U.S. SECURITIES AND EXCHANGE COMMISSION, Washington, D.C. 20549
Form 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the Fiscal Year ended December 31, 1996 Commission File number 0-28138
Spanlink Communications, Inc.
-----------------------------
Minnesota 41-1618845
7125 Northland Terrace, Minneapolis, Minnesota 55428
(Address of principal executive offices) (Zip Code)
Issuer's telephone number 612-971-2000
One Main Street S. E., Minneapolis, MN
--------------------------------------
Former address
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value per share
------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 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 ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. __X__
State issuer's revenues for its most recent fiscal year: $5,422,929.
State the aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the registrant based on the closing average price as reported
by The Nasdaq Stock Market on March 21, 1997: $6,787,000.*
As of March 21, 1997, 5,080,500 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held May 13, 1997 are incorporated by reference into Items 9,
10, 11 and 12 of Part III.
Transitional Small Business Disclosure Format (check one): Yes ___ No __X__
- ---------------------------------------------------
*Shares of Common Stock held beneficially by directors, executive officers and
persons known to own beneficially in excess of 5 percent of the Common Stock
have been excluded in calculating this value.
PART I
Unless the context indicates otherwise, all references to the "Company",
"Registrant' or the "Issuer" in this Annual Report on Form 10-KSB relate to
Spanlink Communications, Inc.
The following United States registered trademarks appear in this Annual Report
on Form 10-KSB and are owned by the Company: Spanlink, WebCall, ExtraAgent and
PRODiag.
Item 1. Description of Business
General Development
The Company designs, develops and markets interactive computer
telecommunications software and services that effectively and efficiently link
business computer systems, telecommunications systems and the Internet. The
Company has been shifting its focus from developing custom software for
interactive communications systems to developing configurable software packages.
These packages can be configured to meet the needs of particular customers or
markets without modifying the underlying computer programming. The Company's
software employs touch tone or speech recognition to allow consumers to use a
telephone, rather than a company sales or service agent, to bank by phone, place
a catalog order, temporarily suspend newspaper deliveries, obtain up-to-date
stock quotes, check on airline arrivals and departures and provide callers
alternatives to waiting on hold. The software also provides an integration
availability between telephone systems and a company's host computer system that
allow a screen full of information to "pop" up on a customer service agent's
computer monitor. In addition, one of the Company's products can facilitate
telephone communication between a user of the Internet's World Wide Web and a
company's sales and service agents.
Using the Company's products, a business can allow its customers to interact
with its computer system via the telephone, a fax machine or an Internet Web
browser. Products include: the EXTRAAGENT family of products which allows
businesses with a "call center" (a group of employees, called agents, dedicated
to handling a high volume of incoming or outgoing calls) to provide efficient
and effective service to the caller; WEBCALL which integrates call centers of a
business with the World Wide Web; FASTPOINT which offers locator services and
basic voice response functions to end users; and SELECTSOLUTIONS which provides
custom interactive computer telecommunications software applications utilizing
the Company's core software modules. In addition, the Company provides
professional software services, including consulting, training, customization of
its configurable software packages and maintenance.
The Company's strategy is to develop configurable software packages which meet a
significant portion of the needs of a variety of interactive computer
telecommunications markets. The Company plans to use these standard products as
a foundation on which the Company, with a limited amount of additional work, can
build application packages specific to its target markets. The Company's current
target markets are call centers, newspapers and financial institutions. In
addition, these configurable software packages can be modified to meet the
particular needs of an individual customer within that market. For example, the
Company's ExtraAgent product, which streamlines telephone calls into a call
center, is used across a wide variety of industries. In the newspaper market,
the Company has enhanced ExtraAgent to allow customers to report a delivery
problem or temporarily stop their newspaper service. Historically, the Company
has relied significantly on the marketing and distribution network of Lucent
Technologies, Inc. (Lucent) to deliver its products and services into the
marketplace. In 1996, the Company expanded and strengthened its own direct sales
force to focus on strategic accounts. The Company has created distribution
agreements with telephone and data processing dealers and alliances with
original equipment manufacturers where appropriate. Over the past five years,
the interactive computer telecommunications industry has begun to emerge as a
major component of the communications industry. Based on information provided by
Dataquest, a research organization, the Company believes that the interactive
computer telecommunications markets, not including the World Wide Web, are over
$2.5 billion in size and expected to grow to $5.8 billion in 1999.
The Company has sold over 1,000 of its configurable software packages and has
designed and developed SelectSolutions for more than 180 customers in the United
States, Germany, the United Kingdom, the Netherlands, Spain, Belgium, Mexico and
Canada. The Company's products are installed in numerous government agencies and
corporations such as Cargill, Citibank, Eli Lilly, Knight-Ridder, Minneapolis
Star Tribune, Mobil, Northern States Power Company, Panasonic, Pepsico,
Prudential, Shell Oil, Toro, United Air Lines and USA Today. However, the
Company has no long-term sales agreements with any of these entities, and there
can be no assurance that any future sales will be made to these customers.
The Company began operations and was incorporated under the laws of the state of
Minnesota in August 1988. The Company's principal office is located at 7125
Northland Terrace, Minneapolis, Minnesota 55428, its home page can be located on
the Internet at "http://www.spanlink.com" and its telephone number is (612)
971-2000.
Primary Products
All of the Company's products share an open, modular architecture and the same
system software. This allows the Company to assemble different products into an
interactive computer telecommunications (ICT) system to meet the needs of a
particular customer. The Company's software operates in combination with a
variety of other telephone systems, networks, LANs and host computers to allow
businesses to improve their services at a lower cost.
Although subject to many variations, a call from a consumer to a business using
the Company's ICT server might adhere to the following scenario. When a consumer
places a call, it passes through the public telephone network to the business'
PBX/ACD system. The PBX/ACD directs the call to the ICT server, where the
Company's software collects the caller's telephone number from the public
telephone network and accesses the host computer or LAN servers to obtain
consumer information and determines how to manage the call. If no agents are
currently available, the Company's software will give the consumer an estimate
of how long the consumer will have to wait and a list of options. These options
might include leaving a message for immediate or later call back, choosing the
music on hold or transacting business using a touch tone keypad or by speaking
commands. If the caller chooses to wait or leaves a message, the Company's
software directs the information collected from the telephone network, ACD or
computer system to the personal computer of an available call center agent,
along with the call. Since the agent has the consumer information on the
display, the service to the consumer can be delivered more quickly than if the
call center agent were required to ask the consumer these questions first.
As demonstrated by the example, the Company's interactive computer
telecommunications applications may employ any or all of voice messaging,
interactive voice response (IVR), computer telephone integration (CTI) and
Internet technologies and interface with the public telephone network, telephone
systems and computer systems. The Company has developed a number of applications
that interface with a wide variety of PBX/ACD Systems using standard telephony
interfaces (Analog, T-1, PRI) and protocols (TSAPI, ASAI, ISDN, Digital
Telephone Set emulation). The Company has developed solutions to work with a
variety of PBX/ACDs, including Lucent Technologies, Northern Telecom, Rockwell
and Siemens ROLM. The Company also has developed applications that interface
with various computer systems from manufacturers such as IBM, Digital Equipment,
Hewlett Packard, Sun Microsystems, Unisys, NCR and a variety of network servers.
The Company has experience utilizing various network interfaces (Ethernet, Token
Ring, BISYNC, SDLC, RS-232, X.25) as well as various communication and network
protocols (TCP/IP, IPX/SPX, 3270 and 5250 terminal emulation, SNA, Sockets, RPC,
FTP, Asynch).
The Company believes that its competitors typically focus on one or perhaps two
stand-alone computer technologies like voice messaging, IVR, CTI and the
Internet. These technologies generally operate independently and therefore offer
a limited range of services. Voice messaging vendors are focused on recognizing
the number dialed, answering the call with an appropriate personal greeting and
taking a message. In general, voice messaging does not recognize information
about who is calling or the status of the call center and cannot access a
company computer system to enter and retrieve information or digitally instruct
the PBX where to route a call. IVR applications allow callers to enter or
retrieve information from a business computer system but do not normally
recognize information about who is calling, why they are calling or the status
of the call center. IVR is typically not capable of digitally instructing the
PBX where to route a call and normally has limited or no voice message recording
capabilities. CTI applications derive information from the PBX about the caller
and the status of the call center and from the business computer system to
determine where to route a call. CTI is normally capable of digitally
instructing the PBX where to route a call and the computer system where to route
call related information. It is not usually capable of asking questions of the
caller if more information is required, taking a message or providing an
automated transaction. World Wide Web vendors typically integrate with business
computer systems but have no integration with the PBX or call center. The
Company believes that its ability to utilize all of these technologies and to
integrate them into configurable software packages provides greater customer
service at a reduced cost, resulting in a competitive advantage for the Company.
The Company has four main types of interactive software products: ExtraAgent,
WebCall, FastPoint and SelectSolutions. These products can be combined in a
single interactive computer telecommunications system that utilizes voice
messaging, IVR, CTI and the Internet. A typical sale ranges from $30,000 to
$100,000, although a large customer sale could exceed $500,000.
EXTRAAGENT
ExtraAgent is a configurable software package which increases productivity and
customer satisfaction in a call center by combining IVR, CTI and voice messaging
technologies to enhance a telephone system's automatic call distribution
capability. The software provides "extra agents" which can handle routine
transactions by allowing callers to use automated features during peak business
hours, resulting in a more even flow of calls for the human agents in a call
center. ExtraAgent has multilingual capabilities and has been sold to customers
in non-English speaking countries.
ExtraAgent software automatically collects the caller's telephone number using
automatic number identification ("ANI") and queries a data base to determine the
best call center agent to handle the call (for example, if the customer account
is in arrears, ExtraAgent could forward the call to a collections agent). Based
on the query, ExtraAgent will evaluate the approximate length of time the caller
may need to wait in order to be connected to a call center agent. After
providing an approximate wait time, ExtraAgent can provide tailored options to
the caller, so the caller can select the best option. When the caller is
connected with the appropriate call center agent, ExtraAgent has the capability
to send a screen of information about the caller to the agent, reducing call
time by approximately 15-20 seconds.
The Company has sold ExtraAgent to a variety of organizations in its target
markets. For example, media organizations use ExtraAgent to automate some
transactions and handle calls during peak hours or when the call center is not
staffed. In a newspaper environment, subscribers can serve themselves by dialing
ExtraAgent and pressing touch tone keys or speaking commands to suspend delivery
during vacations, register service errors and request replacement papers at any
time. Financial institutions have purchased ExtraAgent to enable their customers
to perform common retail banking transactions by pressing touch tone keys or
speaking commands. For example, at the Stadtsparkasse Hanover Bank in Hanover,
Germany, customers can call the bank at anytime to check on their account
balance and transfer funds by speaking commands.
WEBCALL
WebCall is a configurable software package which effectively integrates the
Internet with a call center. Based on the Company's experience in the
telecommunications industry, including participation in industry trade shows and
conferences, the Company believes that WebCall is among the first to
successfully create a link between traditional business telephone systems and a
World Wide Web site. WebCall allows a consumer on the World Wide Web to select a
button (icon) labeled "Talk To A Real Person" and receive a return call from a
call center agent over a standard telephone. A consumer browsing through a
catalog or product list at a company's World Wide Web site may have questions or
may wish to purchase a product but may not care to transmit information, such as
a credit card number, over the Internet. After clicking on the "Talk To A Real
Person" button, a series of computer generated questions will appear on the
consumer's screen. The consumer's responses will be transmitted to the agent and
the consumer will be given an estimated call back time. Before the agent returns
the consumer's call, the agent will review the questions and answers and obtain
any additional information required. If a consumer is not comfortable
transmitting information, such as credit card numbers, over the Internet, the
agent can now take the credit card number and validate the account over the
telephone.
