U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File No. 0-28138
SPANLINK COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1618845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7125 Northland Terrace, Minneapolis, MN
(Address of principal executive offices)
(612) 971-2000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date.
At November 6, 1998, there were 5,085,010 shares of the issuer's no par value,
Common Stock, outstanding.
Check whether this is a transitional small business disclosure format:
Yes No X
<PAGE>
SPANLINK COMMUNICATIONS, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheet as of 3
September 30, 1998 and December 31, 1997
Condensed Statement of Operations 4
for the three and nine month periods
ended September 30, 1998 and 1997
Condensed Statement of Cash Flows 5
for the nine month periods ended
September 30, 1998 and 1997
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis 7-9
or Plan of Operation
PART II. OTHER INFORMATION 10-11
SIGNATURES 12
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SPANLINK COMMUNICATIONS, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1998 1997
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 169,558 $ 703,658
Accounts receivable, net of allowances 2,290,973 2,113,271
Inventory 288,592 345,775
Costs and estimated earnings in excess of billings 1,135,601 554,572
Other current assets 257,819 261,572
----------- -----------
Total current assets 4,142,543 3,978,848
Property and equipment, net 1,208,473 1,264,160
Purchased intangibles 521,856 611,619
----------- -----------
Total assets $ 5,872,872 $ 5,854,627
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Advances on bank credit line $ 485,000 $ 0
Accounts payable 631,787 631,263
Accrued expenses 314,690 560,933
Current portion of long term liabilities 315,004 300,570
Deferred maintenance revenue 481,185 432,809
Other current liabilities 327,257 452,466
----------- -----------
Total current liabilities 2,554,923 2,378,041
Capital lease obligations 143,086 195,083
Royalties payable 40,411 250,000
Shareholders' equity:
Common stock 8,199,003 8,193,663
Accumulated deficit (5,064,551) (5,162,160)
----------- -----------
Total shareholders' equity 3,134,452 3,031,503
----------- -----------
Total liabilities and shareholders' equity $ 5,872,872 $ 5,854,627
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
SPANLINK COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS
For the three months and nine months ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
% %
1998 1997 Change 1998 1997 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 2,504,315 $ 1,782,940 40.5 $ 7,702,833 $ 4,442,407 73.4
Cost of Revenue 1,265,205 665,139 90.2 3,434,393 1,955,585 75.6
----------- ----------- ----- ----------- ----------- -----
Gross Profit 1,239,110 1,117,801 10.8 4,268,440 2,486,822 71.6
Gross profit as a
percentage of revenue 49.5% 62.7% 55.4% 56.0%
Operating expenses:
Sales, general and
administrative 1,071,274 996,628 7.5 3,162,502 3,666,191 (13.7)
Research and product development 321,738 324,595 (0.9) 975,287 1,195,055 (18.4)
----------- ----------- ----- ----------- ----------- -----
1,393,012 1,321,223 5.4 4,137,789 4,861,246 (14.9)
----------- ----------- ----- ----------- ----------- -----
Income (loss) from operations (153,902) (203,422) --- 130,651 (2,374,424) ---
Interest income (expense) (19,079) 8,549 --- (33,042) 77,642 ---
----------- ----------- ----- ----------- ----------- -----
Income (loss) before
income taxes (172,981) (194,873) --- 97,609 (2,296,782) ---
Provision (benefit) for
income taxes 0 0 --- 0 0 ---
----------- ----------- ----- ----------- ----------- -----
Net income (loss) $ (172,981) $ (194,873) $ 97,609 $(2,296,782)
=========== =========== =========== ===========
Basic and diluted net income
(loss) per share $ (0.03) $ (0.04) --- $ 0.02 $ (0.45) ---
Diluted weighted average common
shares outstanding 5,083,225 5,080,500 --- 5,182,081 5,080,500 ---
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SPANLINK COMMUNICATIONS, INC.
