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 March 31, 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 June 3, 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
March 31, 1996 and December 31, 1995
Condensed Statement of Operations 4
for the three month periods ended
March 31, 1996 and 1995
Condensed Statement of Cash Flows 6
for the three month periods ended
March 31, 1996 and 1995
Notes to Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION 11
SIGNATURES 13
SPANLINK COMMUNICATIONS, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 270,477 $ 344,689
Accounts receivable, net of allowance for
doubtful accounts 382,877 568,113
Costs and estimated earnings in excess of billings 148,887 137,355
Accrued royalty revenue 180,000 184,000
Other current assets 313,747 142,604
----------- -----------
Total current assets 1,295,988 1,376,761
Property and equipment, net 296,368 223,302
----------- -----------
Total assets $ 1,592,356 $ 1,600,063
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Note payable - bank $ 230,531
Note payable - other $ 245,685 343,683
Notes payable - convertible, net of original issue
discount 352,000
Accounts payable 355,960 208,177
Accrued expenses 309,715 302,479
Accrued income taxes 67,131
Other current liabilities 774,440 627,044
----------- -----------
Total current liabilities 2,037,800 1,779,045
----------- -----------
Shareholders' 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; 2,770,500 and 2,700,000 shares
issued and outstanding, respectively 313,750 3,000
Accumulated deficit (759,194) (181,982)
----------- -----------
Total shareholders' deficit (445,444) (178,982)
----------- -----------
Total liabilities and shareholders' deficit $ 1,592,356 $ 1,600,063
=========== ===========
</TABLE>
See accompanying notes to financial statements.
SPANLINK COMMUNICATIONS, INC.
CONDENSED STATEMENT OF OPERATIONS
For the three months ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues $ 1,034,293 $ 1,067,194
Cost of revenues 468,725 385,529
----------- -----------
Gross profit 565,568 681,665
----------- -----------
Operating expenses:
Sales, general and administrative 1,032,490 574,882
Research and product development 82,848 52,623
----------- -----------
Total operating expenses 1,115,338 627,505
----------- -----------
(Loss) income from operations (549,770) 54,160
Interest expense 27,442 5,333
----------- -----------
(Loss) income before income taxes (577,212) 48,827
Provision (benefit) for income taxes (54,741)
----------- -----------
Net (loss) income $ (577,212) $ 103,568
=========== ===========
Net (loss) income per common and common equivalent share $ (0.21) $ 0.04
=========== ===========
Weighted average common and common equivalent shares 2,725,566 2,700,000
=========== ===========
Supplementary Data:
Supplemental net loss per common and common equivalent
share $ (0.19)
===========
Supplemental weighted average common and common
equivalent shares 2,838,653
===========
</TABLE>
See accompanying notes to financial statements.
SPANLINK COMMUNICATIONS, INC.
CONDENSED STATEMENT OF CASH FLOWS
For the three months ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (Loss) Income $(577,212) $ 103,568
Reconciliation of net (loss) income to net cash used by
operating activities:
Depreciation and amortization 35,287 19,828
Deferred income taxes (78,816)
Common stock grant recognized as compensation 246,750
Amortization of original issue discount recognized as
interest expense 16,000
Changes in current assets and liabilities 266,041 (180,140)
--------- ---------
Net cash used by operating activities (13,134) (135,560)
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (93,841) (22,989)
--------- ---------
Net cash used by investing activities (93,841) (22,989)
--------- ---------
Cash flows from financing activities:
Dividends paid to shareholders (38,708) (75)
Advances on note payable - bank 361,585
Repayments on note payable - bank (230,531)
Repayments on note payable - other (97,998) (117,607)
Proceeds from issuance of notes payable - convertible 336,000
Proceeds from sale of stock warrants 64,000
--------- ---------
Net cash provided by financing activities 32,763 243,903
--------- ---------
Net (decrease) increase in cash and cash equivalents (74,212) 85,354
Cash and cash equivalents at beginning of period 344,689 27,807
--------- ---------
Cash and cash equivalents at end of period $ 270,477 $ 113,161
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 13,352 $ 3,213
========= =========
Cash paid during the period for income taxes $ 75,000
=========
</TABLE>
See accompanying notes to financial statements.
