales
    
    
    2,441
    
    
    
    1,713Total Cost of Sales
    
    
    6,766
    
    
    
    4,918Gross Profit
    
    
    12,547
    
    
    
    9,650OPERATING EXPENSES:Research and Development
    
    
    2,066
    
    
    
    1,903Marketing and Selling
    
    
    6,033
    
    
    
    5,144General and Administrative
    
    
    1,216
    
    
    
    995Total Operating Expenses
    
    
    9,315
    
    
    
    8,042INCOME FROM OPERATIONS
    
    
    3,232
    
    
    
    1,608INVESTMENT INCOME AND OTHER:Interest Income
    
    
    116
    
    
    
    122Other Income (Expense), net
    
    
    41
    
    
    
    (27
    )Total Investment Income and Other
    
    
    157
    
    
    
    95INCOME BEFORE INCOME TAXES
    
    
    3,389
    
    
    
    1,703INCOME TAX EXPENSE
    
    
    1,288
    
    
    
    647NET INCOME
    
    $
    2,101
    
    
    $
    1,056BASIC EARNINGS PER SHARE (Note 3)
    
    $
    0.11
    
    
    $
    0.06BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    18,940
    
    
    
    18,590DILUTED EARNINGS PER SHARE (Note 3)
    
    $
    0.11
    
    
    $
    0.06DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    19,770
    
    
    
    18,800
 The accompanying notes are
an integral part of these condensed consolidated financial statements. 4




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SPECTRALINK CORPORATION AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,101
    
    
    $
    1,056Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    386
    
    
    
    257Income tax benefit from the exercise of stock options
    
    
    194
    
    
    
    12Provision for bad debts
    
    
    35
    
    
    
    11Provision for excess and obsolete inventories
    
    
    128
    
    
    
    90Deferred income taxes
    
    
    (89
    )
    
    
    Changes in operating assets and liabilitiesDecrease in trade accounts receivable
    
    
    64
    
    
    
    471Increase in inventories
    
    
    (1,742
    )
    
    
    (322
    )Decrease (increase) in other assets and income taxes receivable
    
    
    57
    
    
    
    (158
    )Increase in accounts payable
    
    
    538
    
    
    
    81Increase in accrued liabilities, income taxes payable and
deferred revenue
    
    
    383
    
    
    
    712Net cash provided by operating activities
    
    
    2,055
    
    
    
    2,210CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (490
    )
    
    
    (388
    )Net cash used in investing activities
    
    
    (490
    )
    
    
    (388
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under long-term obligation
    
    
    (6
    )
    
    
    Proceeds from exercises of common stock options
    
    
    1,049
    
    
    
    64Dividends paid
    
    
    (1,900
    )
    
    
    Purchases of treasury stock
    
    
    
    
    
    
    (1,789
    )Net cash used in financing activities
    
    
    (857
    )
    
    
    (1,725
    )INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    708
    
    
    
    97CASH AND CASH EQUIVALENTS, beginning of period
    
    
    51,861
    
    
    
    44,211CASH AND CASH EQUIVALENTS, end of period
    
    $
    52,569
    
    
    $
    44,308SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes
    
    $
    106
    
    
    $
    79SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Assets acquired under long-term obligation
    
    $
    21
    
    
    $
    
 The accompanying notes are
an integral part of these condensed consolidated financial statements. 5




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SPECTRALINK CORPORATION AND SUBSIDIARY 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2004
 (Unaudited)
 1. Basis of Presentation The accompanying condensed consolidated financial statements as of March
31, 2004 and December 31, 2003, and for the three months ended March 31, 2004
and 2003, have been prepared from the books and records of SpectraLink
Corporation and its wholly owned subsidiary, SpectraLink International
Corporation (together SpectraLink or the Company) and are unaudited. In
managements opinion, these financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to fairly present
SpectraLinks financial position, results of operations and cash flows for the
periods presented. The results of operations for the period ended March 31,
2004, are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire fiscal year ending December 31, 2004. The financial statements should be read in conjunction with the audited
financial statements and notes thereto as of and for the year ended December
31, 2003, which are included in SpectraLinks Annual Report on Form 10-K. The
accounting policies utilized in the preparation of the financial statements
herein presented are the same as set forth in SpectraLinks annual financial
statements. 2. Stock-Based Compensation Plans The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion (APB) No. 25 (APB No. 25), Accounting for
Stock Issued to Employees. Statement of Financial Accounting Standards No.
123 (SFAS 123), Accounting for Stock-Based Compensation defines a fair value
based method of accounting for stock options and similar equity instruments.
As allowed by SFAS 123, the Company has continued to apply APB No. 25 to
account for its employee stock based compensation plans and has adopted the
disclosure requirements of SFAS 123 and Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation   Transition and
Disclosure, an amendment of SFAS 123. Had the Company determined compensation
expense for its stock-based compensation plans based on fair value at the date
of grant under SFAS 123, the Companys consolidated net income, and basic and
diluted earnings per share, would have been the pro forma amounts as follows: Three months ended March 31,2004
    
    2003(In thousands, except per shareamounts)Net Income, as reported
    
    $
    2,101
    
    
    $
    1,056Deduct stock based employee compensation
expense under the fair value based method,
net of related tax effect:Compensation expense for stock options
    
    
    (455
    )
    
    
    (581
    )Compensation expense for the stock purchase plan
    
    
    (45
    )
    
    
    (43
    )Net Income, pro forma
    
    $
    1,601
    
    
    $
    432Earnings Per Share:Basic   as reported
    
    $
    0.11
    
    
    $
    0.06Basic   pro forma
    
    $
    0.08
    
    
    $
    0.02Diluted   as reported
    
    $
    0.11
    
    
    $
    0.06Diluted   pro forma
    
    $
    0.08
    
    
    $
    0.02
 6




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3. Inventories Inventories include the cost of raw materials, direct labor and
manufacturing overhead, and is stated at the lower of cost (first-in,
first-out) or market. Inventories as of March 31, 2004 and December 31, 2003,
consisted of the following: March 31,
    
    December 31,2004
    
    2003(In thousands)Raw materials
    
    $
    4,254
    
    
    $
    3,276Work in progress
    
    
    
    
    
    
    25Finished goods
    
    
    5,013
    
    
    
    4,352$
    9,267
    
    
    $
    7,653
 The reserve for potential excess and/or obsolete inventories was $697,000 and
$591,000 as of March 31, 2004 and December 31, 2003, respectively. 4. Earnings Per Share Basic earnings per share is computed by dividing the net income by the
weighted average number of shares of common stock outstanding for the period.
Diluted earnings per share is determined by dividing the net 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 excluded from the calculation of
dilutive income per share because they were anti-dilutive, totaled 151,161 and
2,030,485 for the three months ended March 31, 2004 and 2003, respectively. A
reconciliation of the numerators and denominators used in computing earnings
per share is as follows: Three months ended March 31,(In thousands, except per share amounts)2004
    
    2003Income
    
    Shares
    
    Per Share
    
    Income
    
    Shares
    
    Per ShareBasic EPS
    
    $
    2,101
    
    
    
    18,940
    
    
    $
    0.11
    
    
    $
    1,056
    
    
    
    18,590
    
    
    $
    0.06Effect of dilutive securities:Stock purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    Stock options outstanding
    
    
    
    
    
    
    830
    
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    Diluted EPS
    
    $
    2,101
    
    
    
    19,770
    
    
    $
    0.11
    
    
    $
    1,056
    
    
    
    18,800
    
    
    $
    0.06
 5. Product Warranties and Service The Company provides warranties against defects in materials and
workmanship for SpectraLinks products generally ranging from 90 days to 15
months, but in limited cases up to 24 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: Three months endedMarch 31,2004
    
    2003(In thousands)Beginning Balance, Accrued Product Warranty and Service
    
    $
    493
    
    
    $
    274Additions to the accrual for product warranties
    
    
    314
    
    
    
    145Reductions for incurred warranty charges
    
    
    (213
    )
    