CONDENSED STATEMENT OF CASH FLOWS
For the nine months ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 97,609 $(2,296,782)
Reconciliation of net income (loss) to net cash
used by operating activities:
Depreciation and amortization 336,688 251,333
Changes in current assets and liabilities (1,008,673) (621,304)
----------- -----------
Net cash used by operating activities (574,376) (2,666,753)
----------- -----------
Cash flows from investing activities:
Net change in marketable securities 0 2,092,553
Additions to property and equipment (188,478) (326,643)
----------- -----------
Net cash (used) provided by investing activities (188,478) 1,765,910
----------- -----------
Cash flows from financing activities:
Advances on bank credit line 485,000 0
Repayments on capital lease obligation (51,997) (42,990)
Reduction of royalties payable (209,589) 0
Proceeds from exercise of incentive stock options 5,340 0
----------- -----------
Net cash provided (used) by financing activities 228,754 (42,990)
----------- -----------
Net decrease in cash and cash equivalents (534,100) (943,833)
Cash and cash equivalents at beginning of period 703,658 2,284,952
----------- -----------
Cash and cash equivalents at end of period $ 169,558 $ 1,341,119
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 49,732 $ 24,420
=========== ===========
Supplemental disclosure of noncash investing and financing activities:
Capital lease obligation incurred $ 0 $ 300,400
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
NOTE 1- CONDENSED FINANCIAL STATEMENTS
The unaudited condensed financial information contained in this report
reflects all adjustments (consisting of normal recurring adjustments) considered
necessary, in the opinion of management, for a fair presentation of results of
the interim periods presented for Spanlink Communications, Inc. (the "Company").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the most recent audited financial statements and notes thereto
included in the Company's Form 10-KSB for the fiscal year ended December 31,
1997. The results of operations of the periods ended September 30 are not
necessarily indicative of the results of operations for a full year.
NOTE 2 - USE OF ESTIMATES
The preparation of condensed interim financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Revenues
Total revenue increased 40.5% to $2,504,315 for the three-month period
ended September 30, 1998 from $1,782,940 for the comparable period in 1997. The
increase was due primarily to increased revenue across all major product
categories. Revenue for the nine-month period ended September 30, 1998 increased
73.4% over the comparable period in 1997 due also to higher revenues across all
major product categories.
Cost of Revenue
Cost of revenue increased 90.2% to $1,265,205 for the three-month period
ended September 30, 1998 from $665,139 for the three-month period ended
September 30, 1997. The increase was due primarily to higher costs to support
the increase in sales together with product mix changes. Cost of revenue
increased 75.6% for the nine-month period ended September 30, 1998 versus the
comparable period in 1997 due primarily to the higher sales levels.
Gross Profit
Gross profit increased 10.8% to $1,239,110 for the three-month period ended
September 30, 1998. Gross profit as a percentage of total revenue decreased from
62.7% for the three-month period ended September 30, 1997 to 49.5% for the
three-month period ended September 30, 1998. The lower gross margin for the
three-month period as a percentage of total revenue was due primarily to a
product mix shift to lower margin hardware and custom software applications.
Gross margin as a percentage of total revenue decreased slightly to 55.4% for
the nine-month period ended September 30, 1998 from 56.0% for the comparable
period in 1997.
Sales, General and Administrative
Sales, general and administrative expenses increased 7.5% to $1,071,274 for
the three-month period ended September 30, 1998 from $996,628 for the
three-month period ended September 30, 1997. The increase is due primarily to
higher sales and marketing expenses. Sales, general and administrative expenses
decreased 13.7% for the nine-month period ended September 30, 1998 to $3,162,502
from $3,666,191 for the same period in 1997. The decrease resulted from reduced
sales and marketing costs in the first half of 1998, together with non-recurring
costs related to severance and restructuring charges of approximately $200,000
incurred in 1997.
<PAGE>
Research and Product Development
Research and product development expenses decreased 0.9% to $321,738 for
the three-month period ended September 30, 1998 from $324,595 for the
three-month period ended September 30, 1997. Research and development expenses
decreased 18.4% for the nine month period ended September 30, 1998 to $975,287
from $1,195,055 for the comparable period in 1997 due primarily to the Company'
cost containment efforts.
Interest Income (Expense)
The Company recorded net interest expense of $19,079 for the three-month
period ended September 30, 1998, versus net interest income of $8,549 for the
comparable period in 1997. Net interest expense for the nine-month period ended
September 30, 1998 was $33,042 versus net interest income of $77,642 for the
comparable period in 1997. The changes from 1997 to 1998 in each case reflect
the Company's borrowing levels under its bank credit line in 1998 compared to
the Company's invested cash balances in 1997.