The Company believes that a need exists for WebCall, a system that connects
consumers to call centers by using standard Internet connections and allows the
consumers the option to "talk to a real person." The Company believes that
WebCall enhances a consumer's satisfaction by preparing the agent to respond to
the consumer's questions. In addition, the Company believes that WebCall reduces
the number of lost sales and provides the opportunity to make additional sales.
WebCall also decreases a call center's costs by collecting information directly
from a consumer, and thereby reducing the amount of time that an agent must
spend on the telephone gathering information from the consumer.
The Company believes that WebCall benefits a variety of applications on the
World Wide Web including electronic commerce, help desk and marketing. Companies
that sell products on the Internet can use WebCall to connect the consumer to a
human operator to complete a credit card transaction and possibly sell other
products. Companies that provide on line help desks can use WebCall to connect a
PC user, accessing a home page on the World Wide Web, with a person at the
Company's help desk after the agent has analyzed the problem through background
provided by WebCall. WebCall also enables companies to better track and assess
the results of marketing programs that utilize the Internet.
FASTPOINT
FastPoint is a configurable software package that includes features commonly
used to provide interactive locator services capability, such as (i) automated
attendant, a series of options that instruct the caller to press certain numbers
on a touch tone phone to be connected to various groups within a business (for
example: "to reach sales, press 1; to reach security, press 2"); (ii) phone-fax,
the ability to retrieve a fax using touch tone telephone; and (iii) service
locator, which permits a caller to find the location of the service provider
closest to the caller. These applications are common elements necessary to
provide interactive voice response capability. In some cases, FastPoint will
represent the customer's entire application. In other cases it might work in
tandem with, or as a front end to, a custom application developed around a very
specific customer requirement. FastPoint includes a bundle of common voice
products, just as PC software is sold bundled with a single software product
combining many applications. FastPoint provides basic levels of voice and fax
response functionality without the time and expense of custom programming.
SELECTSOLUTIONS
The Company develops customized interactive computer telecommunications software
which it refers to as "SelectSolutions." This portion of the Company's business
enables the Company to create direct customer relationships and apply industry
experience to develop additional configurable software packages for specific
industries. SelectSolutions has provided the foundation for many of the
Company's configurable software packages. By retaining ownership of its software
application source code, the Company builds its library of reusable software
modules which can be incorporated into future products, thereby reducing the
cost and time necessary to develop new configurable software packages. The
Company believes that this product line provides a strategic asset to the
Company and its marketing strategy.
CUSTOMER SUPPORT
Once the Company's products are installed, the Company typically provides
ongoing technical assistance for the life of the system. Technical support
representatives provide technical diagnosis, consulting and engineering support
through the Company's 24-hour customer service center. The Company also provides
remote on-line diagnosis. The Company's products are sold with a limited 90 day
software warranty and one year hardware warranty, commencing on the date of
acceptance. Technical assistance after the warranty period must be purchased as
part of a separately priced maintenance contract. To date, warranty claims have
been negligible.
MAINTENANCE
After the expiration of the warranty, customers may purchase a renewable
maintenance contract for either software or hardware or both. These contracts
enable customers to continue to access the Company's customer service center.
Post warranty hardware maintenance is provided on a time and materials basis
through company employees and third party maintenance providers. The Company has
no written agreements with these maintenance providers.
PROACTIVE DIAGNOSTICS
PROdiag, the Company's proactive diagnostics package, performs on-line
monitoring and alarm notification of the Company's interactive computer
telecommunications server by performing a series of tests to ensure error-free
operation. PROdiag's diagnostics identify trends that indicate a degradation in
application performance. Upon the discovery of a condition that could result in
system failure, an alarm alerts the Company's technical support center for
remote diagnosis and repair in the event of a system failure. In addition,
PROdiag is capable of reporting functions for notification of error conditions,
status, report of tests, actions taken and results. Notification or reporting of
potentially unstable conditions minimizes potential downtime of the system.
CONSULTING AND PROFESSIONAL SERVICES
The Company offers a variety of consulting and professional services, including
project and system management, application and human factors. Application
consultants with technical engineering expertise survey and analyze the computer
and telephone infrastructure of a business and recommend interactive computer
telecommunications solutions. The Company believes that these consulting
services enable the Company to introduce its products to potential customers.
Through human factors consulting, the Company assists a business in the
assessment of the ease with which callers can use a business' interactive
computer telecommunications system. Businesses purchasing project management
services retain the Company to monitor and control complex development projects
and the installation of interactive computer telecommunications solutions.
Customers not only purchase project management services in connection with the
purchase of SelectSolutions, but also in connection with the purchase of the
Company's configurable software packages.
HARDWARE SALES
The Company's products utilize the Intuity Platform, a hardware and base
software system manufactured by Lucent Technologies, Inc. (Lucent). Although the
Intuity Platform is premium priced, the Company has sold this platform to both
large and small customers. In connection with the sale of its software, the
Company also sells the necessary hardware to those organizations requiring the
equipment. Currently, most of the Company's customers who purchase an initial
system through the Company's direct sales force also purchase hardware. However,
hardware sales as a percentage of total revenues have declined since 1993 due to
the shift in the Company's business from the sale of custom voice processing
software and the related hardware to the development and sale of configurable
software packages. The Company believes that, long term, hardware as a
percentage of total revenues will continue to decline as the Company develops a
version of its products that operates on other platforms thereby allowing the
software to be installed on an existing computer. Customers that purchase
hardware through the Company receive the equipment manufacturer's warranty which
is generally one year. The Intuity Platform is generally available from a number
of different Lucent distributors. The Company does not anticipate any difficulty
in obtaining the Intuity Platform.
COMPETITION
The market for interactive computer telecommunications products is intensely
competitive and characterized by rapid, technological change. The Company
believes that competition in this market is likely to persist and to intensify
as a result of increasing demand for interactive computer telecommunications
products. The Company's principal competitors include Brite Voice Systems,
Edify, Intervoice, Periphonics, Syntellect and large diversified companies such
as Lucent Technologies, Digital Equipment and IBM for which interactive computer
telecommunications systems are a small portion of their overall business. In
addition, local competitors include MicroVoice and Digital DataVoice. Although
the Company has an OEM relationship with Lucent Technologies, Lucent
Technologies also markets some software products not manufactured by the Company
which could compete with the Company's products. Substantially all of the
Company's principal competitors have greater financial, marketing, service,
support, technical and other competitive resources than the Company.
Ongoing research and product development for interactive computer
telecommunications products is widespread, and as a result, the Company does not
know the full extent of its competition or the stage of its competitors' product
development. In the future, the Company also may face competition from these and
other parties that develop interactive computer telecommunications products.
There can be no assurance that the market for interactive computer
telecommunications products will not ultimately be dominated by strategies other
than those employed by the Company.
The Company believes that the principal competitive factors affecting the market
for interactive computer telecommunications products include the ease of
implementation, flexibility, expansion of customer service provided and cost
savings resulting from improved operational efficiency. The Company believes
that the Company's customer base will broaden as a result of the benefits
provided by its packaged products developed for growing telecommunications
markets. However, there can be no assurance that the Company can maintain its
competitive position against current and potential competitors, especially those
with significantly greater resources.
Current and potential competitors have established or may in the future
establish cooperative relationships to increase the ability of their products to
address the interactive computer telecommunications needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances may emerge and rapidly acquire significant market share. If this were
to occur, the financial condition or results of operations of the Company could
be materially adversely affected.
MARKETING AND SALES
The Company markets its products in North America through its direct sales force
and pursuant to agreements with Lucent Technologies, Inc. The Company has
identified five target markets on which it focuses its direct marketing and
sales activities:
* Call centers such as customer service centers, catalog order centers,
ticket reservation centers and businesses such as service bureaus.
* Media markets such as newspapers, cable, television and radio
organizations.
* Healthcare markets such as HMO's, PPO's, dental insurance and other
insurance coverage organizations in the health care field.
* Manufacturing markets for such applications as order entry, warranty
status and credit card verification.
* Utility markets for such applications as power outage reporting, billing
and customer services.
* Financial institutions such as banks, credit unions, mortgage banks and
diversified financial service organizations.
In addition, the Company plans to continue to sell its products through its
relationships with Lucent and to establish a dealer distribution network through
alliances with existing telephone and data processing dealers and original
equipment manufacturers, such as predictive dialing software manufacturers and
business systems hardware and software manufacturers.
The Company's direct sales employees solicit prospective customers and provide
technical advice and support with respect to the Company's products. During
1996, the Company focused its marketing and sales efforts on building a sales
organization to call directly on system users in its target markets.
The Company's marketing strategy is to target and penetrate specific markets by
selling and marketing broad based configurable software packages in order to
meet the initial needs of a large group of customers quickly and efficiently. In
addition, the Company intends to market and sell industry specific configurable
software packages to each target market to increase penetration and market
share. The Company also plans to utilize SelectSolutions to customize value
added applications for customers in each target market, thereby increasing
penetration and market share.
LUCENT TECHNOLOGIES RELATIONSHIPS
Since 1989, the Company has worked together in a variety of relationships with
various units of AT&T and its successor Lucent Technologies, Inc., to develop
software, distribute interactive computer telecommunications products, transfer
technology and co-market. The Company currently develops its software products
to operate on the Intuity Platform and has an agreement to purchase Lucent
hardware and system software at discounts. The Company utilizes Lucent services
at times to repair and upgrade Lucent products that have been sold by the
Company. As a result of these relationships the Company has been able to broaden
its distribution of products, accelerate the development of products and
generate revenues and profits from the sale of its products. Total revenues from
Lucent were approximately $2,550,000 and $2,300,000 for the years ended December
31, 1996 and 1995, respectively, which represented 47% and 53% of total revenues
for 1996 and 1995, respectively.
The Company's business relationships with Lucent Technologies fall into three
main categories - Voice Processing Co-Marketer (VPC), Independent Software
Vendor (ISV) and Software Licenser . As a VPC, the Company has access to Lucent
proprietary technology and services, receives volume purchase discounts on
hardware and system software and marketing and selling relationships with Lucent
sales and marketing for purposes of selling Company products. The Company is one
of three companies who have been named "co-marketers with distinction" certified
to handle Lucent's advanced speech technologies such as speech recognition and
ISDN network integration. This relationship is valuable to the Company for
purposes of selling software products to end customers where Lucent PBX products
are installed and where the Intuity Platform is utilized as part of a customer
system. The Company acquires the Intuity Platform at a discount, installs its
software products and resells the hardware and software to the end customer at a
price equal to cost plus a profit margin.
As an Independent Software Vendor (ISV), the Company provides development
services as ordered by Lucent. The Company's right to provide development
services as an ISV is non-exclusive. Lucent may contract with others to procure
the same or comparable services and no minimum amount of work is guaranteed to
the Company. If the Company develops an application for a Lucent customer, which
requires further modification, Lucent has agreed to solicit the Company's
services provided the customer has been satisfied with the Company's services.
The Company has agreed not to contact Lucent's customers directly. This program
provides a method for the Company to distribute its software products and
services through Lucent to end customers. Usage rights for the developed
software are licensed to Lucent and the end customer for purposes of support.
Rights to the source code, design and materials remain the property of the
Company.
The Company has developed and provides to Lucent for distribution a configurable
call center software package. The Company provides a license to Lucent to
distribute the software in return for quarterly royalty payments to the Company.
The royalty payments will vary based on the number of copies of the software
sold. Lucent is not required to make any minimum royalty payments nor is Lucent
restricted from offering comparable products. The current configurable software
package offering incorporates the ability to communicate in 11 languages and can
be sold on a global basis. The Company also directly distributes the call center
software via its direct sales force and through other dealers. Since 1993, over
1,000 of the Company's call center configurable software packages have been sold
and installed by Lucent Technologies.
Research and Product Development
The Company spent $1,016,048 in 1996 and $238,916 in 1995 on research and
product development. In the past, the majority of the Company's research and
product development efforts have been funded through the design of customized
products for its customers and have been included in cost of revenues. However,
the Company intends to fund future research and product development efforts
independently through internally generated funds, as well as through customizing
products for its customers. The Company is conducting research into new
technologies and new methods of creating products and product extensions.