    
    (137
    )Ending Balance, Accrued Product Warranty and Service
    
    $
    594
    
    
    $
    282
 7




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6. Advertising Costs The Company expenses all advertising costs as they are incurred.
Advertising expense for the three months ended March 31, 2004 and 2003, were
approximately $168,000 and $133,000, respectively. 7. Stockholders Equity In the first quarter of 2004, SpectraLink did not repurchase any
outstanding common stock. During the first quarter of 2003, 226,500 shares of
outstanding common stock (classified as treasury stock) were repurchased at a
cost of $1,789,000. 8. Reclassifications Certain reclassifications have been made to the prior year financial
statements to conform to current year presentation. 9. Legal Proceedings On January 14, 2002, SpectraLink issued a press release announcing
preliminary financial results for the fourth quarter of 2001 and revising
downward its estimates for year 2002 results of operations. Shortly after the
press release, the Companys stock price declined and the Company and certain
of its officers and directors were named as defendants in four lawsuits filed
between February 7, 2002 and March 6, 2002, three of which were filed in the
United States District Court for the District of Colorado and one of which was
filed in the Colorado District Court for the City and County of Denver. In
each of the lawsuits, plaintiffs, who purport to be purchasers or holders of
SpectraLink common stock, initially sought to assert claims either on behalf of
a class of persons who purchased securities in SpectraLink between July 19,
2001 and January 11, 2002, or in the case of two of the lawsuits (one filed in
the United States District Court and one in the Colorado District Court),
derivatively on behalf of SpectraLink. Two of the lawsuits filed in the United
States District contained essentially identical claims alleging that
SpectraLink and certain of its officers and directors violated Sections 10(b)
and 20(a) and Rule 10b-5 under the Securities Exchange Act of 1934, as a result
of alleged public misstatements and omissions, accompanied by insider stock
sales made in the months prior to the decline in the price of SpectraLinks
stock after the January 14, 2002 press release. In the cases brought as
derivative actions, the plaintiffs allege that the officers and directors of
SpectraLink violated fiduciary duties owed to SpectraLink and its stockholders
under state laws by allowing and/or facilitating the issuance of these same
alleged public misstatements and omissions, misappropriating nonpublic
information for their own benefit, making insider stock sales, wasting
corporate assets, abusing their positions of control, and mismanaging the
corporation. The plaintiffs in these derivative cases allege that SpectraLink
has and will continue to suffer injury as a result of these alleged violations
of duty for which the officers and directors should be liable. The cases are designated as follows: Wilmer Kerns, Individually And On Behalf
of All Others Similarly Situated, Plaintiff, vs. SpectraLink Corporation, Bruce
Holland and Nancy K. Hamilton, Defendants (United States District Court Civil
Action Number 02-D-0263); Danilo Martin Molieri, Individually and On Behalf of
All Others Similarly Situated, Plaintiff, v. SpectraLink Corporation, Bruce
Holland and Nancy K. Hamilton, Defendants (United States District Court Civil
Action Number 02-D-0315); Evie Elennis, derivatively on behalf of SpectraLink
Corporation, Plaintiff(s), v. Bruce M. Holland, Anthony V. Carollo, Jr., Gary
L. Bliss, Michael P. Cronin, Nancy K. Hamilton and John H. Elms, Defendants),
and SpectraLink Corporation, Nominal Defendant (United States District Court
Civil Action Number 02-D-0345); and Roger Humphreys, Derivatively on Behalf of
Nominal Defendant SpectraLink Corporation, Plaintiff, v. Carl D. Carman,
Anthony V. Carollo, Jr., Bruce M. Holland, Burton J. McMurtry, Gary L. Bliss,
Michael P. Cronin, John H. Elms, and Nancy K. Hamilton, Defendants (Colorado
District Court Case. No. 02CV1687). The Kerns and Molieri purported class actions were consolidated, and the
plaintiffs filed a Consolidated Amended Complaint in these Consolidated
Actions. In January of 2003, the Court denied a motion to dismiss that amended
pleading, and discovery commenced. The Court has certified a class of all
purchasers of publicly traded common stock of SpectraLink from April 19, 2001
through January 11, 2002, inclusive. On November 26, 2003, the Lead Plaintiffs
in these Consolidated Actions moved the court for permission to file a second
consolidated amended class action, which would have deleted certain of the
original claims, would have extended the class period so that it would commence
on February 1, 2001 instead of April 19, 2001, and would have added more detail
on claims relating to alleged improper revenue recognition. The Company filed
an opposition to that motion. On March 5,
2004, the Magistrate Judge entered his Order denying plaintiffs motions, and
plaintiffs have appealed that decision to the district court. 8




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On April 16, 2004, the parties to these Consolidated Actions held a mediation
in San Francisco. The parties entered into a Memorandum of Understanding
settling the case for $1.5 million, subject to certain terms and conditions,
including approval by the court. The settlement will be paid from insurance
proceeds. The two derivative actions were stayed pending resolution of the motion to
dismiss in the consolidated class action, and plaintiffs counsel in the
Elennis derivative action filed an unopposed motion for relief from the stay
and filed an amended complaint and then a corrected amended complaint. Prior
to the entry of the stays in each of the derivative cases, the defendants had
filed motions to dismiss. In August of 2003, Defendants moved to dismiss the
amended and corrected Elennis complaint. The Court denied that motion on March
22, 2004. No discovery has been conducted in either of the derivative actions.
The Company expects to engage in settlement discussions with the derivative
plaintiffs in light of the settlement of the Consolidated Actions. SpectraLink believes that the lawsuits are without merit and it intends to
vigorously defend itself and its officers and directors if the two derivative
cases are not settled in light of the settlement of the Consolidated Actions,
and/or if the settlement of the Consolidated Actions is not approved by the
court. SpectraLink does not believe that its interests and that of the named
officers and directors are adverse to each other as of this time. However, no
assurance can be given that SpectraLink will be successful in defending the
claims being asserted in these suits, or that the interests of the various
parties will remain aligned. If SpectraLink is not successful in its defense
of these suits, it could be required to make significant payments to its
stockholders and their lawyers, which could have a material adverse effect on
SpectraLinks business, financial condition and results of operations. In
addition, the litigation could result in substantial costs, divert managements
attention and resources, or ultimately result in the interests of SpectraLink
becoming adverse to those of certain of its officers and directors. In either
case, SpectraLinks business could be adversely affected, even if the
plaintiffs are not successful in their claims against SpectraLink and/or its
officers and directors. The Company has incurred a loss related to the directors and officers
insurance deductible of which the majority of the expense was reflected in
2002. As noted, the settlement of the Consolidated Actions will be funded by
insurance proceeds. Based on current facts and circumstances, the Company is
unable to estimate future losses, if any, it may incur if the cases are not
settled, after considering the amounts that will be covered by insurance. SpectraLink is not presently a party to any other material pending legal
proceedings of which it is aware. 9




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PART I   ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECTRALINK CORPORATION AND SUBSIDIARY This Form 10-Q contains forward-looking statements within the context of
Section 21E of the Securities Exchange Act of 1934, as amended. Each and every
forward-looking statement involves a number of risks and uncertainties which
are described in this report. The actual results that SpectraLink achieves may
differ materially from those described in any forward-looking statement due to
such risks and uncertainties. Certain statements in this Form 10-Q, as well as
statements made by SpectraLink in periodic press releases, oral statements made
by SpectraLinks 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 (the Reform Act). Words
such as believes, anticipates, expects, intends, could, might, and similar
expressions are intended to identify forward-looking statements, but are not
the exclusive means of identifying such statements. These projections and
forward-looking statements are based on assumptions, which are believed
reasonable but are, by their nature, inherently uncertain. In all cases,
results could differ materially from those projected. Accordingly, caution
should be taken not to place undue reliance on any such forward-looking
statements since such statements speak only as of the date of the making of
such statements. Some of the important factors that could cause actual results
to differ from any of these projections or other forward-looking statements are
detailed below, and in other reports filed by SpectraLink under the Securities
Exchange Act of 1934. 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 3 under the caption
Forward-Looking Statement Factors. SpectraLink undertakes no obligation to
revise any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report, except as may be
required under law. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this quarterly
report on Form 10-Q. Business Description and Overview SpectraLink commenced operations in April 1990 to design, manufacture and
sell unlicensed wireless telephone communication systems for businesses.
SpectraLinks product portfolio consists of two product categories
differentiated by the wireless technology implemented: Link WTS and NetLink
Wireless Telephones. Link WTS targets organizations that require a dedicated
wireless voice solution for their on-premises mobile workforce. NetLink
Wireless Telephones target organizations that want both a wireless voice and
wireless data solution on a single network. Because of the recent advances in
wireless local area network (LAN) technology, SpectraLinks future focus will
be on its existing NetLink products as well as products it is currently
developing that operate on a wireless LAN. SpectraLinks primary sales efforts
currently focus on home improvement, grocery and other retail store chains,
hospitals, nursing homes, distribution centers, manufacturing and service
facilities, corporate offices, government and education facilities. For the three months ended March 31, 2004, SpectraLinks earnings per
diluted share were $0.11 on net income of $2.1 million and revenue of $19.3
million. This represents 99% growth in quarterly year-over-year net income, and
over 33% growth in quarterly year-over-year revenue. A driver of revenue
growth for the three months ended March 31, 2004 was the increased sales of
NetLink Wireless Telephones. Sales of this product line grew by approximately
$1.9 million or a 67.4% increase for the three months ended March 31, 2004
compared to the same period in 2003. SpectraLink introduced new NetLink products in 2003. All of these
products are based on the global 802.11 standard and are expected by SpectraLink
to be a foundation for targeted future growth. Over time, SpectraLink expects
that sales of NetLink Wireless Telephones will become a majority of its product
sales. For the three months ended March 31, 2004, sales through SpectraLinks
distributors accounted for 69.9% of total product sales. The vast majority of
sales during the three months ended March 31, 2004 occurred in North America.
International sales are expected to grow as a percentage of total revenue with
the introduction of SpectraLink products that utilize VoIP that are offered at
a much-reduced price to the customer as compared to its past products. The i640 NetLink handset, which is targeted at vertical markets that need
extensive features and durability, was enhanced with a push-to-talk feature
allowing broadcast messaging where needed. The new e340 NetLink handset, which
is a smaller, lighter option than previously offered products, was designed to
expand SpectraLinks presence into the small- to medium- sized enterprise
markets, as well as international markets. With its dramatically reduced price,
this handset is intended to capitalize on the price elasticity of demand and
drive overall product volume. The 10