Income Taxes
The Company did not record a tax benefit for the three-month and
nine-month periods ended September 30, 1998 as the likelihood of realization of
the benefit is presently not assured.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $169,558 as of September 30,
1998. The Company established a $1,000,000 line of credit, subject to certain
asset levels, with its bank in April, 1998. At September 30, 1998, the remaining
available borrowing under this line was $515,000. The Company believes that its
current cash resources combined with projected operating cash flow and its
credit line will be sufficient to fund its operations and capital expenditures
through 1999.
Year 2000
Year 2000 Background
The Company's overall goal is to be Year 2000 ready. To accomplish this
goal, the Company has been addressing the issue with respect to both its
information technology (IT) and non-IT systems, as well as its business
relationships with key third parties. To be ready, the Company needs to evaluate
the Year 2000 issues and fix any problems it can so that all of its systems and
relationships will be suitable for continued use into and beyond the Year 2000.
<PAGE>
The Company began addressing the Year 2000 issue in 1998 using a multi-step
approach, including inventory and assessment, remediation and testing, and
contingency planning. The Company began by assessing its major internal software
systems that were susceptible to system failure or processing errors as a result
of the Y2K issue. This phase is substantially complete. The Company's Year 2000
efforts will also include assessment of "embedded" systems (such as security and
telephone systems, as well as heating and air conditioning systems).
As part of the assessment phase, the Company has also had conversations
with many of its major software and service suppliers, and has recently
initiated plans to obtain formal written assurances from such key third parties
in order to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. The Company has
not yet completed this part of the assessment phase and cannot predict the
outcome of other companies' remediation efforts.
Year 2000 Costs
The Company currently plans to substantially complete its Year 2000
compliance efforts by June 30, 1999. To date, the Company has spent only a
minimal amount during the assessment phase, which essentially amounts to
purchases of software and hardware and compensation of internal employees
working on Year 2000 projects. Although the Company has not yet completed its
assessment phase, the total remaining cost of such efforts is estimated at less
than $100,000. The cost of the project and the date on which the Company plans
to complete Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
availability of certain resources, third parties' Year 2000 readiness and other
factors.
Risk Assessment
Possible consequences to the company or its business partners not being
fully Y2K compliant could include delays in the receipt of revenues or inability
to meet customer needs. These consequences could have a material adverse impact
on the company's results of operations, financial condition and cash flows if
the Company is unable to conduct its business in the ordinary course.
The Company does not currently have a contingency plan but will continue to
monitor the necessity of such in 1999. If a contingency plan is reasonably
necessary, it will likely include identifying and securing alternative
suppliers, and the Company intends to have the plan substantially finalized by
June 30, 1999.
Forward-Looking Statements
Statements made in this report regarding the sufficiency of funds for 1999
and the impact of Year 2000 issues on the Company's business 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: (i) for sufficiency of capital, the availability of sufficient
capital if needed to finance the Company's business plan on terms satisfactory
to the Company; the ability of the Company to meet its revenue goals which
depends on competitive factors, such as the introduction of new products in the
same markets, and changes in operating costs, including labor and general
business and economic conditions; and (ii) for the Year 2000 impact, the
accuracy and reliability of the Company's and its suppliers' and customers'
assessment and remediation of Year 2000 issues. 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 - Financial Data Schedule (electronic version only).
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
SPANLINK COMMUNICATIONS, INC.
(Registrant)
Date: November 16, 1998 /s/ Brett A. Shockley
Brett A. Shockley
Chief Executive Officer
(Principal Executive Officer)
Date: November 16, 1998 /s/ Timothy E. Briggs
Timothy E. Briggs
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 169,558
<SECURITIES> 0
<RECEIVABLES> 2,290,973
<ALLOWANCES> 0
<INVENTORY> 288,592
<CURRENT-ASSETS> 4,142,543
<PP&E> 1,208,473
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,872,872
<CURRENT-LIABILITIES> 2,554,923
<BONDS> 0
0
0
<COMMON> 8,199,003
<OTHER-SE> (5,064,551)
<TOTAL-LIABILITY-AND-EQUITY> 5,872,872
<SALES> 7,702,833
<TOTAL-REVENUES> 7,702,833
<CGS> 3,434,393
<TOTAL-COSTS> 3,434,393
<OTHER-EXPENSES> 4,137,789
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,042
<INCOME-PRETAX> 97,609
<INCOME-TAX> 0
<INCOME-CONTINUING> 97,609
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97,609
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