Backlog
The Company fills orders as they are received and has had no significant order
backlogs. Accordingly, the Company periodically has experienced month to month
fluctuations in its net sales. The Company has experienced and may in the future
experience periods in which low unit volume could result in operating losses.
Government Regulation
The Company currently is not subject to direct regulation by any government
agency, other than regulations applicable to businesses generally.
Intellectual Property Rights
The Company's policy is to own all software it has developed for its customers.
The Company believes that its success is dependent, in part, upon its
proprietary software and telecommunications technology. The Company relies on
trademark, copyright and trade secret laws, employee and third-party
non-disclosure agreements and other methods to protect its proprietary rights.
There can be no assurance that these agreements will not be breached, that the
Company will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known to or independently developed by
competitors.
The Company is not aware of any violation of proprietary rights claimed by any
third party relating to the Company or the Company's products. Because the
computer technology market is characterized by frequent and substantial
intellectual property litigation there can be no assurance that the Company will
not become involved in such litigation in the future to either enforce or defend
its intellectual property rights. Intellectual property litigation is complex
and expensive and the outcome of such litigation is difficult to predict. There
can be no assurance that the Company will have the funds necessary to defend or
pursue such litigation.
Employees
At December 31, 1996 the Company employed 87 employees, of which 81 are full
time. No employee of the Company is represented by a labor union or is subject
to a collective bargaining agreement. The Company believes it maintains good
relations with its employees.
Item 2. Description of Property
The Company currently leases 26,993 square feet for its office and warehouse
facilities located at 7125 Northland Terrace, Minneapolis, Minnesota under a
lease which will terminate on July 1, 2002. Annual rental costs are
approximately $245,000 over the term of the lease. Rent expense for the years
ended December 31, 1996 and December 31, 1995 was $79,406 and $31,204
respectively.
The Company also leases 9,989 square feet of commercial office space at One Main
Street SE, Minneapolis, Minnesota 55414 under a lease which will terminate on
September 30, 1999. From October 1, 1994 through September 30, 1995 the annual
base rental payment was $29,967 and will increase annually to $64,929 in the
final year of the lease. In January, 1997, the Company moved all its operations
from the One Main Street location to the Northland Terrace site. The Company has
the right to sublease the space at One Main Street and is currently actively
pursuing that option.
Item 3. Legal Proceedings
The Company is not involved in any pending or, to its knowledge, threatened
material litigation.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) Market Information
The Company's common stock trades on The Nasdaq SmallCap Market under the symbol
SPLK. The following table shows the range of high and low quotations for the
Company's Common Stock on The Nasdaq Stock Market for the fiscal quarters
indicated, as reported by Nasdaq in its "Monthly Statistical Report". The
quotations represent prices in The Nasdaq SmallCap Market between dealers in
securities, and do not include retail mark-up, mark-down or commission, and may
not represent actual transactions.
High Low
---- ---
1996
----
First Quarter - -
Second Quarter 8 1/8 4 3/4
Third Quarter 5 7/8 3 1/4
Fourth Quarter 4 3/8 3
(b) Approximate Number of Holders of Common Equity
Approximate Number of
Record Holders
Title of Class (as of March 21, 1997)
-------------- ----------------------
Common Stock, No par value 1,750
(c) Dividends
The Company has not paid any dividends on its Common Stock, and the Board of
Directors intends to retain earnings for the foreseeable future for use in the
expansion of the Company's business.
Item 6. Management's Discussion and Analysis or Plan of Operations
The information contained under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1996
Annual Report to Shareholders is hereby incorporated by reference.
Item 7. Financial Statements
The following financial statements of the Company are included in Exhibit 13.1
of this document:
(i) Report of Independent Accountants
(ii) Balance Sheet as of December 31, 1996 and 1995
(iii) Statement of Operations -For the Years ended December 31, 1996 and 1995
(iv) Statement of Shareholders' Equity (Deficit) - For the Years ended
December 31, 1996 and 1995
(v) Statement of Cash Flows-For the Years ended December 31, 1996 and 1995
(vi) Notes to Financial Statements
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The information contained under the headings "Election of Directors," "Executive
Officers of the Company," and "Section 16(a) Reporting" in the Company's
definitive proxy statement for its annual meeting of shareholders to be held May
13, 1997, is hereby incorporated by reference.
Item 10. Executive Compensation
The information contained under the heading "Executive Compensation" in the
Company's definitive proxy statement for its annual meeting of shareholders to
be held May 13, 1997, is hereby incorporated by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its annual meeting of shareholders to be held May 13, 1997, is hereby
incorporated by reference.
Item 12. Certain Relationships and Related Transactions
The information contained under the heading "Certain Transactions" in the
Company's definitive proxy statement for its annual meeting of shareholders to
be held May 13, 1997, is hereby incorporated by reference.
Item 13. Exhibits and Reports on Form 8-K
The following portions of Item 13 are submitted as separate sections of this
report:
(a) (1) -List of financial statements
(a) (2) -List of exhibits
(a) (3) -Exhibits
Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended December 31,
1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registration has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPANLINK COMMUNICATIONS, INC.
March 21,1997 /s/ Brett A. Shockley
Date Brett A. Shockley, Chairman
and Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Brett A. Shockley March 21, 1997
- ---------------------------
Brett A. Shockley Chairman, Chief Executive
Officer and Director (Principal
Executive Officer)
/s/ Patrick P. Irestone March 21, 1997
- ---------------------------
Patrick P. Irestone President, Chief Operating Officer
and Director
/s/ Brian P. King March 21, 1997
Brian P. King Vice President Finance, Chief
Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Loren A. Singer March 21, 1997
- ---------------------------
Loren A. Singer Secretary, Director
/s/ Bruce E. Humphrey March 21, 1997
- ---------------------------
Bruce A. Humphrey Director
/s/ Thomas F. Madison March 21, 1997
- ---------------------------
Thomas F. Madison Director
/s/ Joseph D. Mooney March 21, 1997
- ---------------------------
Joseph D. Mooney Director
</TABLE>
ANNUAL REPORT ON FORM 10-KSB
ITEM 13(a)(1) LIST OF
FINANCIAL STATEMENTS YEAR ENDED
DECEMBER 31, 1996 SPANLINK
COMMUNICATIONS, INC.
MINNEAPOLIS, MINNESOTA
The following financial statements of Spanlink Communications, Inc. are included
as Exhibit 13.1 of this document:
Report of Independent Accountants
Balance Sheet as of December 31, 1996 and 1995
Statement of Operations - For the Years ended December 31, 1996 and 1995
Statement of Shareholders' Equity (Deficit) -For the Years ended December 31,
1996 and 1995
Statement of Cash Flows - For the Years ended December 31, 1996 and 1995
Notes to Financial Statements
ANNUAL REPORT ON FORM 1O-KSB
ITEM 13 (a)(2) LISTING OF EXHIBITS
AND
ITEM 13(a)(3)-EXHIBITS
YEAR ENDED DECEMBER 31, 1996
SPANLINK COMMUNICATIONS, INC.
MINNEAPOLIS, MINNESOTA
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
Exhibit Number Description
-------------- -----------
3.1 First Restatement of Articles of Incorporation of small
business issuer (incorporated by reference to Exhibit 3.1 to
the Registration Statement on Form SB-2, Commission File No.
333-2022-C).
3.2 Bylaws of small business issuer (incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form SB-2,
Commission File No. 333-2022-C).
4.1 Specimen of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form
SB-2, Commission File No. 333-2022-C).
4.2 Form of Subscription and Investment Representation Agreement;
Form of Lock-up Agreement (pursuant to Section 7 of the
Subscription and Investment Representation Agreement)
(incorporated by reference to Exhibit 4.2 to the Registration
Statement on Form SB-2, Commission File No. 333-2022-C).
4.3 Form of Bridge Note (incorporated by reference to Exhibit 4.3
to the Registration Statement on Form SB-2, Commission File
No. 333-2022-C).
4.4 Form of Bridge Warrant (incorporated by reference to Exhibit
4.4 to the Registration Statement on Form SB-2, Commission
File No. 333-2022-C).
4.5 Promissory Note to Arrow Electronics, Inc. in the principal
amount of $414,427.36 dated August 2, 1995 (incorporated by
reference to Exhibit 4.5 to the Registration Statement on Form
SB-2, Commission File No. 333-2022-C).
10.1 Credit and Security Agreement between Norwest Credit, Inc. and
Spanlink Communications, Inc. dated February 14, 1995 and
Revolving Loan Note in the amount of $600,000; Collateral
Account Agreement dated February 14, 1995; Lockbox Agreement
dated February 14, 1995 (incorporated by reference to Exhibit
10.1 to the Registration Statement on Form SB-2, Commission
File No. 333-2022-C).
10.2 Letter of Credit Agreement between Inacom, Inc. and the
Company dated January 10, 1995; Personal Guaranties of Brett
A. Shockley, Loren A. Singer, Jr., and Todd A. Parenteau dated
January 11, 1996 (incorporated by reference to Exhibit 10.2 to
the Registration Statement on Form SB-2, Commission File No.
333-2022-C).
10.3 Second Amendment to Loan Agreement and Note Extension
Agreement between First Bank National Association and Spanlink
Communications, Inc. dated February 28, 1994; Renewal
Promissory Note in the principal amount of $250,000 dated
October 29, 1993 (incorporated by reference to Exhibit 10.3 to
the Registration Statement on Form SB-2, Commission File No.
333-2022-C).
10.4 Software Development Agreement between AT&T and Spanlink
Communications, Inc. dated January 28, 1994; Amendment dated
February 15, 1996 (incorporated by reference to Exhibit 10.4
to the Registration Statement on Form SB-2, Commission File
No. 333-2022-C).
10.5 Limited Source Code License Agreement between AT&T and
Spanlink Communications, Inc. dated May 4, 1993 (incorporated
by reference to Exhibit 10.5 to the Registration Statement on
Form SB-2, Commission File No. 333-2022-C).
10.6 Escrow Agreement between AT&T, All-Data, Inc. and Spanlink
Communications, Inc. dated March 1, 1994 (incorporated by
reference to Exhibit 10.6 to the Registration Statement on
Form SB-2, Commission File No. 333-2022-C).
10.7 Software Modification Agreement between AT&T and Spanlink
Communications, Inc. dated May 4, 1993 (incorporated by
reference to Exhibit 10.7 to the Registration Statement on
Form SB-2, Commission File No. 333-2022-C).
10.8 Certification Agreement for Resale of AT&T Voice Processing
Products by Authorized Voice Processing Co-Marketer with
Distinction between the Global Business Communications Systems
unit of AT&T and Spanlink Communications, Inc. dated July 29,
1993; Amendment dated November 30, 1993 (incorporated by
reference to Exhibit 10.8 to the Registration Statement on
Form SB-2, Commission File No. 333-2022-C).
10.9 Agreement between NCR GmbH and Spanlink Communications, Inc.
dated March 18, 1994 (incorporated by reference to Exhibit
10.9 to the Registration Statement on Form SB-2, Commission
File No. 333-2022-C).
10.10 Maintenance Agreement between State of New York Department of
Labor and Spanlink Communications, Inc. dated May 6, 1993;
Renewal Agreement dated February 13, 1995 (incorporated by
reference to Exhibit 10.10 to the Registration Statement on
Form SB-2, Commission File No. 333-2022-C).
10.11 Office Lease Agreement between Spanlink Communications, Inc.
and Ryan Companies US, Inc. dated December 6, 1996.
10.12 Employment Agreement between Spanlink Communications, Inc. and
Patrick P. Irestone dated September 23, 1994; Amendment dated
January 31, 1996 (incorporated by reference to Exhibit 10.12
to the Registration Statement on Form SB-2, Commission File
No. 333-2022-C).