SPANLINK COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 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
March 31 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 - NOTES PAYABLE
NOTES PAYABLE - CONVERTIBLE
On February 28, 1996, the Company closed on a $400,000 bridge financing
of convertible promissory notes (the "Bridge Notes") in a private placement,
resulting in net proceeds to the Company of $350,000 after underwriter's
commission and offering expenses of $50,000. These costs are amortized over the
stated term of the notes. The Bridge Notes provide for interest at 10% per annum
and converted into shares of the Company's common stock May 2, 1996, upon the
closing of the Company's initial public offering (the "IPO") (Note 5). The
conversion price was $3.20 per share.
In connection with this financing, the Company also issued warrants to
the holders of the Bridge Notes to purchase a total of 80,000 shares of common
stock. The warrants are exercisable for a period of five years from the date of
issuance at $3.60 per share. The fair value of the warrants was determined to be
$64,000 and was credited to common stock, resulting in the recognition of a
similar amount as original issue discount which will be expensed over the
outstanding period of the Bridge Notes.
NOTE PAYABLE - BANK
On February 14, 1995, the Company obtained a line of credit with a bank
which provides for borrowing up to the lesser of $600,000 or 75% of eligible
accounts receivable at the bank's reference rate plus 5%. Borrowings under the
line of credit are secured by virtually all assets of the Company and personally
guaranteed by the Company's three founding shareholders. During 1995 and 1996,
the Company was not in compliance with a minimum net worth covenant with the
bank. On February 29, 1996, the Company terminated its bank line of credit,
repaid the outstanding advances in full and obtained a release of all related
liens.
NOTE 4 - SHAREHOLDERS' DEFICIT
RECAPITALIZATION
On February 9, 1996, the Company's Board of Directors and shareholders
increased the number of authorized shares from 1,000,000 shares of common stock,
no par value, to 25,000,000 shares of common stock, no par value, and authorized
5,000,000 shares of undesignated preferred stock. The Company also approved a
900-for-1 stock split of the issued and outstanding common stock of the Company.
All share and per share data included in the the financial statements and
related notes have been adjusted to give retroactive effect to such
authorization and split.
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 into 125,000
shares of common stock that occurred in connection with the IPO; and (iii) the
decrease of net loss by $39,630 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.
NOTE 5 - SUBSEQUENT EVENT
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 $6,540,000. The offering will be
reflected in the financial statements for the quarter ending June 30, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the Company's statement of operations, expressed as a percentage of
total revenues:
Periods Ended
March 31,
---------------
1996 1995
------ ------
Hardware 24.8% 24.4%
Custom software 20.7 34.6
Configurable software 26.8 20.3
Services 27.7 20.7
------ ------
Total revenues 100.0 100.0
Cost of revenues 45.3 36.1
------ ------
Gross profit 54.7 63.9
Operating expenses:
Selling, general and administrative 99.8 53.9
Research and product development 8.0 4.9
------ ------
Total operating expenses 107.8 58.8
------ ------
(Loss) income from operations (53.1) 5.1
Interest expense 2.7 0.5
------ ------
(Loss) income before income taxes (55.8) 4.6
Provision (benefit) for income taxes (5.1)
------ ------
Net (loss) income (55.8)% 9.7%
====== ======
REVENUES
Total revenues decreased 3.1% from $1,067,194 for the three month
period ended March 31, 1995 to $1,034,293 for the three month period ended March
31, 1996. The decrease was due primarily to a 42.1% decrease in custom software
revenues, which was offset partially by a 28.1% increase in configurable
software package revenues and a 29.4% increase in services revenues. The Company
expects that configurable software revenues and services revenues will continue
to grow and custom software revenues to decrease as a percentage of total
revenues, although not necessarily at the same percentage changes as reflected
during the first quarter.
COST OF REVENUES
Cost of revenues increased 21.6% from $385,529 for the three month
period ended March 31, 1995 to $468,725 for the three month period ended March
31, 1996. The increase was due primarily to the hiring and training of
additional engineering personnel.