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other main product announced in 2003 was the wireless deskset. This product
will appeal to the growing interest in totally wireless office facilities. On March 23, 2004, SpectraLink used $1,900,000 of its cash to pay a cash
dividend to its stockholders. SpectraLinks ongoing success is dependent upon its ability to build solid
partnerships and relationships. SpectraLinks commitment to this strategy
resulted in two OEM relationships being finalized in the first quarter of 2004:
one with Alcatel and one other with Nortel Networks. These relationships
complement SpectraLinks existing agreements with Avaya, Inter-Tel, and NEC.
The Original Equipment Manufacturer Program Management Office established in
2003, will continue to seek relationships that will not only distribute
SpectraLink products but also co-brand and private label these products. The
goal of this strategy is to provide greater exposure to SpectraLinks products
through the reach these partners have with their customers. These relationships
also help to establish an international presence for SpectraLink products.
SpectraLink expects to see an increase in indirect sales related to OEM
customers in the second half of 2004. SpectraLink expects that its gross margin in 2004 will range between 60
and 65%. SpectraLink realizes relatively lower margins on products sold
through OEM relationships. Therefore, if SpectraLink succeeds in expanding
these relationships, it will experience downward pressure on gross margins from
historical amounts ranging from 66 to 69%. Another factor that will directly
affect gross margins is product mix. The NetLink e340 handset carries a much
lower margin than any other SpectraLink product. As a result, if SpectraLink
succeeds in penetrating new enterprise markets, and sales of the NetLink e340
handset increase as a result, gross margins will decline. These two factors
may potentially push gross margins below the forecast range of 60 to 65%. Results of Operations Net Sales Three Months
    
    
    
    
    
    Three MonthsEnded March 31,
    
    % Change
    
    Ended March 31,2004
    
    2003 to 2004
    
    2003Net sales
    
    $
    19,313,000
    
    
    
    32.6
    %
    
    $
    14,568,000
 Product Sales, Net.SpectraLink derives its product revenue principally
from the sale of wireless, on-premises telephone systems. Product sales for the three months ended March 31, 2004 increased 34.9%
to $15,206,000 from $11,276,000 for the same period last year. The increase
in product sales dollars was primarily due to SpectraLinks increased product
sales through SpectraLinks indirect channels and increased penetration in the
commercial, healthcare and retail markets, as well as an increase in the
overall marketplaces acceptance of 802.11 technology. Service Sales. SpectraLink derives its service revenue principally from
the installation and service of wireless, on-premises telephone systems. Service sales for the three months ended March 31, 2004 increased 24.8%
to $4,107,000 from $3,292,000 in the same period last year. The increase in
service sales was primarily due to increased revenue from maintenance
contracts relating to products previously sold to a larger installed base of
customers, which continue to use SpectraLinks products and purchase its
maintenance contracts. Service sales also increased due to additional
installations and time and material service repairs. 11




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The customer mix shows a decrease in the percentage of indirect sales
compared to an offsetting increase in the percentage of direct sales. The
increase in direct sales was primarily due to an increase in retail sales to
direct customers. The following table details the sales to different customer
types as a percentage of total net sales. Three Months EndedMarch 31,Customer Mix Table (As a Percentage of Net Sales)
    
    2004
    
    2003Customer Type:Indirect Sales
    
    
    55.1
    %
    
    
    57.6
    %Direct Sales
    
    
    23.6
    %
    
    
    19.8
    %Service Sales
    
    
    21.3
    %
    
    
    22.6
    %Total Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
 The following table summarizes sales to major customers: Three Months EndedMarch 31,Sales to Major Customers (As a Percentage of Net Sales)
    
    2004
    
    2003Customer A:
    
    
    10.8
    %
    
    
    9.7
    %Customer B:
    
    
    8.4
    %
    
    
    10.0
    %
 Total Cost of Sales Three Months
    
    
    
    
    
    Three MonthsEnded March 31,
    
    % Change
    
    Ended March 31,2004
    
    2003 to 2004
    
    2003Total cost of sales
    
    $
    6,766,000
    
    
    
    37.6
    %
    
    $
    4,918,000
 Product.SpectraLinks cost of product sales consists primarily of
direct material, direct labor, product packaging, third party royalties, and
manufacturing overhead. In the three months ended March 31, 2004, cost of product sales increased
by 34.9% to $4,325,000 from $3,205,000 in the same period last year. Cost of
product sales as a percentage of product sales, net was 28.4% for each of the
three months ended March 31, 2004 and 2003. Gross profit from product sales,
net increased by 34.8% to $10,881,000 for the three months ended March 31, 2004
from $8,071,000 in the same period last year. For each of the three months
ended March 31, 2004 and 2003, gross profit from product sales, net (gross
profit from product sales, net as a percentage of product sales, net) was
71.6%. Service.SpectraLinks cost of service sales consists primarily of
employee-related costs and the associated costs incurred to provide
installation, maintenance, training, and product repair and support. Cost of service sales for the three months ended March 31, 2004 increased
by 42.5% to $2,441,000 from $1,713,000 in the same period last year. Cost of
service sales as a percentage of service sales was 59.4% for the three months
ended March 31, 2004 compared to 52.0% for the same period last year. Gross
profit from service sales increased by 5.5% to $1,666,000 for the three months
ended March 31, 2004 from $1,579,000 for the same period last year. For the
three months ended March 31, 2004 and 2003, respectively, gross profit from
service sales (gross profit from service sales as a percentage of service
sales) decreased to 40.6% from 48.0%. The decrease in gross profit percentage
from service sales was primarily due to increasing SpectraLinks service
infrastructure to support future growth, which resulted in an increase in
salaries and employee benefits due to an increase in headcount to hire and
retain personnel, an increase in travel to install, train and support
SpectraLinks customer base, an increase in write-offs and reserves for
obsolete inventory and an increase in costs for materials and freight. 12




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Gross Profit Three Months
    
    
    
    
    
    Three MonthsEnded March 31,
    
    % Change 2003
    
    Ended March 31,2004
    
    to 2004
    
    2003Gross Profit
    
    $
    12,547,000
    
    
    
    30.0
    %
    
    $
    9,650,000
 For the three months ended March 31, 2004, SpectraLinks gross profit
margin (gross profit as a percentage of net sales) decreased to 65.0% from
66.2% in the same period last year. The decrease in gross profit margin was
primarily due to an increase in service inventory reserves and other service
related costs. Operating Expenses Research and Development Three Months
    
    
    
    
    
    Three MonthsEnded March 31,
    
    % Change 2003
    
    Ended March 31,2004
    
    to 2004
    
    2003Expenses
    
    $
    2,066,000
    
    
    
    8.6
    %
    
    $
    1,903,000Percentage of total net sales
    
    
    10.7
    %
    
    
    
    
    
    
    13.1
    %
 Research and development expenses consist primarily of employee costs,
professional services, and supplies necessary to develop, enhance and reduce
the cost of SpectraLinks systems. SpectraLink expects that research and
development expenses will be approximately 10% to 12% of net sales for fiscal
2004. For the three months ended March 31, 2004 compared to the same period last
year, the increase in dollars spent was primarily due to increases in
headcount, merit raises and the rising cost of employee benefits.
Additionally, consulting fees, patent and miscellaneous parts and supplies
increased with the development of the desktop docking station and performance
enhancements to existing products. The percentage of net sales decreased from
the prior year due to an increase in sales. Marketing and Selling Three Months
    
    
    
    
    
    Three MonthsEnded March 31,
    
    % Change 2003
    
    Ended March 31,2004
    
    to 2004
    
    2003Expenses
    
    $
    6,033,000
    
    
    
    17.3
    %
    
    $
    5,144,000Percentage of total net sales
    
    
    31.2
    %
    
    
    
    
    
    
    35.3
    %
 Marketing and selling expenses consist primarily of salaries and other
expenses for personnel, commissions, travel, advertising, trade shows, sales
meetings and market research. The increase in dollars spent for the three months ended March 31, 2004
compared to the same period last year for both domestic and international
sales, was primarily due to an increase in salaries and employee benefits to
hire new personnel and to retain existing personnel, and increases related to
sales meetings, travel, commissions, marketing and promotional costs and legal
fees. Marketing and selling expenses as a percentage of net sales decreased
from the prior year due to an increase in sales. 13




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General and Administrative Three Months
    
    
    
    
    
    Three MonthsEnded March 31,
    
    % Change 2003
    
    Ended March 31,2004
    
    to 2004
    
    2003Expenses
    
    $
    1,216,000
    
    
    
    22.2
    %
    
    $
    995,000Percentage of total net sales
    
    
    6.3
    %
    
    
    
    
    
    
    6.8
    %
 General and administrative expenses consist primarily of salaries and
other expenses for management, finance, accounting, contract administration,
order processing, investor relations, and human resources, as well as legal and
other professional services. The increase in dollars spent for the three months ended March 31, 2004
compared to the same period last year, was primarily due to increasing
SpectraLinks infrastructure to support future growth, which resulted in
increased headcount, salaries and employee benefits to hire and retain
personnel, as well as increases in insurance, legal, professional fees, and
amounts for corporate governance and disclosure requirements related to
Sarbanes-Oxley legislation. The percentage of net sales decreased from the
prior year due to an increase in sales. Other Non-Operating Income and Expenses Investment Income and Other, Net Three Months
    
    
    
    
    
    Three MonthsEnded March 31,
    
    % Change 2003
    
    Ended March 31,2004
    
    to 2004
    
    2003Other
    
    $
    157,000
    
    
    
    65.3
    %
    
    $
    95,000Percentage of total net sales
    
    
    0.8
    %
    
    
    
    
    
    
    0.7
    %
 Investment income is the result of SpectraLinks investment in money
market, investment-grade debt securities, government securities, and corporate
bonds, while reduced by typical banking fees. The increase in other income was primarily due to a refund for certain
banking fees. Income Tax Three Months
    
    
    
    
    
    Three MonthsEnded March 31,
    
    % Change 2003
    
    Ended March 31,2004
    
    to 2004
    
    2003Income tax expense
    
    $
    1,288,000
    
    
    
    99.1
    %
    
    $
    647,000Percentage of total net sales
    
    
    6.7
    %
    
    
    
    
    
    
    4.4
    %Effective tax rate
    
    
    38.0
    %
    
    
    
    
    