10.13 Office Lease Agreement between Spanlink Communications, Inc.
and Riverplace Inc. dated August 8, 1994 (incorporated by
reference to Exhibit 10.13 to the Registration Statement on
Form SB-2, Commission File No. 333-2022-C).
10.14 Spanlink Communications, Inc. 1996 Omnibus Stock Plan
(incorporated by reference to Exhibit 10.14 to the
Registration Statement on Form SB-2, Commission File No.
333-2022-C).
13.1 Audited Financial Statements
13.2 Management's Discussion and Analysis
23.1 Consent of Price Waterhouse LLP (page 48 of this report).
24.1 Power of Attorney (included in the signature page to the Form
10-KSB).
27.1 Supplemental Data Schedule; electronic filing only.
B. REPORTS ON FORM 8-K
NONE
EXHIBIT 10.11 Lease Agreement with Ryan Companies
This LEASE AGREEMENT, made as of this 6th day of December , 1996 between Ryan
Companies U S,. Inc. ("Landlord"), and Spanlink Communications, Inc.,
("Tenant");
WITNESSETH, THAT
1. PREMISES: Landlord, subject to the terms and conditions hereof, hereby leases
to Tenant certain premises ("Premises") shown crosshatched on the floor plan
attached hereto as Exhibit A containing approximately 26,993 square feet in the
building situated at 7125 Northland Terrace, Brooklyn Park, Minnesota 55428
('Building"). The square footage of the Premises has been calculated by
landlord's architect by measuring from the outside face of the exterior walls of
the Building and from the centerline of the interior common walls of the
Premises. The Building, the land underlying and contiguous thereto and all
improvements thereon are hereinafter referred to as the "Project"(delineated on
the attached site plan and legal description as Exhibit C).
1.1 RIGHT OF FIRST OFFER: Tenant shall have a Right of First Offer on the
adjacent approximately 4,800 square feet of space during the original lease term
with ten (10) business days to respond to such offer. The Base Rent rate for
this space shall be the then existing Base Rental rate being paid under this
Lease, with an improvement allowance proportionate to the original allowance of
Twenty and 75/100 Dollars per square foot pro-rated over the remaining term of
the Lease.
Further, and notwithstanding the above, in the event a prospective tenant
desires to lease more than the adjacent 9,880 square feet, the Landlord shall
have no obligation to provide this Right of First Offer.
Tenant shall have an on-going Right of First Offer on adjacent space that
becomes available during the term of this Lease in as-is condition, subject to
renewal options of existing leases.
2. TERM: Tenant takes the Premises from Landlord, upon the terms and conditions
herein contained for the term ("Term") of Five (5) years and six and one half (6
1/2) months commencing on January 15,1997 and terminating on July 31, 2002
unless sooner terminated as herein provided.
2.1 LEASE TERMINATION: Tenant shall have the option to terminate this lease
after three (3) years upon payment of a termination fee of Three Hundred
Thirteen Thousand, Three Hundred Dollars($313,300.00) along with a six(6)month
prior written notice to Landlord.
2.2 RENEWAL OPTION: Provided Tenant is not in default of this Lease, Tenant
shall have the option to renew this Lease for one period of three (3) years at a
base rental rate of $10.61 per square foot subject to six (6) months prior
written notice to Landlord.
3. MONTHLY BASE RENT: Tenant agrees to pay to Landlord for the period of January
15, 1997, through January 31, 1997 a month Base Rent ("Base Rent") of Zero
Dollars ($0.00); for the period of February 1, 1997, through February 28, 1997,
a monthly Base Rent of Ten Thousand One Hundred Fifty Six Dollars and Twelve
Cents ($10,156.12); for the period of March 1, 1997, through December 31, 1998,
a monthly Base Rent of Twenty Thousand Three Hundred Twelve and Twenty Three
Cents ($20,312.23); for the period of January 1, 1999 through July 31, 2002, a
monthly Base Rent of Twenty Thousand Seven Hundred Sixty Two and Twelve Cents
($20,762.12) payable on the first day of each month in advance, without
deduction or setoff of any kind, to Landlord and delivered to 700 International
Centre, 900 Second Avenue South, Minneapolis, Minnesota 55402, or at such other
place as may from time to time be designated by Landlord.
4. USE: Tenant shall use the Premises only as Marketing, Administrative Offices,
Light Assembly, and other uses related to Tenant's business of Communications
Systems Development.
5. OPERATING COSTS: Tenant shall, for the entire Term, pay to Landlord as an
item of additional rent, without any setoff or deduction therefrom, its
Proportionate Share of costs ("Operating Costs") which Landlord may incur in
owning, maintaining and operating the Project during each calendar year of the
Term. "Proportionate Share" is defined as the % of Operating Costs incurred by
Landlord with respect to the Project (the decimal equivalent of a fraction, the
numerator of which is the rentable area of the Premises and the denominator of
which is the rentable area within the entire Project). "Operating Costs" are
defined to include all expenses and costs (but not specific costs which are
separately billed to and paid by individual tenants) of every kind and nature
which the Landlord shall pay or become obligated to pay because of or in
connection with the ownership and operation of the Project and supporting
facilities of the Project, including but not limited to all real estate taxes
and annual installments of special or other assessments payable with respect to
the Project; costs of any contest of such taxes, including attorney's fees;
management fees, (not to exceed 4% of gross receipts) insurance premiums,
utility costs, security costs, costs of wages, maintenance costs (relating to
the Project including sidewalks, landscaping and parking or service areas,
common areas, service contracts, equipment and supplies) and all other costs of
any nature whatsoever which for federal tax purposes may be expensed rather than
capitalized, but exclusive only of leasing commissions, depreciation, costs of
tenant improvements and payments of principal and interest on any mortgages,
deeds of trusts, or other security devices covering the Project. Operating Costs
shall also include the yearly amortization of capital costs incurred by the
Landlord for improvements to the Project required to comply with any change in
the laws, rules or regulations of any governmental authority having
jurisdiction, or for purposes of reducing Operating Costs, which costs shall be
amortized over the useful life of such improvements or repairs, as reasonably
estimated by the Landlord.
As soon as reasonably practicable prior to the commencement of each calendar
year during the Term, Landlord shall furnish to Tenant an estimate of Operating
Costs for the ensuing calendar year and Tenant's Proportionate Share thereof.
Tenant shall pay, as additional rent hereunder together with each installment of
Base Rent, one-twelfth (1/12th) of its estimated annual Proportionate Share of
Operating Costs. As soon as reasonably practicable after the end of each
calendar year during the Term, Landlord shall furnish to Tenant a statement of
the actual Operating Costs for the previous calendar year, including Tenant's
Proportionate Share of Operating Costs, and within thirty (30) days thereafter
Tenant shall pay to Landlord, or Landlord shall credit to the next rent payments
due Landlord from Tenant, as the case may be, any difference between the actual
Operating Costs and the estimated Operating Costs paid by Tenant. Tenant's
Proportionate Share of Operating Costs for the years in which this Lease
commences and terminates shall be prorated by multiplying the actual Operating
Costs by a fraction the numerator of which is the number of days of that year of
the Term and the denominator of which is 365. Notwithstanding any other
provision herein to the contrary, it is agreed that in the event that the
Project is not fully occupied at any time during the Term, an adjustment shall
be made in computing the Operating Costs for such year so that the Operating
Costs shall be computed for such year as though the Project had been fully
occupied during such year.
For a period of one year following Tenant's receipt of Landlord's statement of
actual Operating Costs, Landlord shall keep available for Tenant's inspection
copies of all supporting statements relating to Operating Costs. During this
period Tenant may audit Landlord's Operating Costs records upon reasonable
notice to Landlord. The audit must be performed during regular business hours in
the offices where Landlord maintains its accounting records. Within ten (10)
business days after the date of the audit, Tenant will provide Landlord a copy
of the audit. Tenant shall not have the right to audit while in monetary
default. No subtenant will have the right to audit under this provision. AN
assignee, approved by Landlord, may have the right to audit as provided herein,
however, such right shall only apply to the assignee's term of occupancy in the
Premises pursuant to the Lease. In the event a discrepancy of five percent (5%)
or more is found in favor of Tenant, Landlord shall pay the cost of such audit.
6. ADDITIONAL TAXES: Tenant shall pay as additional rent to Landlord, together
with each installment of Base Rent, the amount of any gross receipts tax, sales
tax or similar tax, or any tax imposed in lieu of real property taxes (but
excluding therefrom any income tax), or arising out of ownership, payable or
which will be payable by Landlord, by reason of the receipt of the Base Rent and
adjustments thereto.
7. SECURITY DEPOSIT: On the date of execution of the Lease by Tenant, there
shall be due and payable by Tenant a security deposit in the amount of Nineteen
Thousand, Seven Hundred and Sixty One Dollars ($19,761.00) to be held for the
performance by Tenant of Tenant's covenants and obligations under this Lease, it
being expressly understood that the deposit shall not be considered an advance
payment of rent or a measure of Landlord's damage in case of default by Tenant.
Upon the occurrence of any event of default by Tenant or breach by Tenant of
Tenant's covenants under this Lease, Landlord may, from time to time, without
prejudice to any other remedy, use the security deposit to the extent necessary
to make good any arrears of rent and/or damage, injury, expense or liability
caused to Landlord by the event of default or breach of covenant, any remaining
balance of the security deposit to be returned by Landlord to Tenant upon
termination of this Lease.
8. LEASEHOLD IMPROVEMENTS: Landlord shall make and install or provide for the
installation of leasehold improvements in accordance with the plans,
specifications, terms and conditions set forth in Exhibit B. Landlord will
provide Tenant a leasehold allowance of Twenty Dollars and Seventy Five Cents
($20.75) per square foot, or Five Hundred Sixty Thousand Dollars($560,000.00).
Except as specifically provided for in this Lease, Landlord shall have no
obligation to repair, improve, redecorate or remodel the Premises. All
contractors and subcontractors performing work at the Premises for the initial
lease-up of the building must be recognized and approved by the Building Trades
Council having jurisdiction and each such contractor or subcontractor must be
bound by and a signatory to an applicable bargaining agreement and observe area
standards for wages and other terms and conditions of employment, including
fringe benefits; provided, however, that this requirement does not apply to or
affect any maintenance or similar type of workers performing services at the
Premises or employees of Tenant after the Premises are complete.
9. UTILITIES: Landlord shall provide mains and conduits to supply water, gas,
electricity and sanitary sewage service to the Premises. Tenant shall pay, when
due, all charges for sewer usage or rental, garbage disposal, refuse removal,
water, electricity, gas, telephone and/or other utility services or energy
source furnished to the Premises during the term of this Lease, or any renewal
or extension thereof. If Landlord elects to furnish any of the foregoing, the
rate charged by Landlord for such utility services or other services furnished
or caused to be furnished by Landlord shall not exceed the rate Tenant would be
required to pay to a utility company or service company furnishing any of the
foregoing utilities or services. The charges thereof shall be deemed additional
rent.
10. CARE AND REPAIR OF PREMISES, BUILDING AND PROJECT: Tenant shall, at all
times throughout the terms of this Lease, including renewals and extensions, and
at its sole expense, keep and maintain the Premises in a clean, safe, sanitary
and first class condition and in compliance with all applicable laws, codes,
ordinances, rules and regulations provided, however, that the initial
installation shall be in compliance. Tenant's obligations hereunder (excluding
Landlord's negligence) shall include but not be limited to the maintenance,
repair and replacement, if necessary, of all lighting, HVAC and plumbing
fixtures and equipment, fixtures, motors and machinery, all interior walls,
partitions, doors and windows, including the regular painting thereof, all
exterior entrances, windows, doors and docks and the replacement of all broken
glass. When used in this provision, the term "repairs" shall include
replacements or renewals when necessary, and all such repairs made by the Tenant
shall be equal in quality and class to the original work. For the first five
years of the lease term Tenant's obligations for HVAC shall be limited to
repairs. Notwithstanding the foregoing, Landlord shall extend to Tenant all
warranties related to Tenant's Premises.
