U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT
For the transition period from ______________ to ______________
Commission File No. 0-28138
SPANLINK COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1618845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Main Street S. E., Minneapolis, MN
(Address of principal executive offices)
(612) 362-8000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes __X__ No _____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date.
At November 7, 1996, there were 5,080,500 shares of the issuer's no par value,
Common Stock, outstanding.
Check whether this is a transitional small business disclosure format:
Yes _____ No __X__
SPANLINK COMMUNICATIONS, INC.
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheet as of 3
September 30, 1996 and December 31, 1995
Condensed Statement of Operations 4
for the three and nine month periods
ended September 30, 1996 and 1995
Condensed Statement of Cash Flows 5
for the nine month periods ended
September 30, 1996 and 1995
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis 7
of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION 8
SIGNATURES 9
<TABLE>
<CAPTION>
SPANLINK COMMUNICATIONS, INC.
CONDENSED BALANCE SHEET
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 819,655 $ 344,689
Marketable securities 4,566,582
Accounts receivable, net of allowance for
doubtful accounts 866,131 568,113
Costs and estimated earnings in excess of billings 49,117 137,355
Accrued royalty revenue 186,500 184,000
Other current assets 206,104 142,604
---------- ----------
Total current assets 6,694,089 1,376,761
Property and equipment, net 698,471 223,302
---------- ----------
Total assets $7,392,560 $1,600,063
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable - bank $ 230,531
Note payable - other 343,683
Accounts payable $ 413,273 208,177
Accrued expenses 408,771 302,479
Accrued income taxes 67,131
Deferred revenue 425,508 361,024
Other current liabilities 116,498 266,020
---------- ----------
Total current liabilities 1,364,050 1,779,045
---------- ----------
Shareholders' equity (deficit):
Preferred stock; undesignated par value; 5,000,000
shares authorized; none issued or outstanding
Common stock; no par value; 25,000,000 shares
authorized; 5,080,500 and 2,700,000 shares
issued and outstanding, respectively at September
30, 1996 and December 31, 1995 8,193,663 3,000
Accumulated deficit (2,165,153) (181,982)
---------- ----------
Total shareholders' equity (deficit) 6,028,510 (178,982)
---------- ----------
Total liabilities and shareholders' equity (deficit) $7,392,560 $1,600,063
========== ==========
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
SPANLINK COMMUNICATIONS, INC.
CONDENSED STATEMENT OF OPERATIONS
For the Three months and Nine months ended
September 30
(Unaudited)
Three Months Nine Months
------------ -----------
% %
1996 1995 Change 1996 1995 Change
---------- ---------- ------ ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 1,341,090 $ 1,146,414 17.0 $ 3,420,800 $ 3,175,421 7.7
Cost of Revenue 507,452 386,274 31.4 1,389,083 1,211,026 14.7
----------- ----------- ----- ----------- ----------- -----
Gross Profit 833,638 760,140 9.7 2,031,717 1,964,395 3.4
Gross profit as a percentage of 62.2% 66.3% 59.4% 61.9%
revenues
Operating expenses:
Sales, general and
administrative 1,385,095 510,633 171.2 3,531,912 1,547,742 128.2
Research and product development 314,190 54,889 472.4 569,201 171,830 231.3
----------- ----------- ----- ---------- ----------- -----
1,699,285 565,522 200.5 4,101,113 1,719,572 138.5
----------- ----------- ---------- ----------- -----
(Loss) income from operations (865,647) 194,618 -- (2,069,396) 244,823 --
Interest income (expense) 78,665 (13,050) 86,225 (31,013)
----------- ----------- ---------- -----------
(Loss) income before income (786,982) 181,568 -- (1,983,171) 213,810 --
taxes
Provision (benefit) for income taxes 0 69,057 -- 0 10,238 --
----------- ----------- ---------- -----------
Net (loss) income $ (786,982) $ 112,511 -- $(1,983,171) $ 203,572 --
=========== =========== =========== ===========
Net (loss) income per common share $ (0.15) $ 0.04 -- $ (0.49) $ 0.08 --
Weighted average common shares 5,080,500 2,700,000 4,039,555 2,700,000
Supplementary Data:
Supplementary net loss per
common and
common equivalent shares $ (0.46)
Supplemental weighted average
common and common equivalent shares 4,138,753
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
SPANLINK COMMUNICATIONS, INC.
CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1996 1995
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net (Loss) Income $ (1,983,171) $ 203,572
Reconciliation of net (loss) income to net cash used
by operating activities:
Depreciation and amortization 147,300 65,278
Allowance for doubtful accounts, net of write-offs 30,360
Deferred income taxes (81,216)
Common stock grant recognized as compensation 246,750
Amortization of original issue discount recognized as
interest expense 32,516
Changes in current assets and liabilities (109,421) (486,593)
------------- ----------
Net cash used by operating activities (1,635,666) (298,959)
------------ ----------
Cash flows from investing activities:
Purchases of marketable securities (6,566,582)
Maturities of marketable securities 2,000,000
Additions to property and equipment (594,944) (50,790)
------------ ----------
Net cash used by investing activities (5,161,526) (50,790)
------------ ----------
Cash flows from financing activities:
Dividends paid to shareholders (39,000) (31,761)
Advances on note payable - bank 162,184
Repayments on note payable - bank (230,531) (117,607)
Advances on note payable - other 380,178
Repayments on note payable - other (343,683)
Proceeds from issuance of notes payable - convertible 336,000
Offering costs for notes payable - convertible (52,268)
Proceeds from sale of stock warrants 64,000
Proceeds from sale of common stock, net of issuance costs 7,537,640
------------ ----------
Net cash provided by financing activities 7,272,158 392,994
------------ ----------
Net increase in cash and cash equivalents 474,966 43,245
Cash and cash equivalents at beginning of period 344,689 27,807
------------ ----------
Cash and cash equivalents at end of period $ 819,655 $ 71,052
============ ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 23,465 $ 29,779
============ ==========
Cash paid during the period for income taxes $ 75,000
============
Supplemental disclosure of noncash investing and financing activities:
Conversion of notes payable to common stock, net of
unamortized original issue discount and offering
costs $ 342,273
============
See accompanying notes to financial statements.
</TABLE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1- CONDENSED FINANCIAL STATEMENTS
The unaudited condensed financial information contained in this report
reflects all adjustments (consisting of normal recurring adjustments) considered
necessary, in the opinion of management, for a fair presentation of results of
the interim periods presented of Spanlink Communications, Inc. (the "Company").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the most recent audited financial statements and notes thereto
included in the Company's SB-2 registration statement file no. 333-2022-C, dated
April 29, 1996. The results of operations of the periods ended September 30 are
not necessarily indicative of the results of operations for a full year.
NOTE 2 - USE OF ESTIMATES
The preparation of condensed interim financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 3 - SHAREHOLDERS' EQUITY (DEFICIT)
SUPPLEMENTARY LOSS PER SHARE DATA
Supplementary loss per share data reflects certain adjustments for: (i) the
issuance of 71,420 shares of common stock in connection with the repayment of a
note payable from certain net proceeds received from the Company's IPO that
closed on May 2, 1996; (ii) the conversion of the Bridge Notes originally issued
on February 28, 1996 into 125,000 shares of common stock that occurred in
connection with the IPO; and (iii) the decrease of net loss by $75,655 for the
nine months ended September 30, 1996 for interest expense, amortization of the
Bridge Notes debt issuance costs, and amortization of original issue discount
related to the issuance of the Bridge Notes. These adjustments were made as
though these items had occurred on January 1, 1996 for (i) and February 28, 1996
for (ii).
Common stock equivalents, consisting of shares of common stock which might
be issued upon exercise of stock options and warrants, are not included in
weighted average common shares outstanding in periods where losses are reported
since their inclusion would be anti-dilutive. For purposes of the Company's
recent IPO, loss per common share was calculated pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No.83 ("SAB 83"). SAB 83 requires
the inclusion of certain common stock equivalents in the calculation of weighted
average common shares outstanding even if their inclusion is anti-dilutive.
INITIAL PUBLIC OFFERING
The Company's initial public offering became effective on April 29, 1996.
The offering closed on May 2, 1996 with an issuance of 1,900,000 shares of
common stock and net proceeds of approximately $6,500,000. In addition, the
underwriter exercised in full its over-allotment option to purchase 285,000
shares of common stock , netting the Company an additional $1,037,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
Total revenue increased 17.0% from $1,146,414 for the three month period
ended September 30, 1995 to $1,341,090 for the comparable period in 1996. The
increase was due primarily to a 19% increase in configurable software revenue
and 45% increase in service revenue. Revenue for the nine month period ended
September 30, 1996 increased 7.7% over the comparable period in 1995 due
primarily to a 33.6% increase in configurable software revenue and 31.1%
increase in service revenue offset by a 16.0% decrease in custom software and
hardware revenue.
COST OF REVENUE
Cost of revenue increased 31.4% from $386,274 for the three month period
ended September 30, 1995 to $507,452 for the three month period ended September
30, 1996. The increase was due primarily to labor and materials to support the
higher sales levels as well as a ramp up in operations expenses to support a
projected increase in sales. Cost of revenue increased 14.7% for the nine month
period ended September 30, 1996 versus the comparable period in 1995 due
primarily to the same reason as the three month period.