    
    38.0
    %
 The increase in income tax expense for the three months ended March 31,
2004 compared to the same period last year was primarily related to an increase
in pretax income. Liquidity and Capital Resources Three Months
    
    Three MonthsEnded March 31,
    
    Ended March 31,2004
    
    2003Cash from operating activities
    
    $
    2,055,000
    
    
    $
    2,210,000Cash used in investing activities
    
    
    (490,000
    )
    
    
    (388,000
    )Cash used in financing activities
    
    
    (857,000
    )
    
    
    (1,725,000
    )
 SpectraLink has funded its operations since inception with cash provided
by operations, supplemented by equity financing and leases on capital
equipment. As of March 31, 2004, SpectraLink had $52,569,000 of cash and cash
equivalents. During the first quarter of 2004, SpectraLink paid its quarterly
cash dividend to holders of common 14




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stock and intends to use some of its cash provided by operations to pay future
quarterly dividends during a yet to be determined period of time as determined
by the Board of Directors. SpectraLink may also use its cash and cash
equivalents to purchase treasury stock in accordance with its stock repurchase
program approved by the Board of Directors. SpectraLinks repurchase program
will be evaluated by management on a quarterly basis. Under SpectraLinks stock
repurchase plan, SpectraLink may repurchase up to an additional 2.070 million
shares of its common stock. During the three month period ending March 31, 2004, SpectraLink generated
cash from operations of $2,055,000 consisting principally of net income of
$2,101,000, adjustments for depreciation and amortization, income tax benefit
from exercises of stock options, deferred income taxes and provisions for bad
debt and excess and obsolete inventories that reconcile net income to cash
generated by operating activities, as well as increases in accounts payable,
accrued liabilities, income taxes payable and deferred revenue and decreases in
trade accounts receivable and was offset by increases in inventories and other
assets and income tax receivable. SpectraLinks inventories increased in the
quarter to $9.3 million resulting from business changes related to satisfying
OEM demands for increased volume and expanded product mix. Investing activities used cash of $490,000 for purchases of property and
equipment primarily related to purchases of manufacturing tooling and molds for
the desktop docking station and office equipment. SpectraLink used $857,000 of cash in financing activities during the three
month period ended March 31, 2004, which was a direct result of the issuance
and payment of a cash dividend of $1,900,000 and payments on an obligation of
$6,000. These cash outflows were offset by proceeds of $1,049,000 received
from common stock option exercises. As of March 31, 2004, SpectraLink had no debt outstanding, and there were
no off-balance sheet arrangements, unconsolidated subsidiaries, commitments or
guarantees, except as disclosed in the notes to the consolidated financial
statements included in the 2003 Form 10-K or as noted in the Aggregate
Contractual Obligations and Commercial Commitments section. Stockholders
equity at March 31, 2004 was $67,993,000, which represented 81.4% of total
assets. As of March 31, 2004, SpectraLink had working capital of $63,480,000
compared to $62,178,000 at December 31, 2003. The increase in working capital
of $1,302,000 occurred primarily from cash flows from operations and proceeds
from common stock option exercises, offset by the purchase of capital assets
and the cash dividend paid. As of March 31, 2004, SpectraLinks current ratio
(ratio of current assets to current liabilities) was 5.15:1, compared with a
current ratio of 5.33:1 as of December 31, 2003. SpectraLink believes that its current cash, cash equivalents and cash
generated from operations will be sufficient, based on SpectraLinks presently
anticipated needs, to fund necessary capital expenditures, to provide adequate
working capital, pay dividends, repurchase shares of its common stock and to
finance its expansion for the foreseeable future (next 12 months). There can be
no assurance, however, that SpectraLink will not require additional financing.
There can be no assurance that any additional financing will be available to
SpectraLink on acceptable terms, or at all, when required by SpectraLink. If
additional funds were to be raised through the sale of equity securities,
additional dilution to the existing stockholders would be likely to result. Aggregate Contractual Obligations and Commercial Commitments SpectraLink incurs various contractual obligations and commercial
commitments in its normal course of business. Such obligations and commitments
consist primarily of the following: Lease Commitments.SpectraLink leases its facilities under noncancelable
operating lease arrangements that expire at various dates through 2007.
SpectraLink has other obligations for office equipment that expire at various
dates through 2008. Purchase Commitments.SpectraLink incurs 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. SpectraLink is committed to accept delivery of such
materials pursuant to such purchase orders subject to various contract
provisions which allow SpectraLink to delay receipt of such orders. Such
orders may or may not include cancellation costs payable by SpectraLink. In
the past, SpectraLink has been required to take delivery of materials from its
suppliers that were in excess of demand requirements and SpectraLink has 15




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previously recognized charges and expenses related to such excess material,
related primarily to engineering changes. If SpectraLink is not able to
adequately manage its supply chain and adjust such commitments for changes in
demand, SpectraLink may incur additional inventory expenses related to excess
and obsolete inventory. Such expenses could have a material adverse effect on
SpectraLinks business, financial condition and results of operations. Indemnifications. SpectraLink provides indemnifications of varying scope
and size to certain customers against claims of intellectual property
infringement made by third parties arising from the use of its products.
SpectraLink evaluates 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). SpectraLink considers
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,
SpectraLink has not encountered material costs as a result of such obligations
and has not accrued any liabilities related to such indemnifications in
SpectraLinks financial statements. As of March 31, 2004, expected future cash payments related to contractual
obligations and commercial commitments were as follows: 2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    TotalOperating leases
    
    $
    828,000
    
    
    $
    837,000
    
    
    $
    828,000
    
    
    $
    280,000
    
    
    $
    
    
    
    $
    2,773,000Purchase commitments
    
    
    320,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    320,000Other obligations
    
    
    22,000
    
    
    
    34,000
    
    
    
    35,000
    
    
    
    35,000
    
    
    
    14,000
    
    
    
    140,000Total contractual
obligations and
commercial
commitments
    
    $
    1,170,000
    
    
    $
    871,000
    
    
    $
    863,000
    
    
    $
    315,000
    
    
    $
    14,000
    
    
    $
    3,233,000
 SpectraLink believes its existing cash balances and funds expected to be
generated from future operations will be sufficient to satisfy these
contractual obligations and commercial commitments and that the ultimate
payments associated with these commitments will not have a material adverse
effect on SpectraLinks liquidity position. Critical Accounting Policies and Estimates Below is a summary of SpectraLinks most critical accounting policies.
SpectraLink determined the critical accounting principles by considering
accounting policies that involve the most complex or subjective decisions or
assessments. This discussion and analysis should be read in conjunction with
SpectraLinks unaudited condensed consolidated financial statements and related
notes beginning on page 3 of this report and in conjunction with SpectraLinks
consolidated financial statements and related notes included in SpectraLinks
Annual Report on Form 10-K for the fiscal year ended December 31, 2003, which
was filed with the U.S. Securities and Exchange Commission on March 11, 2004
(2003 Form 10-K). SpectraLinks discussion and analysis of its financial condition and
results of operations are based upon SpectraLinks consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires SpectraLink to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. SpectraLink evaluates its
estimates, on an on-going basis, including those related to revenue
recognition, receivables, product warranty obligations, inventories and income
taxes. SpectraLink bases its estimates on historical experience and on various
other assumptions that it believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. SpectraLink considers an accounting estimate to be critical if:  
    
    It requires SpectraLink to make assumptions about matters
that were uncertain at the time of making the estimate, and
    
    Changes in the estimate or assumptions in the estimate could
have a material impact on SpectraLinks financial condition or
results of operations. 16




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##### Table of Contents



The following table presents information about the nature and rationale for
SpectraLinks critical accounting policies and estimates used in the
preparation of its consolidated financial statements: Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    Used
    
    Key FactorsSales and deferred
revenue
    
    Collectibility
    
    SpectraLink is
required to
estimate the
collectibility of
invoiced amounts
based upon its
assessment of the
ability of the
customer to pay.
    
    SpectraLink
determines whether
collectibility is
reasonably assured
based on possible
credit
deterioration, the
customers ability
to sell through the
products purchased
and the
relationship
SpectraLink has
with its customer.

SpectraLinks
revenue recognition
policy is based on
complex and dynamic
rules established
by the Securities
and Exchange
Commission and
other governing
bodies. These
rules require
SpectraLink to make
judgments with
regard to post
delivery
obligations. When
post delivery
obligations exist,
revenue is deferred
until such
obligations are
fulfilled.
    
     Customer ability to pay

 Customer ability to sell to end-user
 Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    Used
    
    Key FactorsAccounts receivable
    
    Collectibility of
invoiced amounts
    
    Estimating the
collectibility of
accounts receivable
requires
SpectraLink to make
judgments about the
credit quality and
economic viability
of customers based
on information
available to
SpectraLink.
    
    SpectraLink uses
all applicable
information
available at the
time of credit
issuance, such as
D&B, payment
history, or
financial
information
provided by the
customer.

For ongoing
customers and past
due balances,
discussions
with SpectraLinks
customers to
determine if
economic conditions
have deteriorated,
resulting in an
impairment of their
ability to make
payments.

SpectraLink
maintains a
provision for
estimated credit
losses based upon
its historical
experience and any
specific customer
collection issues
that SpectraLink
has identified.
    
     Historical
experience
regarding payment
history

 Customer creditworthiness

 Monitoring collections and
payments from
customers

 Deterioration of customers economic
condition after
date of invoice

 Changes in credit loss rates from
historical rates
used
 17




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##### Table of Contents



Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    Used
    
    Key FactorsCost of goods sold
and Inventory
    
    Obsolete,
unmarketable or
excess inventory
    
    Estimating
obsolete,
unmarketable or
excess inventory
requires
SpectraLink to
forecast future
demand and market
conditions.
    