If Tenant fails, refuses or neglects to maintain or repair the Premises as
required in this Lease after notice shall have been given Tenant, Landlord may
make such repairs without liability to Tenant for any loss or damage that may
accrue to Tenant's merchandise, fixtures or other property or to Tenant's
business by reason thereof, (except from negligent acts) and upon completion
thereof, Tenant shall pay to Landlord all costs plus 15% for overhead incurred
by Landlord in making such repairs upon presentation to Tenant of an invoice
therefor.
Landlord shall keep the foundation, exterior walls (except plate glass or glass
or other breakable materials used in structural portions) and roof in good
repair, and if necessary or required by proper governmental authority, make
modifications or replacements thereof, except that Landlord shall not be
required to make any such repairs, modifications or replacements which become
necessary or desirable by reason of the negligence of Tenant, its agents,
servants or employees, or by reason of anyone illegally entering or upon the
Premises.
Landlord shall maintain and manage all common areas of the Project, including
grounds and parking areas. The cost of said maintenance shall be prorated in
accordance with Section 4 of this Lease. All such maintenance which is provided
by Landlord shall be provided as reasonably necessary for the comfortable use
and occupancy of the Premises during business hours, including Saturdays,
Sundays, and holidays, upon the condition that the Landlord shall not be liable
for damages for failure to do so due to causes beyond its control.
11. COVENANTS OF TENANT: Tenant agrees that it shall:
A. Observe such rules and regulations as from time to time may be put in effect
by Landlord for the general safety, comfort and convenience of Landlord,
occupants and tenants of the Building.
B. Give Landlord access to the Premises at all reasonable times, without change
or diminution of rent, to enable Landlord to examine the same and to make
such repairs, additions and alterations as Landlord may deem advisable, and
during the ninety (90) days prior to the expiration of the Term, to exhibit
the Premises to prospective tenants and to place within the Project any
usual or ordinary 'For Lease" signs.
C. Keep the Premises in good order and condition and replace all broken glass
with glass of the same quality as that broken, save only glass broken by
fire or other casualty covered by standard all risk insurance, and commit no
waste on the Premises.
D. Pay for all electric lamps, starters and ballasts used in the Premises.
E. Upon the termination of this Lease in any manner whatsoever, remove Tenant's
goods and effects and those of any other person claiming under Tenant, and
quit and deliver up the Premises to Landlord peaceably and quietly in as
good order and condition as the same are now in or hereafter may be put in
by Landlord or Tenant, reasonable use and wear thereof and repairs which are
Landlord's obligation excepted. Goods and effects not removed by Tenant at
the termination of this Lease, however terminated, shall be considered
abandoned and Landlord may dispose of the same as it deems expedient.
F. The Tenant may not assign this Lease or sublet all or any part of the
Premises voluntarily, involuntarily or by operation of law, without first
obtaining Landlord's written consent thereto. Landlord's consent will not be
unreasonably withheld provided that (i) the occupancy of any such assignee
or sublessee is not inconsistent with the character of the Building; (ii)
such assignee or sublessee shall assume in writing the performance of the
covenants and obligations of Tenant hereunder; (iii) a fully executed copy
of any such assignment or sublease shall be immediately delivered to
Landlord but the making of such assignment or sublease shall not be deemed
to release Tenant from the payment and performance of any of its obligations
under this Lease; (iv) Tenant shall promptly disclose and pay to Landlord as
additional rent hereunder any rent or other payments pursuant to any
sublease which exceeds the amounts payable hereunder and any other
consideration paid, or to be paid, by reason of the assignment or sublease;
and(v) such assignment or subletting is approved by any mortgagee holding a
mortgage covering the Premises which reserves such right unto the mortgagee.
Notwithstanding the foregoing, if Tenant wishes to assign this Lease or
sublet all or any part of the Premises to a named third party, Tenant shall
first offer, in writing, to assign or sublet (as the case may be) to
Landlord on the same terms and conditions and for the same Base Rent and
additional rent as provided in this Lease. Any such offer by Tenant shall be
deemed to have been rejected by Landlord unless within ten days from receipt
thereof, Landlord delivers to Tenant written notice of acceptance of
Tenant's offer.
G. Not place signs on or about the Premises without first obtaining Landlord's
written consent thereto.
H. Not overload, damage or deface the Premises or do any act which may make
void or voidable any insurance on the Premises or the Building, or which may
render an increased or extra premium payable for any insurance deemed
necessary or advisable by Landlord.
I. Not place any additional locks on any of Tenant's doors without the written
consent of the Landlord. The Landlord shall have the right to keep pass keys
to the Premises, however, Landlord shall provide 24 hours prior notice to
enter the premises except for emergencies or for routine maintenance
provided during regular business hours.
J. Not make any alterations or additions to the Premises which exceed
$10,000.00 without obtaining the prior written approval of the Landlord
thereto, and all alterations, additions or improvements (including carpeting
or other floor covering which has been glued or otherwise affixed to the
floor) which may be made by either of the parties hereto upon the Premises,
except movable office furniture and equipment, shall be the property of
Landlord, and shall remain upon and be surrendered with the Premises, as a
part thereof, at the termination of this Lease.
K. Keep the Premises and the Project free from any mechanics', materialmen's,
contractors' or other liens arising from, or any claims for damages growing
out of, any work performed, materials furnished or obligations incurred by
or on behalf of Tenant. Provided, however, that Tenant shall have the right
to contest any such lien, in which event such lien shall not be considered a
default under this Lease until the existence of the lien has been finally
adjudicated and all appeal periods have expired. Tenant shall indemnify and
hold harmless Landlord from and against any such lien, or claim or action
thereon, reimburse Landlord promptly upon demand therefor by Landlord for
costs of suit and reasonable attorneys' fees incurred by Landlord in
connection with any such lien, claim or action, and, upon written request of
Landlord, provide Landlord with a bond in an amount and under circumstances
necessary to obtain a release of the Premises or the Project from such lien.
L. Cause to be performed by a competent service company, preventative
maintenance of all HVAC units and warehouse unit heaters serving the
Premises, as recommended by the equipment manufacturer.
M. Not carry any stock of goods or do anything in or about said Premises which
will increase insurance rates on said Premises or the Building in which the
same are located without the Landlord's written consent. If Landlord shall
consent to such use, Tenant agrees to pay as additional rental any increase
in premiums for insurance resulting from the business carried on in the
Premises by Tenant. Tenant shall, at its own expense, comply with the
requirements of insurance underwriters and insurance rating bureaus and
governmental authorities having jurisdiction.
N. Maintain in full force and effect during the term hereof, a policy of public
liability insurance under which Landlord and Tenant are named insured. The
minimum limits of liability of such insurance shall be $1,000,000.00
combined single limit as to bodily injury and property damage. Tenant agrees
to deliver a certificate of insurance evidencing such coverage to Landlord.
Such policy shall contain a provision requiring thirty (30) days written
notice to Landlord before cancellation of the policy can be effected.
12. AMERICANS WITH DISABILITIES ACT: The parties agree that the liabilities and
obligations of Landlord and Tenant under that certain federal statute commonly
known as the Americans With Disabilities Act as well as the regulations and
accessibility guidelines promulgated thereunder as each of the foregoing is
supplemented or amended from time to time (collectively, the "ADA") shall be
apportioned as follows:
A. If any of the common areas of the Project, including, but not limited to,
exterior and interior routes of ingress and egress, off-street parking and
all rules and regulations applicable to the Premises, the Building or the
Project, fails to comply with the ADA, such nonconformity shall be promptly
made to comply by Landlord. Landlord shall also cause its manager of the
Building and the Project (the "Manager") to comply with the ADA in its
operation of the Building and the Project.
B. Tenant and Landlord acknowledge and agree that Landlord has reviewed and
approved the plans and specifications for Tenant's leasehold improvements
and will construct Tenant's leasehold improvements in compliance with
current interpretations of the ADA. If Landlord's construction of Tenant's
leasehold improvements does not comply with current interpretation of the
ADA, Landlord shall be responsible for any alterations or additions which
may be required by the ADA at any time prior to or subsequent to the
commencement of this Lease. In the event that alterations or additions to
Tenant's leasehold improvements constructed by Landlord are required due to
any change in the ADA or in the interpretation of the ADA subsequent to the
commencement of this Lease, Tenant shall bear the responsibility for such
changes.
From and after the commencement date of this Lease, Tenant covenants and
agrees to conduct its operations within the Premises in compliance with the
ADA. If any of the Tenant's operations fail to comply with the ADA, such
nonconformity shall be promptly made to comply by Tenant. In the event that
Tenant elects to undertake any alterations to, for or within the Premises,
Tenant agrees to cause such alterations to be performed in compliance with
the then current interpretation of the ADA.
13. PARKING AND DRIVES: Tenant, its employees, and invitees shall have the
nonexclusive right to use the common driveways and parking lots along with the
other tenants and customers of the building. The use of such driveways and
parking facilities are subject to such reasonable rules and regulations as the
Landlord may impose. Tenant further agrees not to use, or permit the use by its
employees, the parking areas for the overnight storage of automobiles or other
vehicles without the written permission of Landlord.
14. CASUALTY LOSS: If the Premises is damaged in part or whole from any cause
and the Premises can be substantially repaired and restored within one hundred
eighty (180) days from the date of the damage using standard working methods and
procedures. Landlord shall at its expense promptly and diligently repair and
restore the Premises to substantially the same condition as existed before the
damage. This repair and restoration shall be made within one hundred eighty
(180) days from the date of the damage unless the delay is due to causes beyond
Landlord's reasonable control.
If the Premises cannot be repaired and restored within the one hundred eighty
(180) day period, then either party may, within ten (10) days after determining
that the repairs and restoration cannot be made within one hundred eighty (180)
days, cancel the Lease by giving notice to the other party. If the Premises is
not repaired and restored within one hundred eighty (180) days from the date of
the damage, then Tenant may cancel the Lease at any time after the one hundred
eightieth (180th) day and before the two hundred tenth (210th) day following the
date of damage. Tenant shall not be able to cancel this Lease if its willful
misconduct caused the damage unless Landlord is not promptly and diligently
repairing and restoring the Premises.
Unless the damage is caused by Tenant's willful misconduct, the Base Rent and
Additional Rent shall abate in proportion to that part of the Premises that is
unfit for use in Tenant's business. The abatement shall consider the nature and
extent of interference to Tenant's ability to conduct business in the Premises
and the need for access and essential services. The abatement shall continue
from the date the damage occurred until ten (10) business days after Landlord
completes the repairs and restoration, or until Tenant again uses the Premises
or the part rendered unusable, whichever is first.
Landlord shall not be obligated to repair or restore damage to Tenant's trade
fixtures, furniture, equipment, or other personal property, or any improvements
made by Tenant.
Landlord or Tenant may cancel this Lease if
(i) more than forty percent (40%) of the Building is damaged and the
Landlord decides not to repair and restore the Building;
(ii) any mortgagee -of the Building does not allow adequate insurance
proceeds for repair and restoration;
(iii) the damage is not covered by Landlord's insurance; or
(iv) the Lease is in the last twelve (12) months of its Term. To cancel,
Landlord or Tenant must give notice to the other party within thirty
(30) days after knowledge of the damage. The notice must specify the
cancellation date, which shall be at least thirty (30) but not more
than sixty (60) days after the date notice is given.
