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 June 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 August 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
June 30, 1996 and December 31, 1995
Condensed Statement of Operations 4
for the three and six month
periods ended June 30, 1996 and 1995
Condensed Statement of Cash Flows 5
for the six month periods ended
June 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 9
SIGNATURES 10
<TABLE>
<CAPTION>
SPANLINK COMMUNICATIONS, INC.
CONDENSED BALANCE SHEET
ASSETS
June 30, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 716,944 $ 344,689
Marketable securities 5,537,959
Accounts receivable, net of allowance for
doubtful accounts 566,948 568,113
Costs and estimated earnings in excess of billings 161,339 137,355
Accrued royalty revenue 310,200 184,000
Other current assets 213,212 142,604
----------- -----------
Total current assets 7,506,602 1,376,761
Property and equipment, net 540,558 223,302
----------- -----------
Total assets $ 8,047,160 $ 1,600,063
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable - bank $ 230,531
Note payable - other 343,683
Accounts payable $ 202,384 208,177
Accrued expenses 355,578 302,479
Accrued income taxes 67,131
Other current liabilities 673,706 627,044
----------- -----------
Total current liabilities 1,231,668 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 June 30,
1996 and December 31, 1995 8,193,663 3,000
Accumulated deficit (1,378,171) (181,982)
----------- -----------
Total shareholders' equity (deficit) 6,815,492 (178,982)
----------- -----------
Total liabilities and shareholders' equity (deficit) $ 8,047,160 $ 1,600,063
=========== ===========
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
SPANLINK COMMUNICATIONS, INC.
CONDENSED STATEMENT OF OPERATIONS
SECOND QUARTER AND SIX MONTHS
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- -----------------------------
1996 1995 % Change 1996 1995 % Change
----------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 1,045,417 $ 961,813 8.7% $ 2,079,710 $ 2,029,007 2.5%
Cost of Revenues 412,906 439,223 -6.0% 881,631 824,752 6.9%
----------- ----------- ----- ----------- ----------- -----
Gross Profit 632,511 522,590 21.0% 1,198,079 1,204,255 -.5%
Gross profit as a percentage 60.5% 54.3% 57.6% 59.4%
of revenues
Operating expenses:
Sales, general and
administrative 1,114,327 462,227 141.1% 2,146,817 1,037,109 107.0%
Research and product development 172,163 64,318 167.7% 255,011 116,941 118.1%
----------- ----------- ----- ----------- ----------- -----
1,286,490 526,545 144.3% 2,401,828 1,154,050 108.1%
----------- ----------- ----- ----------- ----------- -----
(Loss) income from operations (653,979) (3,955) -- (1,203,749) 50,205 --
Interest income (expense) 35,002 (12,630) -- 7,560 (17,963) --
----------- ----------- ---------- -----------
(Loss) income before income (618,977) (16,585) -- (1,196,189) 32,242 --
taxes
Provision (benefit) for 0 (4,078) -- 0 (58,819) --
income taxes ----------- ----------- ----------- -----------
Net (loss) income $ (618,977) $ (12,507) -- $(1,196,189) $ 96,061 --
=========== =========== =========== ===========
Net (loss) income per common
share $ (0.14) $ (0.01) $ (0.34) $ 0.03
Weighted average common
shares 4,301,159 2,700,000 3,513,363 2,700,000
Supplementary Data:
Supplementary net loss per
common and
common equivalent shares $ (0.13) $ (0.31)
Supplemental weighted
average
common and common
equivalent shares 4,414,246 3,626,450
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
SPANLINK COMMUNICATIONS, INC.