    SpectraLink bases
its estimate on the
difference between
the cost of held
inventory and the
expected market
value of the
inventory.
    
     Product lifecycle

 Evaluation of customer demand for various product
types

 Analysis of inventory on hand
with no estimated
future demand from
customer base
 Financial Statement
    
    Critical Estimate
    
    Nature of Estimates
    
    Assumptions/ApproachesCaption(s)
    
    Item
    
    Required
    
    Used
    
    Key FactorsDeferred income taxes
    
    Recoverability of
deferred tax assets
    
    SpectraLink is
required to
estimate whether
recoverability of
deferred tax assets
is more likely than
not based on
forecasts of
taxable earnings in
the related tax
jurisdictions.
    
    SpectraLink uses
historical and
projected future
operating results,
including a review
of the eligible
carryforward
period, tax
planning
opportunities and
other relevant
considerations.
    
     Tax law changes
 Variances in future projected
profitability, including by taxing
entity
 In addition, there are other items within SpectraLinks financial
statements that require estimation, but are not as critical as those discussed
above. Revisions to any of the discussed estimates, or other non-critical
items, could have a significant effect on SpectraLinks consolidated financial
statements. Recently Issued or Proposed Accounting Pronouncements In December 2003, the Staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue
Recognition, which supersedes SAB 101, Revenue Recognition in Financial
Statements. SAB 104s primary purpose is to rescind accounting guidance
contained in SAB 101 related to multiple element arrangements, superseded as a
result of the issuance of EITF 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. Additionally, SAB 104 rescinds the SECs Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers (the
FAQ) issued with SAB 101 that had been codified in SAB Topic 13, Revenue
Recognition. Selected portions of the FAQ have been incorporated into SAB 104.
While the wording of SAB 104 has changed to reflect the issuance of EITF
00-21, the revenue recognition principles of SAB 101 remain largely unchanged
by the issuance of SAB 104. The adoption of SAB 104 in December 2003 did not
have an effect on the consolidated results of operations or financial position
of SpectraLink. On March 31, 2004, the FASB issued a proposed Statement, Share-Based
Payment, which addresses the accounting for share-based payment transactions.
The proposed Statement would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, Accounting for Stock
Issued to Employees, and generally would require instead that such
transactions be accounted for using a fair-value-based method. Since
SpectraLink currently reports stock-based compensation using the
intrinsic-value method, should the FASB require companies to expense
stock-based compensation on fair-value measurements rather than allow voluntary
reporting, this potential change could reduce SpectraLinks future earnings or
increase future losses. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk. Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of SpectraLink due to adverse
changes in financial and commodity market prices and rates. SpectraLink is
exposed to market risk due to changes in United States interest rates. These
exposures are directly related to SpectraLinks 18




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normal operating and funding
activities. As of March 31, 2004, SpectraLink has not used derivative
instruments or engaged in hedging activities, and is not currently impacted significantly by
fluctuations in foreign currency exchange rates. Interest Rate Risk As part of SpectraLinks cash management strategy, at March 31, 2004,
SpectraLink had cash and cash equivalents of approximately $52,569,000 mainly
in the form of bank demand deposits and money markets. SpectraLink has
completed a market risk sensitivity analysis of these cash and cash equivalents
based on an assumed 1% point increase in interest rates. If market rates had
increased or decreased 1% during the three month period ended March 31, 2004,
SpectraLinks interest income would have increased or decreased by
approximately $131,000. FORWARD-LOOKING STATEMENT FACTORS Certain statements in this Form 10-Q, as well as statements made by
SpectraLink in periodic press releases, oral statements made by SpectraLinks
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 (the Reform Act). Words such as believes,
anticipates, expects, intends, could, might, and similar expressions are
intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements. These projections and forward-looking
statements are based on assumptions, which are believed reasonable but are, by
their nature, inherently uncertain. In all cases, results could differ
materially from those projected. Accordingly, caution should be taken not to
place undue reliance on any such forward-looking statements since such
statements speak only as of the date of the making of such statements. Some of
the important factors that could cause actual results to differ from any of
these projections or other forward-looking statements are detailed below and in
other reports filed by SpectraLink under the Securities Exchange Act of 1934.
SpectraLink undertakes no obligation to revise any forward-looking statements
in order to reflect events or circumstances that may arise after the date of
this report. 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.  If SpectraLink is unable to fulfill quarter end customer orders,
then SpectraLink could lose revenue and customers.The volume of
customer orders for SpectraLinks products typically increases
significantly at the end of each quarter. Generally, sales in a given
quarter are distributed approximately as follows: 15% in the first
month, 25% in the second month, and 60% in the third month.
SpectraLink faces significant challenges in meeting this demand. It
is difficult to ensure that SpectraLink has 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. SpectraLink may not have
the personnel and/or systems necessary to fulfill the large order
volume or the ability to upgrade and develop its systems and
infrastructure to meet an increased order volume. If SpectraLink is
unable to meet demand from its customer for its products in a cost
effective manner, then SpectraLink might lose revenue and customers or
incur increased operating costs, either of which would harm
SpectraLinks business. Many of the orders for SpectraLinks products are realized at the
end of the quarter, which makes it difficult to estimate or adjust
SpectraLinks operating activities quickly in response to an
unexpected increase or decrease in customer demand.Due to the timing
of orders from customers, SpectraLink has often recognized a
substantial portion of its revenue in the last month of a quarter. As
a result, minor fluctuations in the timing of orders and the shipment
of products may, in the future, cause operating results to vary
significantly from quarter to quarter. The demand for SpectraLinks
products depends upon many factors and is difficult to forecast.
Significant unanticipated fluctuations in demand could cause problems
in SpectraLinks operations. The lead-time required to assemble
SpectraLinks systems is often longer than the lead-time SpectraLinks
customers provide to SpectraLink for delivery of their product
requirements. Therefore, SpectraLink often must place orders in
advance of expected purchase orders from SpectraLinks customers. As
a result, SpectraLink has only a limited ability to react to
fluctuations in demand for its products, which could cause it to have
either too much or too little inventory of a particular product.
Further, the business relationship which SpectraLink has with Offshore
Group to use a Mexico facility to assemble SpectraLinks products may
not be able to provide product in a timely manner. Additionally, once
SpectraLink receives an order, it requires sufficient time to complete
the configuration of its product to the phone systems of the customer.
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Spectralinks inability to satisfy customer demand in a timely manner
would lead to lost sales and impede SpectraLinks ability to increase
its revenue. Conversely, a large portion of SpectraLinks expenses,
including rent and salaries, is fixed and difficult to reduce.
SpectraLinks expenses are based in part on expectations for its
revenue. If SpectraLinks revenue does not meet its expectations, the
adverse effect of the revenue shortfall upon SpectraLinks operating
results may be acute in light of the fixed nature of its expenses. It
is possible that due to fluctuations in revenue, SpectraLinks operating
results could be below the expectations of securities analysts and
investors. For instance, SpectraLinks stock price declined
substantially after its preliminary announcement of its fourth quarter
2001 financial results reported in January 2002. In such an event, or
in the event that adverse market conditions prevail or are perceived to
prevail either generally or with respect to SpectraLinks business, the
price of SpectraLinks common stock would likely decline further. SpectraLinks reliance on sole or limited sources of supply for
many components and equipment used in its manufacturing process.
SpectraLink relies on sole or limited sources of supply for many
components and equipment used in its manufacturing process. The
delay, inability, or refusal of any of these suppliers to ship these
components or equipment could interrupt SpectraLinks 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 SpectraLink from decreasing its 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 the financial
performance of SpectraLink. Because many of SpectraLinks 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 SpectraLinks business,
operating results or financial condition.Many of SpectraLinks
complex products can only be fully tested when deployed in commercial
networks. As a result, end-users may discover defects or errors or
experience breakdowns in their networks after the products have been
deployed. If any of these products contains defects, or has
reliability, quality or compatibility problems, SpectraLinks
reputation might be damaged significantly and customers might be
reluctant to buy SpectraLink products. These defects could interrupt
or delay sales. SpectraLink may have to invest significant capital
and other resources to correct these problems. If SpectraLink fails to
provide solutions to the problems, it will also incur product recall,
repair, warranty or replacement costs. These problems might also
result in claims against SpectraLink by its 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
SpectraLinks estimates; diversion of resources, and; increased
insurance costs and other losses to SpectraLinks business or to
end-users. If SpectraLink experiences warranty failure that indicates either
manufacturing or design deficiencies, SpectraLink 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 warranty failures, SpectraLinks business could be
adversely affected resulting in reduced revenue, increased costs and
decreased customer satisfaction. End-users have discovered errors in
SpectraLinks products in the past and may discover errors in
SpectraLinks products in the future. In addition, if SpectraLinks
costs of remediating problems experienced by SpectraLinks customers
exceed SpectraLinks warranty reserves, these costs may adversely
affect SpectraLinks operating results. Consequently, SpectraLinks
warranty failure could have a material adverse impact on SpectraLinks
operations and financial results. SpectraLinks ability to attract and retain personnel, including
key technical and management personnel.Much of the future success of
SpectraLink depends on the continued service and availability of
skilled personnel, including technical, marketing and staff positions.
Experienced personnel in the information technology industry are in
high demand and competition for their talents is intense. There can
be no assurance that SpectraLink will be able to successfully retain
and attract the key personnel it needs. Many of SpectraLinks key
personnel receive a total compensation package that includes stock
options and other equity awards. New regulations, volatility in the
stock market and other factors could diminish the value of
SpectraLinks equity awards, putting SpectraLink at a competitive
disadvantage or forcing SpectraLink to use more cash compensation.
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 The risk of business interruption arising from SpectraLinks
dependence on its manufacturing facility located in Boulder, Colorado,
and the business relationship SpectraLink has with Offshore Group to
use a facility in Empalme, Sonora, Mexico which provides assembly
services.SpectraLink is highly dependent on its Boulder, Colorado
manufacturing facility, which is home to the majority of SpectraLinks
manufacturing operations. SpectraLink is also highly dependent upon
its business relationship with Offshore Group to provide management
services and a facility located in Empalme, Sonora, Mexico which
assembles SpectraLinks products. Any event that may disrupt or
indefinitely discontinue either of the facilities capacity to
manufacture, assemble and repair SpectraLinks products could greatly
impair SpectraLinks ability to generate revenues, fulfill orders and
attain financial goals. For instance, SpectraLink may experience
delays in the receipt of assembled product from the facility in Mexico
should the border between the U.S. and Mexico close. SpectraLinks 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, SpectraLink 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 quickly enough to
satisfy market demands and without significant product redesign;
    