15. CONDEMNATION: if the entire Premises is taken by eminent domain or
transferred under threat of such taking, this Lease shall automatically
terminate as of the date of taking. If a portion of the Premises are taken by
eminent domain, Landlord or Tenant shall have the right to terminate this Lease
as of the date of taking by giving written notice thereof to the other party
within ninety (90) days after such date of taking. If Landlord does not elect to
terminate this Lease, it shall, at its expense, restore the Premises, exclusive
of any improvements or other changes made therein by Tenant, to as near the
condition which existed immediately prior to the date of taking as reasonably
possible, and to the extent that the Premises are rendered untenantable, the
rent shall proportionately abate. All damages awarded for a taking under the
power of eminent domain shall belong to and be the exclusive property of
Landlord, whether such damages be awarded as compensation for diminution in
value of the leasehold estate hereby created or to the fee of the Premises;
provided, however, that Landlord shall not be entitled to any separate award
made to Tenant for the value and cost of removal of its personal property and
fixtures or Leasehold Improvements.
16. DELAY IN POSSESSION: If, the Premises shall, on the scheduled date of
commencement of the Term, not be ready for occupancy by the Tenant due to the
possession or occupancy thereof by any person not lawfully entitled thereto, or
because construction has not yet been completed, or by reason of any building
operations, repair or remodeling to be done by Landlord, Landlord shall use due
diligence to complete such construction, building operations, repair or
remodeling and to deliver possession of the Premises to Tenant. The Landlord,
using such due diligence, shall not in any way be liable for failure to obtain
possession of the Premises for Tenant or to timely complete such construction,
building operations, repair or remodeling, but the rental and other charges
payable by 'tenant hereunder shall be abated until the Premises shall, on
Landlord's part, be ready for occupancy by Tenant, this Lease remaining in all
other respects in full force and effect and the Term and conditions shall be
extended proportionately.
17. LIABILITY AND INDEMNITY: Save for its gross negligence, Landlord shall not
be responsible or liable to Tenant for any loss or damage (i) that may be
occasioned by or through the acts or omissions of persons occupying any part of
the Building or any persons transacting any business in or about the Building or
persons present in or about the Building for any other purpose or (ii) for any
loss or damage resulting to Tenant or its property from burst, stopping or
leaking water, sewer, sprinkler or steam pipes or plumbing fixtures or from any
failure of or defect in any electric line, circuit or facility. Tenant shall not
defend, indemnify and save Landlord harmless from and against all liabilities,
damages, claims, costs, charges, judgments and expenses, including, but not
limited to, reasonable attorneys' fees, which may be imposed upon or incurred or
paid by or asserted against Landlord, the Premises or any interest therein or in
the Building by reason of or in connection with any use, non-use, possession or
operation of the Premises, or any part thereof, any negligent or tortious act on
the part of Tenant or any of its agents, contractors, servants, employees,
licensees OR invitees, any accident, injury, death or damage to any person or
property occurring in, on or about the Premises or any part thereof, and any
failure on the part of Tenant to perform any of the tern-is or conditions of
this Lease provided, however, that nothing contained in this paragraph shall be
deemed to require Tenant to indemnify Landlord with respect to any gross
negligence or tortious act committed by Landlord or to any extent prohibited by
law.
18. MUTUAL RELEASE/WAIVER OF SUBROGATION: Each of Landlord and Tenant hereby
releases the other from any and all liability or responsibility to the other or
anyone claiming through or under them by way of subrogation or otherwise for any
loss or damage to property caused by any of the all risk casualties, even if
such casualty shall have been caused by the fault or negligence of the other
party, or anyone for whom such party may be responsible.
19. HAZARDOUS SUBSTANCES: Tenant shall not (either with or without negligence)
cause or permit the escape, disposal or release of any biologically or
chemically active or other hazardous substances or materials. Tenant shall not
allow the storage or use of such substances or materials in any manner not
sanctioned by law or by the highest standards prevailing in the industry for the
storage and use of such substances or materials, nor allow to be brought into
the Project any such materials or substances except to use in the ordinary
course of Tenant's business, and then only after written notice is given to
Landlord of the identity of such substances or materials. Without limitation,
hazardous substances and materials shall include those described in the
Comprehensive Environmental Response Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601 et. seq., and applicable state or local laws and
the regulations adopted under these acts. If any lender or governmental agency
shall ever require testing to ascertain whether or not there has been any
release of hazardous materials, then the reasonable costs thereof shall be
reimbursed by Tenant to Landlord upon demand as additional charges if such
requirement applies to the Premises. In addition, Tenant shall execute
affidavits, representations and the like from time to time at Landlord's request
concerning Tenant's best knowledge and belief regarding the presence of
hazardous substances or materials on the Premises. In all events, Tenant shall
indemnify Landlord in the manner elsewhere provided in this Lease from any
release of hazardous materials on the Premises occurring while Tenant is in
possession, or elsewhere if caused by Tenant or persons acting under Tenant. The
within covenants shall survive the expiration or earlier termination of the
Term.
20. DEFAULT: Tenant hereby agrees that in case Tenant shall default in making
its payments hereunder or any of them or in performing any of the other
agreements, terms and conditions of this Lease, then, in any such event,
Landlord, in addition to all other rights and remedies available to Landlord by
law or by other provisions hereof, may after five days written notice, with due
process, re-enter immediately into the Premises and remove all persons and
property therefrom, and, at Landlord's option, annul and cancel this Lease as to
all future rights of Tenant and Tenant hereby expressly waives the service of
any notice in writing of intention to re-enter as aforesaid. Tenant further
agrees that in case of any such termination Tenant will indemnify the Landlord
against all loss of rents and other damage which Landlord incurs by reason of
such termination, including, but not being limited to, costs of restoring and
repairing the Premises and putting the same in rentable condition, costs of
renting the Premises to another tenant, loss or diminution of rents and other
damage which Landlord may incur by reason of such termination, and all
reasonable attorney's fees and expenses incurred in enforcing any of the terms
of the Lease. Neither acceptance of rent by Landlord, with or without knowledge
of breach, nor failure of Landlord to take action on account of any breach
hereof or to enforce its rights hereunder shall be deemed a waiver of any
breach, and absent written notice or consent, said breach shall be a continuing
one.
21. NOTICES: All bills, statements, notices or communications which Landlord may
desire or be required to give to Tenant shall be deemed sufficiently given or
rendered if in writing and either delivered to Tenant personally or sent by
registered or certified mail addressed to Tenant at the Premises and the time of
rendition thereof of the giving of such notice or communication shall be deemed
to be the time when the same is delivered to Tenant or deposited in the mail as
herein provided. Any notice by Tenant to Landlord must be served by registered
or certified mail addressed to Landlord at the address where the last previous
rental hereunder was payable, or in case of subsequent change upon notice given,
to the latest address furnished.
22. HOLDING OVER: Should Tenant continue to occupy the Premises after expiration
or termination for any reason of the Term or any renewal or renewals thereof
such tenancy shall be from month to month and in no event from year to year or
for any longer term, and shall be on all the terms and conditions hereof
applicable to a month to month tenancy except that Base Rent shall equal one
hundred fifty percent (150%) of the Base Rent plus Tenant's Proportionate Share
of Operating Costs payable at the time of such expiration or termination.
Nothing herein, however, shall prevent Landlord from removing Tenant forthwith
and seeking all remedies available to Landlord in law or equity.
23. SUBORDINATION: The rights of Tenant shall be and are subject and subordinate
at all times to the lien of any mortgage now or hereafter in force against the
Project, and Tenant shall execute such further instruments subordinating this
Lease to the lien of any such mortgage as shall be requested by Landlord,
including upon request an agreement by Tenant to attorn to the holder of such
mortgage, in return for a covenant of nondisturbance of Tenant's occupancy by
such holder in the event that such holder, its successors or assigns, succeeds
to the interest of Landlord. Landlord agrees to make a commercially reasonable
effort to obtain a non-disturbance and subordination agreement from its current
lender.
24. ESTOPPEL CERTIFICATE: Tenant shall at any time and from time to time, upon
not less than ten (10) days prior written notice from Landlord, execute,
acknowledge and deliver to Landlord and any other parties designated by
Landlord, a statement in writing certifying (a) that this Lease is in full force
and effect and is unmodified (or, if modified, stating the nature of such
modification), (b) the date to which the rental and other charges payable
hereunder have been paid in advance, if any, and (c) that there are, to Tenant's
knowledge, no uncured defaults on the part of Landlord hereunder (or specifying
such defaults if any are claimed). Any such statement may be furnished to and
relied upon by any prospective purchaser, lessee or encumbrancer of all or any
portion of the Project.
25. SERVICE CHARGE: Tenant agrees to pay a service charge equal to one percent
(I%) per month or any portion thereof of any payment of monthly Base Rent or
additional charge payable by Tenant hereunder which is not paid within ten (10)
days from the date due.
26. BINDING EFFECT: The word "Tenant", wherever used in this Lease, shall be
construed to mean tenants in all cases where there is more than one tenant, and
the necessary grammatical changes required to make the provisions hereof apply
to corporations, partnerships or individuals, men or women, shall in all cases
be assumed as though in each case fully expressed. Each provision hereof shall
extend to and shall, as the case may require, bind and inure to the benefit of
Landlord and Tenant and their respective heirs, legal representatives,
successors and assigns, provided that this Lease shall not inure to the benefit
of any heir, legal representative, transferee or successor of Tenant except upon
the express written consent or election of Landlord.
27. TRANSFER OF LANDLORD'S INTEREST: In the event of any transfer or transfers
of Landlord's interest in the Premises or the Project, other than a transfer for
security purposes only, the transferor shall be automatically relieved of any
and all obligations and liabilities on the part of Landlord accruing from and
after the date of such transfer.
28. LIMITATION OF LIABILITY: In the event that Landlord is ever adjudged by any
court to be liable to Tenant in damages, Tenant specifically agrees to look
solely to Landlord's interest in the Building for the recovery of any judgment
from Landlord, it being agreed that Landlord, or if Landlord is a partnership,
its partners whether general or limited, or if Landlord is a corporation, its
directors, officers, or shareholders, shall never be personally liable for any
judgment. The provision contained in the foregoing sentence is not intended to,
and shall not, limit any right that Tenant might otherwise have to obtain
injunctive relief against Landlord or Landlord's successor in interest, or to
maintain any other action not involving the personal liability of Landlord (or
if Landlord is a partnership, its partners whether general or limited, or if
Landlord is a corporation, requiring its directors, officers or shareholders to
respond in monetary damages from assets other than Landlord's interest in the
Building), or to maintain any suit or action in connection with enforcement or
collection of amounts which may become owing or payable under or on account of
insurance maintained by Landlord.
29. ADDITIONAL RENT AMOUNTS: Any amounts in addition to Base Rent payable to
Landlord by Tenant hereunder, including without limitation amounts payable
pursuant to Sections 5, 6, 7, 8, 9, 10F, 10K, 17 and Exhibit B, hereof
("Additional Rent") shall be an obligation of Tenant hereunder and all such
Additional Rent shall be due and payable upon demand.
30. INCORPORATION OF EXHIBITS: The following exhibits to this Lease are hereby
incorporated by reference for all purposes as fully set forth at length herein:
Exhibit A Floor Plan of Premises
Exhibit B List of Leasehold Improvements Plans and Specifications
Exhibit C Site Plan and Legal Description
31. FORCE MAJEURE: All of the obligations of Landlord and of Tenant under this
Lease are subject to and shall be postponed for a period equal to any delay or
suspension resulting from fire, strikes, acts of God, and other causes beyond
the control of the party delayed in its performance hereunder, this Lease
remaining in all other respects in full force and effect and the Term not
thereby extended. Provided nevertheless, the unavailability of funds for payment
or performance of Tenant's obligations hereunder shall not give rise to any
postponement or delay in such payment or performance of Tenant's obligations
hereunder.
32. BROKERS: Unless otherwise agreed in writing, if Tenant has dealt with any
person or real estate broker in respect to leasing or renting space in the
Building, except United Properties (the listing Broker) or Essence Real
Estate Services, Tenant shall be solely responsible for the payment of any
fee due said person or firm and Tenant shall hold Landlord free and harmless
from and against any liability in respect thereto.
33. GENERAL: The submission of this Lease for examination does not constitute
the reservation of or an option for the Premises, and this Lease becomes
effective only upon execution and delivery hereof by Landlord and Tenant.