CONDENSED STATEMENT OF CASH FLOWS
For the six months ended June 30,
(Unaudited)
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net (Loss) Income $(1,196,189) $ 91,061
Reconciliation of net (loss) income to net cash (used)
provided by operating activities:
Depreciation and amortization 72,300 41,277
Allowance for doubtful accounts 45,000
Deferred income taxes (80,913)
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 (200,290) 16,660
----------- -----------
Net cash (used) provided by operating activities (999,913) 68,085
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities (6,037,959)
Maturities of marketable securities 500,000
Additions to property and equipment (362,031) (40,733)
----------- -----------
Net cash used by investing activities (5,899,990) (40,733)
----------- -----------
Cash flows from financing activities:
Dividends paid to shareholders (39,000) (6,275)
Advances on note payable - bank 166,466
Repayments on note payable - bank (230,531) (117,607)
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 42,584
----------- -----------
Net increase in cash and cash equivalents 372,255 69,936
Cash and cash equivalents at beginning of period 344,689 27,807
----------- -----------
Cash and cash equivalents at end of period $ 716,944 $ 97,743
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 23,465 $ 15,286
=========== ===========
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>
SPANLINK COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 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 June 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 $36,025 and
$75,655 for the three and six months ended June 30, 1996 respectively 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
REVENUES
Total revenues increased 8.7% from $961,813 for the three month period
ended June 30, 1995 to $1,045,417 for the comparable period in 1996. The
increase was due primarily to a 75.0% increase in configurable software revenues
and 20.1% increase in service revenues offset by a 20.8% decrease in custom
software and hardware revenues. Revenues for the six month period ended June 30,
1996 increased 2.5% over the comparable period in 1995 due primarily to a 49.6%
increase in configurable software revenues and 24.3% increase in service
revenues offset by a 23.2% decrease in custom software and hardware revenues.
COST OF REVENUES
Cost of revenues decreased 6.0% from $439,223 for the three month period
ended June 30, 1995 to $412,906 for the three month period ended June 30, 1996.
The decrease was due primarily to increased sales of higher margin configurable
software packages. Cost of revenues increased 6.9% for the six month period
ended June 30, 1996 versus the comparable period in 1995 due primarily to the
hiring and training of additional personnel.
GROSS PROFIT
Gross profit increased 21.0% from $522,590 for the three month period ended
June 30, 1995 to $632,511 for the three month period ended June 30, 1996. Gross
profit as a percentage of total revenues increased from 54.3% for the three
month period ended June 30, 1995 to 60.5% for the three month period ended June
30, 1996. The increased gross margin as a percentage of total revenues was due
primarily to an increase in sales of higher margin configurable software
packages. Gross profit as a percentage of total revenues decreased to 57.6% for
the six month period ended June 30, 1996 from 59.4 % for the comparable period
in 1995. The decrease was due primarily to the hiring and training of additional
personnel.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses increased 141.1% to $1,114,327
for the three month period ended June 30, 1996 from $462,227 for the three month
period ended June 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 107.0% for the six month period in 1996 to
$2,146,817 from $1,037,109 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. 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 167.7% from $64,318 for
the three month period ended June 30, 1995 to $172,163 for the three month
period ended June 30, 1996. The increase is due to the Company's continuing
focus on developing configurable software packages. Research and development
expenses increased 118.1% for the six month period ended June 30, 1996 to
$255,011 from $116,941 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 foreseeable future.
INTEREST INCOME / EXPENSE
The Company recorded net interest income of $35,002 for the three month
period ended June 30, 1996 versus net interest expense of $12,630 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 six month period ended June 30, 1996 was $7,560 versus
net interest expense of $17,963 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, 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 or six month period ended June 30, 1996 as the likelihood of realization
of the benefit is presently not likely.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $6,254,903 as of June 30,
1996I 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.
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.
(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.
(i) May 28, 1996 - Announcing the resignation of
Wesley Schultz from the temporary position of
acting Vice President of Finance and Chief
Financial officer and the assumption of such
responsibilities by Patrick P. Irestone.
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: August 13, 1996 /s/Brett A. Shockley
----------------------- -----------------------------------------
Brett A. Shockley
Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1996 /s/Patrick P. Irestone
----------------------- -----------------------------------------
Patrick P. Irestone
President and Chief Operating Officer
Date: August 13, 1996 /s/Brian P. King
----------------------- ------------------------------------------
Brian P. King
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 716,944
<SECURITIES> 5,537,959
<RECEIVABLES> 632,948
<ALLOWANCES> 66,000
<INVENTORY> 64,257
<CURRENT-ASSETS> 7,506,602
<PP&E> 850,270
<DEPRECIATION> 309,712
<TOTAL-ASSETS> 8,047,160
<CURRENT-LIABILITIES> 1,231,668
<BONDS> 0
0
0
<COMMON> 8,193,663
<OTHER-SE> (1,378,171)
<TOTAL-LIABILITY-AND-EQUITY> 8,047,160
<SALES> 2,079,710
<TOTAL-REVENUES> 2,079,710
<CGS> 881,631
<TOTAL-COSTS> 881,631
<OTHER-EXPENSES> 2,401,828
<LOSS-PROVISION> 45,000
<INTEREST-EXPENSE> 52,429
<INCOME-PRETAX> (1,196,189)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,196,189)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,196,189)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