    develop or obtain access to advanced wireless
networking capabilities as they become available; and
    
    design, develop and introduce competitive new products
on a timely basis.  Due to the competitive nature of SpectraLinks business, any failure
by SpectraLink to meet these challenges could materially and adversely
affect SpectraLinks business, reputation, and operating results.  Potential fluctuations in SpectraLinks future revenues, gross
margins and operating results.SpectraLink has experienced, and may
in the future continue to experience, significant quarterly
fluctuations in revenue, gross margins and operating results due to
numerous factors, some of which are outside SpectraLinks 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, SpectraLinks products;
    
    the timing of and delay of significant orders from customers;
    
    seasonality in demand within SpectraLinks various sectors;
    
    increases in material or labor costs;
    
    excess inventory;
    
    obsolescence charges;
    
    changes in shipment volume;
    
    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 distribution channels including our OEM partners;
    
    increases in warranty costs; and
    
    introducing of new products and costs of entering new markets.  For example, historically SpectraLink has not operated with a
significant order backlog and a substantial portion of SpectraLinks
revenue in any quarter has been derived from orders booked and shipped
in that quarter. Accordingly, SpectraLinks revenue expectations are
based almost entirely on its internal estimates of future demand and not
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in the short-term and are based in large part on these estimates, and if
orders and revenue do not meet expectations, SpectraLinks revenues,
gross margins and operating results could be materially adversely
affected.  The continuing uncertainty about economic prospects in some
sectors of SpectraLinks target customer market, adversely impacts
their information technology spending and SpectraLinks business.
SpectraLinks business has been adversely impacted by the continuing
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 continue to defer, and
in some cases cancel, their purchase decisions. SpectraLinks
operating results have been adversely affected as a result.
SpectraLink expects the economic uncertainty to continue to adversely
impact its business and operating results for at least the next few
quarters and perhaps significantly longer. The adverse impacts from
economic uncertainty include longer sales cycles, lower average
selling prices, fewer large orders from a single customer and reduced
revenues. Changes in rules and regulations of the FCC and other regulatory
agencies.The wireless communications industry, regulated by the
Federal Communications Commission (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,
could significantly impact SpectraLinks operations in the United
States and internationally. The ability of SpectraLink and its current and new distributors
and resellers to develop and execute effective marketing and sales
strategies.SpectraLink offers its products directly and indirectly
through a variety of third-party business partners, including
distributors and resellers. Changes in the financial or business
condition of these distributors and resellers, in addition to the
ability to develop and execute effective marketing and sales
strategies, could subject SpectraLink to lost sales and affect its
ability to bring its products to market. For instance, SpectraLink
experienced a decrease in sales by distributors during the second
quarter of 2002 when those distributors downsized their businesses in
reaction to the economic slowdown and, as a result, had fewer sales
representatives marketing SpectraLink products. SpectraLinks revenue and earnings are highly seasonal.
Seasonality and other factors cause significant quarterly fluctuations
in SpectraLinks revenue and net income.SpectraLinks business is
highly seasonal. This causes significant quarterly fluctuations in
SpectraLinks 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. A lower than anticipated rate of acceptance of domestic and
international markets using the 802.11b standard.SpectraLinks
NetLink Wireless Telephones are compatible with the IEEE 802.11b
standard for use on 802.11b compliant wireless LANs. Consequently,
demand for NetLink Wireless Telephones depends upon the acceptance of
markets utilizing 802.11b compliant networks. This depends in part
upon the initial adoption of the 802.11b 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 802.11b 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 SpectraLink products until
wireless systems are developed which provide for greater security.
Further, SpectraLinks products may not be compatible with secure
wireless systems that may be developed in the future. If markets
utilizing 802.11b compliant networks do not grow as SpectraLink
anticipates, SpectraLinks growth would be impeded and it would not be
able to factor the related revenues into its growth in the future. The market for on-premises wireless telephone systems may fail to
grow or to grow as quickly as SpectraLink anticipates.SpectraLink
derives its revenue principally from the sale of wireless, on-premises
telephone systems and related installation and other services relating
to those systems. Therefore, SpectraLinks future operating results
depend on the demand for those types of services. If this market does
not grow or grow quickly, SpectraLinks future results of operations
would be significantly harmed.
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 SpectraLinks reliance on a limited number of significant
customers.A portion of SpectraLinks revenue has been derived from a
limited number of customers. Sales to one customer represented
approximately 10.8% of SpectraLinks revenue during the three months
ended March 31, 2004. SpectraLink also has experienced
quarter-to-quarter variability in sales to each of its major customers
and expects this pattern to continue in the future. SpectraLink might not be able to execute on its business plan if
it loses key management or technical personnel, on whose knowledge,
leadership and technical expertise it relies, or if new members of
SpectraLinks management team fail to work effectively together.
SpectraLinks success depends heavily upon the contributions of its
key management and technical personnel, whose knowledge, leadership
and technical expertise would be difficult to replace. Many of these
individuals have been with SpectraLink for several years and have
developed specialized knowledge and skills relating to its technology
and business. Others have been promoted within, or have newly joined,
senior management roles only recently. For example, in September 2003,
John Elms, SpectraLinks Vice President of Operations, was promoted to
President and Chief Executive Officer, while Bruce Holland, the former
President and Chief Executive Officer, continued with SpectraLink as
Chairman of the Board until he resigned from the Board in March 2004.
Additionally, in October 2003, SpectraLink hired John Kelley as Vice
President of Operations. In February 2004, Michael Cronin,
SpectraLinks Vice President of Sales and Marketing decided to resign
his positions of Vice President of Sales and Marketing and Corporate
Officer effective April 1, 2004, although he has agreed to remain an
employee of SpectraLink to assist with the transition through June 30,
2004. In April 2004, Nancy Hamilton, SpectraLinks Vice President of
Finance and Administration and Chief Financial Officer, decided to
resign her positions as Vice President of Finance and Administration
and Chief Financial Officer and Corporate Officer effective April 20,
2004, although she has agreed to remain an employee of SpectraLink to
assist with the transition through July 20, 2004. Additionally, in
April 2004, SpectraLink hired David Rosenthal as Vice President of
Finance and Administration, Chief Financial Officer, and Corporate
Secretary. SpectraLink further announced that Jill Kenney accepted
the position of Vice President of Sales and Marketing effective May
17, 2004. SpectraLinks success depends in part upon the ability of
new executives to work effectively together and with the rest of
SpectraLinks employees to continue to develop its technology and
manage the operation and growth of SpectraLinks business. All of
SpectraLinks executive officers and key personnel are employees at
will. SpectraLink has no employment contracts and does not maintain
key person insurance on any of its personnel. SpectraLink might not be
able to execute on its business plan if it were to lose the services
of any of its key personnel. If any of these individuals were to leave
SpectraLink unexpectedly, SpectraLink 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. SpectraLinks reliance on its 802.11b technology partners to
continue to provide the wireless local area network for SpectraLinks
NetLink product, and to provide access points which support
SpectraLink Voice Priority.In the absences of a wireless voice
prioritization standard, SpectraLink relies on 802.11b technology
partners, such as Proxim, Symbol Technologies, and Cisco Systems to
continue to provide wireless local area network support for
SpectraLinks NetLink product and to provide access points that
support SpectraLink Voice Priority. If any of SpectraLinks
technology partners fails to provide voice prioritization support for
SpectraLinks products, the market opportunity for NetLink products
would be reduced and SpectraLinks future results of operations would
be materially harmed until SpectraLink finds new 802.11b technology
partners or voice prioritization standards are adopted. The ability of SpectraLink to develop and introduce new products
and transition existing products.SpectraLinks development efforts
may not lead to the successful introduction of new or improved
products. SpectraLink may encounter delays in deploying new or
improved products. For instance, SpectraLinks new products may not
properly function with its customers existing telephone systems or
SpectraLinks new products may contain defects or bugs. These
incompatibilities, defects or bugs may not be detected until
SpectraLinks customers begin to install the products or thereafter.
SpectraLink may need to modify the design of its new or improved
products if they have incompatibilities, defects or bugs, which could
result in significant expenditures by SpectraLink as it seeks to
remedy the problems, delays in the purchase of the products or
cancelled orders. SpectraLink 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
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delayed during the product transition,
SpectraLink may experience a decline in revenue and have excess
inventory on hand which could decrease gross profit margins.
SpectraLinks 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 SpectraLinks
business, operating results or financial condition. SpectraLinks ability to manage potential expansion of operations
in the U.S. and internationally.SpectraLink intends to expand its
existing domestic and international operations and to enter new
markets. This expansion will require significant management attention
and financial resources. SpectraLink currently has limited experience
in marketing and distributing its products internationally and in
developing versions of products that comply with local standards.
SpectraLink may also not be able to maintain or increase international
market demand for its 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. SpectraLink faces 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 SpectraLinks 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
SpectraLinks competitors have significantly greater financial,
technical, research and development, and marketing resources than
SpectraLink. As a result, SpectraLinks 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 SpectraLink.
Enterprise adoption of standards for wireless LAN and voice over IP
may lead to the commoditization of wireless telephone technology and
the availability of low-cost alternative products. In addition, some
purchasers may prefer to buy their wireless telephone systems from a
single source provider of telephone systems, such as Alcatel or Cisco
Systems, both of which manufacture and sell enterprise telephone
systems. 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 or Symbol Technologies, both
of which provide 802.11 wireless infrastructure and wireless
telephones. Because SpectraLink focuses on wireless on-premises
telephone communications, it cannot serve as the sole source for a
complete telephone or data communications system. There is no
assurance that SpectraLink 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 a
SpectraLink 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 a SpectraLink Wireless Telephone System. The certification and approval process for SpectraLinks NetLink
product for use in countries that support the 802.11b standard.
Foreign countries which support the 802.11b standard could provide
future markets for the NetLink products. However, countries
certification and approval processes for 802.11b compatible products,
such as those of SpectraLink, are typically time consuming and costly.
If SpectraLink has difficulty obtaining certification and approval by
foreign countries for its NetLink product, then SpectraLink 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
SpectraLinks business. SpectraLinks ability to protect its intellectual property
rights.SpectraLinks future success depends, in part, upon its
proprietary technology. SpectraLink relies on a combination of
patent, copyright, trade secret and trademark laws, confidentiality
procedures, and nondisclosure and other contractual provisions to
protect its proprietary rights. These legal protections provide only
limited protection and may be time consuming and expensive to obtain
and enforce. There can be no assurance that SpectraLinks issued
patents will not be challenged or circumvented by competitors or
provide meaningful protection against competition. If challenged,
SpectraLinks patents might not be upheld or their claims could be
narrowed. If SpectraLink fails to protect its proprietary rights
adequately, SpectraLinks competitors might gain access to
SpectraLinks technology. As a result, SpectraLinks competitors might
offer similar products and
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SpectraLink might not be able to compete
successfully in its market. Moreover, despite SpectraLinks efforts to
protect its proprietary rights, unauthorized parties may copy aspects of
SpectraLinks products and obtain and use information that SpectraLink
regards as proprietary. Also, SpectraLinks competitors may
independently develop similar, but not infringing, technology, duplicate
SpectraLinks products, or design around SpectraLinks patents or its
other intellectual property. In addition, other parties may breach
confidentiality agreements or other protective contracts with
SpectraLink, and SpectraLink may not be able to enforce its rights in
the event of these breaches. Furthermore, SpectraLink expects that it
will increase its international operations in the future, and the laws
of many foreign countries do not protect SpectraLinks intellectual
property rights to the same extent as the laws of the United States.
SpectraLink may be required to spend significant resources to monitor
and protect its intellectual property rights. Any litigation
surrounding SpectraLinks rights could force SpectraLink to divert
important financial and other resources from its business operations. The assertion of intellectual property infringement claims
against SpectraLink.SpectraLinks 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.
SpectraLink cannot be certain that its products do not and will not
infringe upon issued patents, patents to be issued in the future, or
other intellectual property rights of others. SpectraLink may in the
future be notified that it is infringing upon certain patent and/or
other intellectual property rights of others. Although there are no
such pending lawsuits against SpectraLink that
SpectraLink is 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 SpectraLink.
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 SpectraLinks intellectual
property rights, or to protect SpectraLinks trade secrets.
SpectraLink may also be subject to claims from customers for
indemnification. Any resulting litigation, regardless of its
resolution, could result in substantial costs and diversion of
resources. If it were determined that SpectraLinks products infringe
upon the intellectual property rights of others, SpectraLink would
need to obtain licenses from these parties or reengineer its products
in order to avoid infringement. SpectraLink might not be able to
obtain the necessary licenses on acceptable terms or at all, or to
reengineer its products successfully. Moreover, if SpectraLink is
sued for infringement and loses the suit, it 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
SpectraLink to incur significant costs and prevent it from selling its
products. Recently enacted and proposed changes in securities laws and
regulations are likely to increase SpectraLinks costs.The
Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as
new rules subsequently implemented by the SEC, requires changes in
some of SpectraLinks corporate governance, public disclosure and
compliance practices. The Act also requires the SEC to implement
additional new rules on a variety of subjects. In addition to final
rules and rule proposals already made by the SEC, the Nasdaq National
Market has adopted revisions to its requirements for companies, such
as SpectraLink, that are Nasdaq-listed. These developments have
increased SpectraLinks legal and financial compliance costs, and make
some activities, like SEC reporting obligations, more difficult. In
addition, SpectraLink expects these developments to make it more
difficult and more expensive for SpectraLink to obtain director and
officer liability insurance, and SpectraLink may be required to accept
reduced coverage or incur substantially higher costs to obtain
coverage. These developments could make it more difficult for
SpectraLink to attract and retain qualified members of SpectraLinks
board of directors, particularly to serve on SpectraLinks audit
committee, and qualified executive officers. SpectraLink is presently
evaluating and monitoring regulatory developments and cannot estimate
the timing or magnitude of additional costs SpectraLink may incur as a
result. SpectraLinks reported financial results may be adversely
affected by changes in accounting principles generally accepted in the
United States.Generally accepted accounting principles in the United
States are subject to issuance and interpretation by the Financial
Accounting Standards Board, or FASB, the American Institute of
Certified Public Accountants, the Securities and Exchange Commission,
(SEC), and various bodies formed to promulgate and interpret
appropriate accounting principles. A change in these principles or
interpretations could have a significant effect on SpectraLinks
reported financial results, and could affect the reporting of
transactions completed before the announcement of a change. For
example, SpectraLink currently is not required to record stock-based
compensation charges if the employees stock option exercise price is
equal to or exceeds the deemed fair value of
SpectraLinks common stock at the date of grant. However, several
companies have recently elected to
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change their accounting policies and
begun to record the fair value of stock options as an expense. Although
the standards have not been finalized and the timing of a final
statement has not been established, FASB published in March 2004 an
exposure draft that would require SpectraLink to record expense for the
fair value of stock options granted. SpectraLinks reported earnings
would be harmed if SpectraLink were required to change its accounting
policy in accordance with the fair-value based concepts of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensationand SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. The historic volatility of SpectraLinks stock price, which may
make it more difficult to resell shares at prices attractive to
sellers.The market price of SpectraLinks common stock has been
volatile and is likely to remain subject to wide fluctuations in the
future. For example, during the 12-month period ended March 31, 2004,
the closing price of SpectraLinks common stock has ranged from a high
of $24.80 per share to a low of $6.40 per share. Many factors could
cause the market price of SpectraLinks common stock to fluctuate,
including:
  
