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, 1999
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 5, 1999, there were 5,124,472 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, 1999 and December 31, 1998
Condensed Statement of Operations 4
for the three and nine month periods
ended September 30, 1999 and 1998
Condensed Statement of Cash Flows 5
for the nine month periods ended
September 30, 1999 and 1998
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis 7-10
of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION 11
SIGNATURES 12
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SPANLINK COMMUNICATIONS, INC
CONDENSED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 83,600 $ 161,558
Accounts receivable, net of allowances 2,733,178 2,871,108
Inventory 566,569 505,787
Costs and estimated earnings in excess of billings 1,313,382 1,703,186
Other current assets 235,655 162,831
----------- -----------
Total current assets 4,932,384 5,404,470
Property and equipment, net 1,034,819 1,227,089
Purchased intangibles 398,492 491,015
Other assets 138,500 138,500
----------- -----------
Total assets $ 6,504,195 $ 7,261,074
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loan payable $ 1,325,000 $ 985,000
Accounts payable 742,337 1,259,812
Accrued expenses 251,739 294,167
Current portion of long term liabilities 113,805 107,755
Deferred maintenance revenue 524,065 439,697
Other current liabilities 364,385 451,613
----------- -----------
Total current liabilities 3,321,331 3,538,044
Capital lease obligation 87,893 137,006
Royalties payable 222,590 228,883
----------- -----------
Total liabilities 3,631,814 3,903,933
----------- -----------
Shareholders' equity:
Common stock 8,266,363 8,255,348
Accumulated deficit (5,393,982) (4,898,207)
----------- -----------
Total shareholders' equity 2,872,381 3,357,141
----------- -----------
Total liabilities and shareholders' equity $ 6,504,195 $ 7,261,074
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
SPANLINK COMMUNICATIONS, INC
CONDENSED STATEMENT OF OPERATIONS
For the three months and nine months ended September 30,
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Nine Months
% %
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 2,603,233 $ 2,504,315 3.9 $ 7,911,345 $ 7,702,833 2.7
Cost of revenue 996,964 1,265,205 (21.2) 3,373,991 3,434,393 (1.8)
----------- ----------- ----------- -------------
Gross profit 1,606,269 1,239,110 29.6 4,537,354 4,268,440 6.3
Gross profit as a percentage of revenue 61.7% 49.5% 57.4% 55.4%
Operating expenses:
Sales, general and administrative 1,173,580 1,071,274 9.5 3,739,739 3,162,502 18.3
Research and product development 388,370 321,738 20.7 1,199,951 975,287 23.0
----------- ----------- ----------- -------------
1,561,950 1,393,012 12.1 4,939,690 4,137,789 19.4
----------- ----------- ----------- -------------
Income (loss) from operations 44,319 (153,902) (402,336) 130,651
Interest expense 33,127 19,079 93,439 33,042
----------- ----------- ----------- -------------
Income (loss) before income taxes 11,192 (172,981) (495,775) 97,609
Provision for income taxes 0 0 0 0
----------- ----------- ----------- -------------
Net income (loss) $ 11,192 $ (172,981) $ (495,775) $ 97,609
=========== =========== ============= =============
Basic and diluted net income (loss) per
share $ 0.00 $ (0.03) $ (0.10) $ 0.02
Shares used in computing diluted net
income (loss) per share 5,257,442 5,083,225 5,109,927 5,182,081
</TABLE>
<PAGE>
SPANLINK COMMUNICATIONS, INC.
CONDENSED STATEMENT OF CASH FLOWS
For the nine months ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (495,775) $ 97,609
Reconciliation of net income (loss) to net cash
used by operating activities:
Depreciation and amortization 432,318 336,688
Changes in current assets and liabilities (162,585) (1,008,673)
----------- -----------
Net cash used by operating activities (226,042) (574,376)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (147,525) (188,478)
----------- -----------
Net cash (used) provided by investing activities (147,525) (188,478)
----------- -----------
Cash flows from financing activities:
Advances on bank credit line 340,000 485,000
Repayments on capital lease obligation (49,114) (51,997)
Reduction of royalties payable (6,293) (209,589)
Proceeds from exercise of incentive stock options 11,016 5,340
----------- -----------
Net cash provided (used) by financing activities 295,609 228,754
----------- -----------
Net decrease in cash and cash equivalents (77,958) (534,100)
Cash and cash equivalents at beginning of period 161,558 703,658
----------- -----------
Cash and cash equivalents at end of period $ 83,600 $ 169,558
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 125,104 $ 49,732
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1999
(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,
1998. 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 3.9% to $2,603,233 for the three-month period ended
September 30, 1999 from $2,504,315 for the comparable period in 1998. The
increase was due primarily to increased revenue from custom software,
professional services and maintenance contracts, partly offset by lower revenue
from purchased products and packaged software. Revenue for the nine-month period
ended September 30, 1999 increased 2.7% over the comparable period in 1998 for
the same reasons outlined above.