This Lease does not create the relationship of principal and agent or of
partnership, joint venture or any association between Landlord and Tenant,
the sole relationship between Landlord and Tenant being that of lessor and
lessee. No waiver of any default of Tenant hereunder shall be implied from
ally omission by Landlord to take any action oil account of such default if
such default persists or is repeated, and no express waiver shall affect any
default other than the default specified in the express waiver and that only
for the time and to the extent therein stated. Each term and each provision
of this Lease performable by Tenant shall be construed to be both a covenant
and a condition. The topical headings of the several paragraphs and clauses
are for convenience only and do not define, limit or construe the contents
of such paragraphs or clauses. All preliminary negotiations are merged into
and incorporated in this Lease. This Lease can only be modified or amended
by an agreement in writing signed by the parties hereto, their successors or
assigns. All provisions hereof shall be binding upon the heirs, successors
and assigns of each party hereto.
34. SEVERABILITY: The invalidity of any provision, clause or phrase herein
contained shall not serve to render the balance of this Lease ineffective or
void and the same shall be construed as if such had not been herein set forth.
IN WITNESS HEREOF, the respective parties hereto have caused this Lease to be
executed the day and year first above written.
LANDLORD: TENANT:
RYAN COMPANIES U S, INC. SPANLINK COMMUNICATIONS, INC.
BY: Timothy P. McShane BY: /s/ Patrick P. Irestone
Its: Vice President Its: President
EXHIBIT 13.1 Audited Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Spanlink Communications, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Spanlink Communications,
Inc. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 13, 1997
<TABLE>
<CAPTION>
SPANLINK COMMUNICATIONS, INC.
BALANCE SHEET
December 31,
---------------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,284,952 $ 344,689
Marketable securities 2,092,553
Accounts receivable, less allowance for
doubtful accounts of $56,000 and $22,000 1,993,667 752,113
Costs and estimated earnings in excess
of billings 61,641 137,355
Other current assets 364,399 142,604
----------- -----------
Total current assets 6,797,212 1,376,761
----------- -----------
Property and equipment 1,261,693 506,869
Less accumulated depreciation (424,205) (283,567)
----------- -----------
Net property and equipment 837,488 223,302
Total assets $ 7,634,700 $ 1,600,063
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable - bank $ 230,531
Note payable - other 343,683
Accounts payable $ 924,590 208,177
Accrued expenses 802,421 369,610
Deferred maintenance revenue 497,088 361,024
Customer deposits 185,298 203,159
Other current liabilities 48,270 62,861
----------- -----------
Total current liabilities 2,457,667 1,779,045
----------- -----------
Commitments (Note 6)
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 December 31, 1996 and 1995 8,193,663 3,000
Accumulated deficit (3,016,630) (181,982)
----------- -----------
Total shareholders' equity (deficit) 5,177,033 (178,982)
----------- -----------
Total liabilities and shareholders'
equity (deficit) $ 7,634,700 $ 1,600,063
=========== ===========
See accompanying notes to the financial statements.
</TABLE>
SPANLINK COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS
For the Years Ended
December 31,
---------------------------
1996 1995
---- ----
Revenues $ 5,422,929 $ 4,340,449
Cost of revenues 2,175,018 1,751,114
----------- -----------
Gross profit 3,247,911 2,589,335
----------- -----------
Operating expenses:
Sales, general and administrative 5,210,783 2,115,506
Research and product development 1,016,048 238,916
----------- -----------
Total operating expenses 6,226,831 2,354,422
----------- -----------
(Loss) income from operations (2,978,920) 234,913
Interest income (expense) 144,272 (48,673)
----------- -----------
(Loss) income before income taxes (2,834,648) 186,240
Provision for income taxes 1,939
----------- -----------
Net (loss) income $(2,834,648) $ 184,301
=========== ===========
Net (loss) income per share $ (.66) $ .07
=========== ===========
Weighted average shares outstanding 4,301,213 2,700,000
=========== ===========
See accompanying notes to the financial statements.
<TABLE>
<CAPTION>
SPANLINK COMMUNICATIONS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock
---------------------------- Total
Number Accumulated Shareholders'
of Shares Amount Deficit Equity (Deficit)
------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 2,700,000 $ 3,000 $ (366,283) $ (363,283)
Net income 184,301 184,301
------------ ------------ ------------ ------------
Balances at December 31, 1995 2,700,000 3,000 (181,982) (178,982)
Common stock grants 70,500 246,750 246,750
Bridge loan stock warrants 64,000 64,000
Conversion of bridge loan to common
stock, net of unamortized original issue
discount and offering costs 125,000 342,273 342,273
Initial public offering, net of issuance
costs 2,185,000 7,537,640 7,537,640
Net loss (2,834,648) (2,834,648)
------------ ------------ ------------ ------------
Balances at December 31, 1996 5,080,500 $ 8,193,663 $ (3,016,630) $ 5,177,033
============ ============ ============ ============
See accompanying notes to the financial statements.
</TABLE>
<TABLE>
<CAPTION>
SPANLINK COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
For the Years Ended
December 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(2,834,648) $ 184,301
Reconciliation of net (loss) income to net cash (used) provided
by operating activities:
Depreciation 159,269 77,041
Amortization 27,525 10,656
Provision for doubtful accounts 34,000 9,200
Deferred income taxes 66,513 (66,513)
Common stock grant recognized as compensation expense 246,750
Amortization of original issue discount recognized as
interest expense 32,516
Changes in current assets and liabilities:
Accounts receivable (1,275,554) 134,445
Costs and estimated earnings in excess of billings 75,714 120,256
Other current assets (289,808) (22,670)
Accounts payable 716,413 (241,905)
Accrued expenses 432,811 106,247
Other current liabilities 142,612 91,645
----------- -----------
Net cash (used) provided by operating activities (2,465,887) 402,703
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities (5,092,553)
Maturities of marketable securities 3,000,000
Additions to property and equipment (773,455) (72,975)
----------- -----------
Net cash used by investing activities (2,866,008) (72,975)
----------- -----------
Cash flows from financing activities:
Payment of dividends accrued in prior years (39,000) (55,126)
Repayments on note payable - bank (230,531)
Advances on note payable - bank 230,531
Principal payments on other notes payable (343,683) (188,251)
Net proceeds from issuance of notes payable and warrants 347,732
Proceeds from sale of common stock, net of issuance
costs 7,537,640
-----------
Net cash provided (used) by financing activities 7,272,158 (12,846)
----------- -----------
Net increase in cash and cash equivalents 1,940,263 316,882
Cash and cash equivalents at beginning of year 344,689 27,807
----------- -----------
Cash and cash equivalents at end of year $ 2,284,952 $ 344,689
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 23,465 $ 46,822
=========== ===========
Cash paid during the year for income taxes $ 75,000 $ 1,321
=========== ===========
Noncash operating and financing activities:
Conversion of notes payable to common stock, net of
unamortized original issue discount and offering costs $ 342,273
===========
Accounts payable converted to notes payable $ 414,327
===========
See accompanying notes to the financial statements.
</TABLE>
SPANLINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS ACTIVITIES
Spanlink Communications, Inc. (the Company) was incorporated in 1988 and
designs, develops and markets interactive computer telecommunications software
and services that link business computer systems, telephone systems and the
Internet. The Company markets its specialized software systems through its sales
organization and licensed sales representatives throughout North America.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Cash Equivalents and Marketable Securities
Cash equivalents consist of highly liquid investments with original maturities
of three months or less and are readily convertible to cash. The Company has
adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," and has classified its
investments as available for sale in accordance with that standard. Marketable
securities generally consist of highly liquid money market funds, government
agency securities and high-grade commercial paper and are classified as short
term in the balance sheet based on maturity date. Marketable securities are
carried at amortized cost and unrealized holding gains and losses have not been
significant.
Fair Value of Financial Instruments
Cash, cash equivalents and marketable securities are valued at their carrying
amounts which are reasonable estimates of fair value. The fair value of all
other financial instruments approximates cost as stated.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist primarily of accounts receivable. The Company grants credit to customers
in the ordinary course of business and generally requires a customer deposit
upon the signing of any system installation contracts. No single region or
industry represents a significant concentration of credit risk. See Note 9 for
discussion of major customer and economic relationships.
Revenue Recognition
Revenues derived from system installation contracts are recognized over the
period the Company satisfies its obligations using the percentage-of-completion
method. Progress on the contracts is measured by the percentage of cost incurred
to date to the total estimated cost for each contract. Management considers cost
to be the best available measure of progress on these contracts. Changes in
conditions may result in revisions of estimated costs and earnings during the
course of the contract and are reflected in the accounting period in which the
facts which require the revision become known. In the normal course of business,
the Company also may be subject to a risk of loss by incurring costs to complete
a contract in excess of the fixed bid price.
Revenues derived from software license fees are recognized upon shipment of the
software if there are no significant post-delivery obligations. The Company
provides a 90 day warranty on sales of Company software products. Warranty costs
are accrued at the time of the initial software product revenue recognition.
Revenues derived from maintenance contracts are deferred and recognized ratably
over the contract period.
Property and Equipment
The Company's property and equipment is stated at cost. Depreciation is
calculated using straight-line and accelerated methods over the estimated lives
of the assets, which generally range from 3 to 7 years. Significant additions or
improvements extending asset lives are capitalized, while repairs and
maintenance are charged to expense as incurred.
Research and Product Development
Expenditures for research and software development costs are expensed as
incurred. Such costs are required to be expensed until the point that
technological feasibility and proven marketability of the product are
established. Costs otherwise capitalizable after technological feasibility is
achieved also have been expensed because they have not been significant or the
timing and probability of realization is not presently determinable.
Income Taxes
Income taxes are accounted for on the liability method under the provisions of
SFAS No. 109, "Accounting for Income Taxes."
Net (Loss) Income Per Share
Net (loss) income per share is computed based on the weighted average number of
common and common equivalent shares outstanding for the period. Common
equivalent shares which include options and warrants using the treasury stock
method have been excluded in 1996 as their effect would be anti-dilutive.
NOTE 3 - COSTS, ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS IN
PROGRESS
Costs, estimated earnings and billings on uncompleted contracts are summarized
as follows:
December 31,
-------------------------
1996 1995
---- ----
Costs incurred on uncompleted contracts $ 434,377 $ 295,212
Estimated earnings 491,288 331,316
------------ -----------
925,665 626,528
Billings to date (912,294) (513,034)
------------ -----------
$ 13,371 $ 113,494
============ ===========
This activity is included in the accompanying balance sheet under the following
captions:
December 31,
------------------------
1996 1995
---- ----
Costs and estimated earnings in excess of billings $ 61,641 $ 137,355
Billings in excess of costs and estimated earnings (48,270) (23,861)
----------- -----------
$ 13,371 $ 113,494
=========== ===========
These amounts are included in current assets and other current liabilities as
all contracts in progress are expected to be completed within one year.
NOTE 4 - NOTES PAYABLE
Note Payable - 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. The
bank line of credit provided for borrowings up to the lesser of $600,000 or 75%
of eligible accounts receivable at the bank's reference rate plus 5%.
Note Payable - Other
On August 2, 1995, the Company converted $414,327 of accounts payable to a
previous equipment vendor to an unsecured note payable bearing interest at 9%.
The Company paid the note in full in May 1996.
NOTE 5 - INCOME TAXES
Effective January 1, 1995, the shareholders of the Company consented to the
revocation of the Company's S corporation status and elected to be taxed as a C
corporation. As an S corporation, the Company's shareholders were allocated
their pro rata share of the Company's net income or loss on their individual
income tax returns and no income tax provision was recorded by the Company. 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 provision for income taxes for the year ended December 31, 1995
consisted of the following:
Current:
Federal $ 57,708
State 10,744
----------
Total current provision 68,452
Deferred:
Deferred tax asset recognized upon becoming a C corporation (77,412)
Other 10,899
----------
Total deferred provision (66,513)
----------
Provision for income taxes $ 1,939
==========
The Company's effective tax rate of 1.0% for 1995 differed from the federal
statutory rate of 34% due primarily to the benefit of the deferred tax asset
recognized on January 1, 1995 upon becoming a C corporation.