    
    variations in SpectraLinks actual or anticipated
quarterly or annual results;
    
    market conditions in SpectraLinks industry, the
industries of SpectraLinks customers and the economy as a whole;
    
    announcements of technological innovations by
SpectraLink or by its competitors;
    
    introduction of new products or product enhancements or
new pricing policies by SpectraLink or by its competitors;
    
    acquisitions or strategic alliances by SpectraLink or by its 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 SpectraLink;
    
    the gain or loss of significant customers; and
    
    changes in the estimates of SpectraLinks 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 SpectraLinks common stock to fall for reasons not
necessarily related to SpectraLinks business, results of operations or
financial condition. The market price of SpectraLinks stock also might
decline in reaction to events that affect other companies in SpectraLinks
industry even if these events do not directly affect SpectraLink.
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 SpectraLink has previously been sued in
several purported securities class action lawsuits. Further, certain of
SpectraLinks management and directors were also sued in purported
shareholder derivative actions. Although SpectraLink believes that the
lawsuits lack merit, due to inherent uncertainties in litigation,
SpectraLink cannot accurately predict the outcome of this litigation. An
adverse determination could have a significant effect upon SpectraLinks
business and materially affect the price of its stock. Moreover,
regardless of the ultimate result, it is likely that the lawsuits will
require SpectraLink to incur expenses and divert managements attention and
resources from other matters, which could also adversely affect
SpectraLinks business and the price of its
stock. 
 Item 4. 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. SpectraLinks Chief Executive Officer and Chief Financial Officer, based
on their evaluation of SpectraLinks disclosure controls and procedures as of
the end of the period covered by this report (the Evaluation Date), concluded
that SpectraLinks disclosure controls and procedures were effective as of the
Evaluation Date for this purpose. Changes in Internal Controls over Financial Reporting.Regulations under
the Securities Exchange Act of 1934 require public companies to evaluate any
change in SpectraLinks internal control over financial reporting, which is
defined as a process to provide reasonable assurance regarding the reliability
of financial reporting and 26