Cost of Revenue
Cost of revenue decreased 21.2% to $996,964 for the three-month period
ended September 30, 1999 from $1,265,205 for the three-month period ended
September 30, 1998. The decrease resulted primarily from product mix changes and
improved profitability from the Company's service operations. Cost of revenue
decreased 1.8% for the nine-month period ended September 30, 1999 versus the
comparable period in 1998.
Gross Profit
Gross profit increased 29.6% to $1,606,269 for the three-month period ended
September 30, 1999. Gross profit as a percentage of total revenue increased from
49.5% for the three-month period ended September 30, 1998, to 61.7% for the
three-month period ended September 30, 1999. The improved gross margin for the
three-month period as a percentage of total revenue was due primarily to a
product mix shift with less low-margin hardware revenue and improved
profitability from the Company's professional service operations. Gross margin
as a percentage of total revenue improved slightly to 57.4% for the nine-month
period ended September 30, 1999 from 55.4% for the comparable period in 1998.
Sales, General and Administrative
Sales, general and administrative expenses increased 9.5% to $1,173,580 for
the three-month period ended September 30, 1999 from $1,071,274 for the
three-month period ended September 30, 1998. The increase resulted primarily
from higher sales and marketing and payroll expenses. Sales, general and
administrative expenses increased 18.3% for the nine-month period ended
September 30, 1999 to $3,739,739 from $3,162,502 for the same period in 1998.
Again the increase related to higher sales and marketing costs in 1999.
<PAGE>
Research and Product Development
Research and product development expenses increased 20.7% to $388,370 for
the three-month period ended September 30, 1999 from $321,738 for the
three-month period ended September 30, 1998. Research and development expenses
increased 23.0% for the nine-month period ended September 30, 1999 to $1,199,951
from $975,287 for the comparable period in 1998. The increases for the
three-month and nine-month periods resulted from the Company's increased
development efforts to enhance its CTI FastCall product line and to expand the
telephone switch compatibility of its products.
Interest Expense
The Company recorded net interest expense of $33,127 for the three-month
period ended September 30, 1999, versus net interest expense of $19,079 for the
comparable period in 1998. Net interest expense for the nine-month period ended
September 30, 1999 was $93,439 versus net interest expense of $33,042 for the
comparable period in 1998. The changes from 1998 to 1999 in each case reflect
the Company's increased borrowing levels under its bank credit line in 1999.
Income Taxes
The Company did not record a tax benefit for the three-month and nine-month
periods ended September 30, 1999 as the likelihood of realization of the benefit
is presently not assured.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $83,600 as of September 30,
1999. The Company has a $1,700,000 line of credit, subject to certain asset
levels, with its bank at an interest rate of 1% over prime. At September 30,
1999, the Company had outstanding borrowings under its line of credit totaling
$1,325,000. 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 for the next twelve months.
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 have also included 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 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 substantially
completed this part of the assessment phase but cannot guarantee the outcome of
other companies' remediation efforts or the accuracy of the assurances it has
received from those third parties.
Year 2000 Costs
The Company currently plans to substantially complete its Year 2000
compliance efforts by November 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. The Company estimates the total remaining cost of
such efforts to be 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. A contingency plan
will likely include identifying and securing alternative suppliers, and the
Company intends to have such a plan substantially finalized by November 30,
1999.
<PAGE>
Forward-Looking Statements
Statements made in this report regarding the sufficiency of funds for 1999
and 2000 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.
None.
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 12, 1999 /s/ Brett A. Shockley
Brett A. Shockley
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 /s/ Timothy E. Briggs
Timothy E. Briggs
Chief Financial Officer
(Principal Financial and Accounting Officer)
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 83,600
<SECURITIES> 0
<RECEIVABLES> 2,733,178
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<INVENTORY> 566,569
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<PP&E> 1,034,819
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<COMMON> 8,266,363
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<TOTAL-LIABILITY-AND-EQUITY> 6,504,195
<SALES> 7,911,345
<TOTAL-REVENUES> 7,911,345
<CGS> 3,373,991
<TOTAL-COSTS> 3,373,991
<OTHER-EXPENSES> 4,939,690
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93,439
<INCOME-PRETAX> (495,775)
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