The Company has an available net operating loss carryforward for income tax
purposes of approximately $2,300,000 at December 31, 1996 which expires in the
year 2011. A valuation allowance exists for the entire net tax benefit
associated with the tax loss carryforward and temporary differences at December
31, 1996, as their realization presently is not assured. The deferred tax asset
recorded in the prior year was reserved in 1996 by a charge to operating
expense.
Deferred tax assets consist of the following:
December 31,
------------------
1996 1995
---- ----
Loss carryforward $ 860,000
Allowance for doubtful accounts 20,797 $ 8,244
Vacation accrual 11,241 6,558
Rent accrual 101,171
Deferred revenue 61,431
Other accruals 51,711 51,711
----------- ---------
1,106,351 66,513
Valuation allowance (1,106,351)
---------- ----------
$ 0 $ 66,513
=========== =========
NOTE 6 - OPERATING LEASE COMMITMENTS
The Company leases certain office space and equipment under operating lease
agreements. The office space lease requires the Company to pay certain annual
operating costs, including maintenance, insurance and real estate taxes. Rental
expense under these operating leases, excluding operating expenses for the
office space lease, for the years ended December 31, 1996 and 1995 was
approximately $103,332 and $126,646, respectively. In December 1996, the Company
signed a five and one half year lease for a new facility. At December 31, 1996,
future minimum lease payments under these operating leases are as follows:
Year Ending December 31,
------------------------
1997 $ 299,605
1998 319,347
1999 297,841
2000 249,145
2001 249,145
Thereafter 145,335
------------
Total minimum payments required $ 1,560,418
============
NOTE 7 - SHAREHOLDERS' EQUITY (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 financial statements and related
notes have been adjusted to give retroactive effect to such authorization and
split.
Stock Grant
On February 28, 1996 the Company issued 67,500 and 3,000 shares of restricted
common stock for no cash consideration to the Company's president and outside
directors, respectively. The issuance of these shares resulted in a contribution
to capital and compensation expense of $246,750.
Convertible Bridge Notes and Warrants
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 $283,732 after underwriter's
commission and offering expenses. The Bridge Notes provided for interest at 10%
per annum and converted to 125,000 shares of common stock upon the closing of
the Company's initial public offering.
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 was expensed over the outstanding period of the Bridge Notes.
Initial Public Offering
The Company completed an initial public offering (IPO) in May 1996 at a price of
$4.00 per common share. Net proceeds to the Company from the offering were
$7,537,640, net of commissions and issuance costs of $1,202,360. As part of the
IPO, the Company granted the underwriters a five year stock warrant to purchase
182,748 shares of common stock at $4.80 per share.
Stock Options
On January 31, 1996, the Company's Board of Directors and shareholders approved
the Company's 1996 Omnibus Stock Plan (the Plan). Under the fixed Plan, 750,000
common shares have been reserved for issuance of restricted shares or for
options to be granted to employees, consultants and non-employee directors.
Options granted generally are exercisable over a five year period from the date
of grant at prices not less than the fair market value at the date the options
are granted and expire ten years after the date of grant. The Plan allows for
the grant of incentive stock options, nonqualified stock options, reload
options, stock appreciation rights and restricted stock. In 1996, the Company
also granted 100,000 fixed options outside of the Plan. These options generally
follow the provisions of the Plan.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the options granted in 1996. Had compensation cost for the
Company's stock options been determined based on the fair value at the grant
date consistent with the provision of SFAS No. 123, the company's net loss and
net loss per share would have increased to the pro forma amounts indicated
below:
Net loss - as reported $ (2,834,648)
Net loss - pro forma $ (3,497,608)
Net loss per share - as reported $ (0.66)
Net loss per share - pro forma $ (0.81)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants beginning in 1996: dividend yield of 0%; expected
volatility of 55%; risk-free interest rate of 6.5%; and expected lives of 8.8
years.
There are 850,000 shares of common stock reserved for issuance upon exercise of
stock options as of December 31, 1996. A summary of stock option activity is as
follows:
<TABLE>
<CAPTION>
Weighted
Options Outstanding Weighted Average
-------------------- Average Remaining
Shares Price Exercise Contractual
Total Exercisable Per Share Price Life
----- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Granted and outstanding at
December 31, 1996 811,863 365,071 $3.38-$3.63 $3.50 8.6 years
The weighted average fair value of options granted during 1996 is $2.41.
</TABLE>
NOTE 8 - BENEFIT PLAN
The Company sponsors a profit sharing and 401(k) plan which provides that
eligible employees may contribute up to 15% of their annual earnings, not to
exceed the maximum allowed under the Internal Revenue Code. The plan covers
substantially all employees after specified periods of service and the
attainment of minimum age requirements. Company contributions are discretionary.
There were no Company contributions to the plan during 1996 and 1995.
NOTE 9 - MAJOR CUSTOMER AND ECONOMIC RELATIONSHIPS
The Company generates a significant portion of its revenues from Lucent
Technologies, Inc (Lucent). The Company has an agreement with Lucent that
provides for royalties to the Company based upon sales of its products by
Lucent. This agreement terminates in December 1999, but may be extended for
successive one year terms at the option of Lucent. The Company also has a
co-marketing arrangement with Lucent.
Total revenues from Lucent were approximately $2,550,000 and $2,300,000 for the
years ended December 31, 1996 and 1995, respectively, which represented 47% and
53% of total revenues for 1996 and 1995, respectively. Accounts receivable from
Lucent represented approximately 50% and 69% of total accounts receivable at
December 31, 1996 and 1995, respectively.
EXHIBIT 13.2 Management's Discussion and Analysis
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:
YEAR ENDED DECEMBER 31, 1996 1995
---- -----
Revenues 100.0% 100.0%
Cost of revenues 40.1 40.4
----- -----
Gross profit 59.9 59.6
Operating expenses:
Sales, general and administrative 96.1 48.7
Research and product development 18.7 5.5
----- -----
Total operating expenses 114.8 54.2
(Loss) income from operations (54.9) 5.4
Interest income (expense) 2.6 (1.1)
----- -----
(Loss) income before income taxes (52.3) 4.3
Provision for income taxes .1
----- -----
Net (loss) income (52.3)% 4.2%
===== =====
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES
Total revenues increased by 24.9% from $4,340,449 in 1995 to $5,422,929 in
1996. The increase was due primarily to a significant increase in configurable
software revenue. The Company's revenues are derived primarily from the sale of
systems generally comprised of hardware, configurable software, custom software
and services. In 1996, the Company shifted its focus from the sale of systems
comprised of custom developed software and related low margin hardware
components to higher margin configurable software packages. The hardware revenue
component of systems increased 22.5% from $856,336 in 1995 to $1,049,294 in
1996. The increase in hardware revenues was due primarily to a few large system
sales that included both hardware and software. Revenues from hardware as a
percentage of total revenues were 19.3% in 1996 and 19.7% in 1995. Software
revenues increased 26.4% from $2,427,508 in 1995 to $3,068,992 in 1996. The
increase was due primarily to an 86% increase in configurable software revenue
and partially offset by a 23% decrease in custom software. The Company
anticipates, but can provide no assurance, that revenues from configurable
software packages will continue to increase as a percentage of total revenues.
The Company expects revenues from custom software as a percentage of total
revenues to decrease over the next several years as it focuses its sales and
marketing efforts on its configurable software packages. Services revenues
increased 23.5% from $1,056,605 in 1995 to $1,304,643 in 1996. The increase
resulted primarily from an increased customer base and the success of the
Company's efforts to sell maintenance contracts and other services to its
existing customers.
COST OF REVENUES
Cost of revenues increased 24.2% from $1,751,114 in 1995 to $2,175,018 in 1996.
The increase was due primarily to a ramp up in cost of revenues department
expenses to support increased sales, as well as an increased hardware component
of costs.
GROSS PROFIT
Gross profit increased 25.4% to $3,247,911 in 1996 from $2,589,335 in 1995.
Gross profit as a percentage of total revenues increased slightly to 59.9% in
1996 from 59.6% in 1995. Gross profit as a percentage of total revenue will vary
from period to period depending on the product mix of sales revenue.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses increased significantly in 1996 to
$5,210,783 from $2,115,506 in 1995. Sales, general and administrative expenses
as a percentage of total revenues were 96.1% in 1996 and 48.7% in 1995. The
increase is due primarily to increased marketing expenditures, increased payroll
costs for additional sales and administrative personnel, increased sales
expenses, and increased professional services expenses, all as part of the
Company's plan to increase sales revenue.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenses increased significantly in 1996 to
$1,016,048 from $238,916 in 1995. Research and product development expenses were
the result of ongoing development of the Company's configurable software
packages and core software modules. Research and product development expenses as
a percentage of total revenues were 18.7% in 1996 and 5.5% in 1995. A portion of
the Company's custom software development efforts are included in cost of
revenues and are essentially customer sponsored product development expenses.
Accordingly, the Company's total research and product development efforts are
greater as a percentage of total revenues than the amounts indicated above.
Research and product development expenses are charged to operations as incurred.
Costs, otherwise capitalizable, also have been expensed because they have been
insignificant or the timing of realization is not determinable. The Company
expects the dollar amount of product development expenses to continue to
increase, although such expenses as a percentage of total revenues will vary
from period to period.
NET INTEREST INCOME (EXPENSE)
The Company recorded net interest income of $144,272 for the year ended December
31, 1996 versus net interest expense of $48,673 for the comparable period in
1995. The interest income resulted from investment of the cash proceeds from the
Company's initial public offering completed in the second quarter. Interest
income 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 TAX PROVISION
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. 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 year ended December 31, 1996 as the likelihood of
realization of the benefit is presently not assured.
NET LOSS
The Company incurred a net loss of $2,834,648 in 1996 due primarily to increased
operating expenses incurred to strengthen the Company's marketing, sales and
administration infrastructure.
IMPACT OF INFLATION
The Company believes that during 1996, inflation had no appreciable effect on
the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and marketable securities of $4,377,505
as of December 31, 1996 resulting from its initial public offering completed in
the second quarter. The Company's cash equivalents and marketable securities are
invested primarily in short term obligations of government agencies, treasury
notes, money market funds or high-grade commercial paper.
On April 29, 1996 the Company's initial public offering became effective,
resulting in approximately $7,537,000 of net proceeds including over-allotment.
During the balance of 1996, the net proceeds of the public offering were
partially used for the repayment of certain liabilities - $350,000, capital
expenditures - $650,000, increased sales and marketing - $1,400,000, increased
research and product development - $650,000 and other - $110,000. 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.
EXHIBIT 23.1 Consent of Price Waterhouse LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No.333-14949) of Spanlink Communications, Inc. of our
report dated February 13, 1997, appearing in the 1996 Annual Report to
Shareholders which is incorporated in this Annual Report on Form 10-KSB.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,284,952
<SECURITIES> 2,092,553
<RECEIVABLES> 2,049,667
<ALLOWANCES> 56,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,797,212
<PP&E> 1,261,693
<DEPRECIATION> 424,205
<TOTAL-ASSETS> 7,634,700
<CURRENT-LIABILITIES> 2,457,667
<BONDS> 0
0
0
<COMMON> 8,193,663
<OTHER-SE> (3,016,630)
<TOTAL-LIABILITY-AND-EQUITY> 7,634,700
<SALES> 5,422,929
<TOTAL-REVENUES> 5,422,929
<CGS> 2,175,018
<TOTAL-COSTS> 2,175,018
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 34,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,834,648)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,834,648)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,834,648)
<EPS-PRIMARY> (.66)
<EPS-DILUTED> (.66)
</TABLE>