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preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States. In connection with their evaluation of SpectraLinks disclosure
controls and procedures as of the end of the period covered by this report,
SpectraLinks Chief Executive Officer and Chief Financial Officer did not
identify any change in SpectraLinks internal control over financial reporting
during the three-month period ended March 31, 2004 that materially affected, or
is reasonably likely to materially affect, SpectraLinks internal control over
financial reporting. 
 Part II            Other Information 
 Item 1 Legal Proceedings On January 14, 2002, SpectraLink issued a press release announcing preliminary
financial results for the fourth quarter of 2001 and revising downward its
estimates for year 2002 results of operations. Shortly after the press
release, the Companys stock price declined and the Company and certain of its
officers and directors were named as defendants in four lawsuits filed between
February 7, 2002 and March 6, 2002, three of which were filed in the United
States District Court for the District of Colorado and one of which was filed
in the Colorado District Court for the City and County of Denver. In each of
the lawsuits, plaintiffs, who purport to be purchasers or holders of
SpectraLink common stock, initially sought to assert claims either on behalf of
a class of persons who purchased securities in SpectraLink between July 19,
2001 and January 11, 2002, or in the case of two of the lawsuits (one filed in
the United States District Court and one in the Colorado District Court),
derivatively on behalf of SpectraLink. Two of the lawsuits filed in the United
States District contained essentially identical claims alleging that
SpectraLink and certain of its officers and directors violated Sections 10(b)
and 20(a) and Rule 10b-5 under the Securities Exchange Act of 1934, as a result
of alleged public misstatements and omissions, accompanied by insider stock
sales made in the months prior to the decline in the price of SpectraLinks
stock after the January 14, 2002 press release. In the cases brought as
derivative actions, the plaintiffs allege that the officers and directors of
SpectraLink violated fiduciary duties owed to SpectraLink and its stockholders
under state laws by allowing and/or facilitating the issuance of these same
alleged public misstatements and omissions, misappropriating nonpublic
information for their own benefit, making insider stock sales, wasting
corporate assets, abusing their positions of control, and mismanaging the
corporation. The plaintiffs in these derivative cases allege that SpectraLink
has and will continue to suffer injury as a result of these alleged violations
of duty for which the officers and directors should be liable. The cases are designated as follows: Wilmer Kerns, Individually And On Behalf
of All Others Similarly Situated, Plaintiff, vs. SpectraLink Corporation, Bruce
Holland and Nancy K. Hamilton, Defendants (United States District Court Civil
Action Number 02-D-0263); Danilo Martin Molieri, Individually and On Behalf of
All Others Similarly Situated, Plaintiff, v. SpectraLink Corporation, Bruce
Holland and Nancy K. Hamilton, Defendants (United States District Court Civil
Action Number 02-D-0315); Evie Elennis, derivatively on behalf of SpectraLink
Corporation, Plaintiff(s), v. Bruce M. Holland, Anthony V. Carollo, Jr., Gary
L. Bliss, Michael P. Cronin, Nancy K. Hamilton and John H. Elms, Defendants),
and SpectraLink Corporation, Nominal Defendant (United States District Court
Civil Action Number 02-D-0345); and Roger Humphreys, Derivatively on Behalf of
Nominal Defendant SpectraLink Corporation, Plaintiff, v. Carl D. Carman,
Anthony V. Carollo, Jr., Bruce M. Holland, Burton J. McMurtry, Gary L. Bliss,
Michael P. Cronin, John H. Elms, and Nancy K. Hamilton, Defendants (Colorado
District Court Case. No. 02CV1687). The Kerns and Molieri purported class actions were consolidated, and the
plaintiffs filed a Consolidated Amended Complaint in these Consolidated
Actions. In January of 2003, the Court denied a motion to dismiss that amended
pleading, and discovery commenced. The Court has certified a class of all
purchasers of publicly traded common stock of SpectraLink from April 19, 2001
through January 11, 2002, inclusive. On November 26, 2003, the Lead Plaintiffs
in these Consolidated Actions moved the court for permission to file a second
consolidated amended class action, which would have deleted certain of the
original claims, would have extended the class period so that it would commence
on February 1, 2001 instead of April 19, 2001, and would have added more detail
on claims relating to alleged improper revenue recognition. The Company filed
an opposition to that motion. On March 5, 2004, the Magistrate Judge entered
his Order denying plaintiffs motions, and plaintiffs have appealed that
decision to the district court On April 16, 2004, the parties to these Consolidated Actions held a mediation
in San Francisco. The parties entered into a Memorandum of Understanding
settling the case for $1.5 million, subject to certain terms and conditions,
including approval by the court. The settlement will be paid from insurance
proceeds. The two derivative actions were stayed pending resolution of the motion to
dismiss in the consolidated class action, and plaintiffs counsel in the
Elennis derivative action filed an unopposed motion for relief from the stay
and filed an 27




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amended complaint and then a corrected amended complaint. Prior
to the entry of the stays in each of the derivative cases, the defendants had
filed motions to dismiss. In August of 2003, Defendants moved to dismiss the
amended and corrected Elennis complaint. The Court denied that motion on March
22, 2004. No discovery has been conducted in either of the derivative actions.
The Company expects to engage in settlement discussions with the derivative
plaintiffs in light of the settlement of the Consolidated Actions. SpectraLink believes that the lawsuits are without merit and it intends to
vigorously defend itself and its officers and directors if the two derivative
cases are not settled in light of the settlement of the Consolidated Actions,
and/or if the settlement of the Consolidated Actions is not approved by the
court. SpectraLink does not believe that its interests and that of the named
officers and directors are adverse to each other as of this time. However, no
assurance can be given that SpectraLink will be successful in defending the
claims being asserted in these suits, or that the interests of the various
parties will remain aligned. If SpectraLink is not successful in its defense
of these suits, it could be required to make significant payments to its
stockholders and their lawyers, which could have a material adverse effect on
SpectraLinks business, financial condition and results of operations. In
addition, the litigation could result in substantial costs, divert managements
attention and resources, or ultimately result in the interests of SpectraLink
becoming adverse to those of certain of its officers and directors. In either
case, SpectraLinks business could be adversely affected, even if the
plaintiffs are not successful in their claims against SpectraLink and/or its
officers and directors. The Company has incurred a loss related to the directors and officers
insurance deductible of which the majority of the expense was reflected in
2002. As noted, the settlement of the Consolidated Actions will be funded by
insurance proceeds. Based on current facts and circumstances, the Company is
unable to estimate future losses, if any, it may incur if the cases are not
settled, after considering the amounts that will be covered by insurance. SpectraLink is not presently a party to any other material pending legal
proceedings of which it is aware. 
 Item 6 Exhibits and Reports on Form 8-K 
 (a) Exhibits The following exhibits are filed herewith: Exhibit Number
    
    Exhibit Title31.1 
    
    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 David I. Rosenthal 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 David I. Rosenthal pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
   
    
    Filed herewith.  *
    
    In accordance with SEC Release No. 33-8238, these exhibits are furnished
with this quarterly report on Form 10-Q and are not deemed filed with the
Securities and Exchange Commission and are not incorporated by reference in
any filing of SpectraLink Corporation under the Securities Act of 1933 or
the Securities Exchange Act of 1934, whether made before or after the date
hereof and irrespective of any general incorporation language in any
filings.  Exhibits filed with SpectraLinks 2003 Form 10-K constitute those
exhibits currently required to be on file. The reader should refer to the
2003 Form 10-K under Part III, Item 15, for a list of those exhibits. 
 (b) Reports on Form 8-K  SpectraLink filed four Current Reports on Form 8-K during the fiscal
quarter ended March 31, 2004. The first Form 8-K, filed February 2, 2004,
reported information under Item 5 Other Events and established a
Rule 10b-5 plan for John H. Elms which will allow Mr. Elms to sell up to
255,000 shares of SpectraLink stock options in monthly increments over a
three year period ending on February 2, 2007.The second Form 8-K, filed February 4, 2004, reported information under
Items 7 Financial Statements and Exhibits, that was intended to be
furnished under Item 12. Results of Operations and Financial Condition in 28




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accordance with SEC Release No. 33-8216. This filing included SpectraLinks
earnings press release for the year and quarter ended December 31, 2003, and
the script used by SpectraLink executives on the conference call explaining
the results. The information furnished under that Form 8-K was intended to
be furnished and not deemed filed with the Securities and Exchange
Commission, and is not incorporated by reference in any filing of
SpectraLink under the Securities Act of 1933 or the Securities Exchange Act
of 1934, including this quarterly report, whether made before or after the
date of that Form 8-K and irrespective of any general incorporation language
in any filings.The third Form 8-K, filed February 11, 2004, reported information under Item
5 Other Events concerning the announcement that: Michael Cronin, Vice
President of Sales and Marketing of SpectraLink since 1997 and a corporate
officer, will resign his positions to retire effective April 1, 2004. Mr.
Cronin will remain an employee of the Company to assist with the transition
through June 30, 2004.The fourth Form 8-K, filed March 10, 2004, reported information under Item 5
Other Events concerning the announcement that: Bruce Holland, Chairman of
the Board of Directors, ended his employment relationship with the Company
effective March 9, 2004. Mr. Holland is replaced on the Board by Werner
Schmuecking. Mr. Schmuecking recently retired from Siemens, where he had
held several senior executive roles. Mr. Schmuecking currently serves on
several public and private boards of directors in Europe and the United
States. 29




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SPECTRALINK CORPORATION 
 SIGNATURES
 In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized. SPECTRALINK CORPORATIONDate: May 10, 2004By: /s/ DAVID I. ROSENTHALDavid I. Rosenthal,Vice President of Finance and Administrationand Chief Financial Officer(Principal Financial and AccountingOfficer and on behalf of the Registrant)
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EXHIBIT INDEX Exhibit Number
    
    Exhibit Title31.1 
    
    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 David I. Rosenthal 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 David I. Rosenthal pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
  
    
    Filed herewith. * In accordance with SEC Release No. 33-8238, these exhibits are furnished
with this quarterly report on Form 10-Q and are not deemed filed with the
Securities and Exchange Commission and are not incorporated by reference in any
filing of SpectraLink Corporation under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after the date hereof
and irrespective of any general incorporation language in any filings. 31