GROSS PROFIT
Gross profit decreased 17.0% from $681,665 for the three month period
ended March 31, 1995 to $565,568 for the three month period ended March 31,
1996. Gross profit as a percentage of total revenues decreased from 63.9% for
the three month period ended March 31, 1995 to 54.7% for the three month period
ended March 31, 1996. The decrease is due primarily to the hiring and training
of additional engineering personnel.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses increased 79.6% from
$574,882 for the three month period ended March 31, 1995 to $1,032,490 for the
three month period ended March 31, 1996. 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. The Company expects sales, general and administrative costs
to be higher in 1996 than in 1995 due to the expected growth of the Company.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenses increased 57.4% from $52,623
for the three month period ended March 31, 1995 to $82,848 for the three month
period ended March 31, 1996. The increase is due to the Company's focus on
developing configurable software packages. The Company expects research and
product development expenses to continue to increase for the foreseeable future.
INTEREST EXPENSE
Interest expense increased 414.6% from $5,333 for the three month
period ended March 31, 1995 to $27,442 for the three month period ended March
31, 1996. The increase is due to interest 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
37.5% before the impact of the S corporation to C corporation change, which gave
rise to a net income tax benefit of $54,741 for the three month period ended
March 31, 1995. The Company did not record a tax benefit for the three month
period ended March 31, 1996 as the likelihood of realization of the benefit is
presently not likely.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit was $741,812 at March 31, 1996.
Current liabilities include $662,105 of customer deposits and deferred
maintenance revenue which will be recognized as revenues in future periods.
The Company's net loss of $577,212 for the three month period ended
March 31, 1996 included $246,750 of noncash expenses for the issuance of stock
grants to the Company's president and outside board of directors.
The Company's capital expenditures were $93,841 for the three month
period ended March 31, 1996 and were $22,989 for the three month period ended
March 31, 1995. The Company expects its capital expenditures will continue to
increase in the next several quarters as the Company adds more personnel and
upgrades its management and information systems.
On February 28, 1996, the Company netted approximately $350,000 of
proceeds from the issuance of $400,000 of convertible notes payable and warrants
in a private placement, after underwriter's commission and offering expenses.
The Company used part of the proceeds to repay the outstanding advances on its
bank line of credit and terminate the loan agreement.
On April 29, 1996 the Company's initial public offering became
effective, resulting in approximately $6,540,000 of net proceeds. The offering
closed on May 2, 1996, and will be reflected in the Company's Form 10-QSB for
the period ending June 30, 1996. The Company believes that the net proceeds from
the initial public offering will be sufficient to fund its operations and
capital expenditures for the foreseeable future.
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.
Prior to the Company's initial public offering which was
declared effective on April 29, 1996, the Company had three
shareholders. The shareholders and board of directors of the Company
adopted several resolutions by joint minutes of written action to
ratify certain actions in connection with the Company's initial public
offering. Those matters required to be submitted to a vote of the
shareholders under federal or state law during the period January 1,
1996 through March 31, 1996 include the following:
Effective February 9, 1996 the shareholders of the Company
unanimously adopted minutes of written action to adopt the
1996 Omnibus Stock Plan.
Effective February 9, 1996 the shareholders of the Company
unanimously adopted minutes of written action to amend and
restate the articles of incorporation of the Company to (i)
increase the authorized number of shares of Common Stock to
25,000,000, (ii) create an aggregate of 5,000,000 shares of
undesignated Preferred Stock, (iii) change the name of the
Company to Spanlink Communications, Inc., (iv) abolish any and
all preemptive rights and cumulative voting currently held by
the shareholders of the Company, and (v) classify the board of
directors into three classes to provide for staggered three
year terms.
At the annual meeting of the shareholders of the Company on
February 28, 1996, Thomas F. Madison, Joseph D. Mooney, and
Bruce E. Humphrey were elected unanimously to serve as members
of the board of directors of the Company. The terms of office
of Brett A. Shockley, Patrick P. Irestone, and Loren A.
Singer, Jr. continued after the meeting.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Those exhibits required to be furnished in response to this
item 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.
(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: June 13, 1996 Brett A. Shockley
-------------------------------------
Brett A. Shockley
Chief Executive Officer
(Principle Executive Officer)
Date: June 13, 1996 Patrick P. Irestone
-------------------------------------
Patrick P. Irestone
President, Chief Operating Officer and
Chief Financial Officer
(Principle Financial and Accounting Officer)