GROSS PROFIT
Gross profit increased 9.7% to $833,638 for the three month period ended
September 30, 1996. Gross profit as a percentage of total revenue decreased from
66.3% for the three month period ended September 30, 1995 to 62.2% for the three
month period ended September 30, 1996. The decreased gross margin as a
percentage of total revenue was due primarily to a ramp up in operations
expenses to support a projected increase in sales. Gross profit as a percentage
of total revenue decreased to 59.4% for the nine month period ended September
30, 1996 from 61.9 % for the comparable period in 1995. The decrease was due
primarily to the hiring and training of additional personnel in operations.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses increased 171.2% to $1,385,095
for the three month period ended September 30, 1996 from $510,633 for the three
month period ended September 30, 1995. The increase is due primarily to higher
marketing expenditures, increased expenses related to the buildup of the
domestic sales force and increased professional services expenses. Sales,
general and administrative expenses increased 128.2% for the nine month period
in 1996 to $3,531,912 from $1,547,742 for the same period in 1995. The increase
is due primarily to $246,750 of noncash expense associated with the granting of
67,500 and 3,000 shares of common stock to the Company's president and outside
board of directors, respectively, at $3.50 per share on February 28, 1996;
increased marketing expenditures; increased payroll costs for additional sales
and administrative personnel; increased sales expenses; and increased
professional services expenses.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenses increased 472.4% from $54,889 for
the three month period ended September 30, 1995 to $314,190 for the three month
period ended September 30, 1996. The increase is due to the Company's continuing
focus on developing configurable software packages. Research and development
expenses increased 231.3% for the nine month period ended September 30, 1996 to
$569,201 from $171,830 for the comparable period in 1995 due primarily to the
Company's focus on developing configurable software packages. The Company
expects research and product development expenses to continue to increase for
the next several quarters.
INTEREST INCOME / EXPENSE
The Company recorded net interest income of $78,665 for the three month
period ended September 30, 1996 versus net interest expense of $13,050 for the
comparable period in 1995. The interest income resulted from investment of the
cash proceeds from the public offering completed in the second quarter. Net
interest income for the nine month period ended September 30, 1996 was $86,225
versus net interest expense of $31,013 for the comparable period in 1995.
Interest income from investment of the cash proceeds from the Company's public
offering more than offset interest expense on the convertible notes payable, the
amortization of the convertible notes payable's original issue discount charged
to interest expense and interest on a note payable to Arrow Electronics, Inc.,
entered in August 1995.
INCOME TAXES
Prior to January 1, 1995, the Company had elected S corporation status, and
as a result, the Company's earnings were taxed at the shareholder level rather
than the corporate level. On January 1, 1995, effective with becoming a C
corporation, a deferred tax asset of $77,412 was recognized representing the tax
effect of the basis differences of assets and liabilities for financial
reporting and income tax purposes. The Company's effective tax rate for 1995 was
42.6% before the impact of the S corporation to C corporation change. The
Company did not record a tax benefit for the three month period or nine month
period ended September 30, 1996 as the likelihood of realization of the benefit
is presently not likely.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and marketable securities of
$5,386,237 as of September 30, 1996 resulting from the public offering completed
in the second quarter.
On April 29, 1996 the Company's initial public offering became effective,
resulting in approximately $7,537,000 of net proceeds including over-allotment.
The offering closed on May 2, 1996, and the over-allotment approximately one
month later. The Company believes that the net proceeds from its initial public
offering combined with projected operating cash flow will be sufficient to fund
its operations and capital expenditures through 1997.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
All statements contained herein that are not historical facts are based on
current expectations. These statements are forward looking in nature and involve
a number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause actual results to differ materially are the
following: the availability of sufficient capital to finance the Company's
business plan on terms satisfactory to the Company; competitive factors, such as
the introduction of new products in the same markets; changes in operating costs
including labor and general business and economic conditions; and other risk
factors described from time to time in the Company's reports filed with the
Securities and Exchange Commission. The Company wishes to caution readers not to
place undue reliance on any such forward looking statements, which statements
are made pursuant to the Private Securities Litigation Reform Act of 1995, and
as such, speak only as of the date made.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(i) Those exhibits required to be furnished in
response to this item, other than Exhibit
27, were furnished in connection with the
Company's Registration Statement on Form
SB-2, File No. 333-2022C, as filed with the
Securities Exchange Commission on March
5, 1996, and as amended by Amendment No. 1
thereto filed on April 16, 1996, and
Amendment No. 2 thereto filed April 29,
1996, all of which are incorporated herein
by reference.
(ii) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
SPANLINK COMMUNICATIONS, INC.
(Registrant)
Date: November 13, 1996 /s/ Brett A. Shockley
-------------------------------------------
Brett A. Shockley
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1996 /s/ Patrick P. Irestone
-------------------------------------------
Patrick P. Irestone
President and Chief Operating Officer
Date: November 13, 1996 /s/ Brian P. King
-------------------------------------------
Brian P. King
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 819,655
<SECURITIES> 4,566,582
<RECEIVABLES> 918,131
<ALLOWANCES> 52,000
<INVENTORY> 73,739
<CURRENT-ASSETS> 6,694,089
<PP&E> 7,078,801
<DEPRECIATION> 384,712
<TOTAL-ASSETS> 7,392,560
<CURRENT-LIABILITIES> 1,364,050
<BONDS> 0
0
0
<COMMON> 8,193,663
<OTHER-SE> (2,165,153)
<TOTAL-LIABILITY-AND-EQUITY> 7,392,560
<SALES> 3,420,800
<TOTAL-REVENUES> 3,420,800
<CGS> 1,389,083
<TOTAL-COSTS> 1,389,083
<OTHER-EXPENSES> 4,101,113
<LOSS-PROVISION> 45,000
<INTEREST-EXPENSE> 52,429
<INCOME-PRETAX> (1,983,171)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,983,171)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,983,171)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
