U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 55428
(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 August 6, 1999, there were 5,110,559 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. Financial Statements
Condensed Balance Sheet as of 3
June 30, 1999 and December 31, 1998
Condensed Statement of Operations 4
for the three and six month periods
ended June 30, 1999 and 1998
Condensed Statement of Cash Flows 5
for the six month periods ended
June 30, 1999 and 1998
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
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 737,309 $ 161,558
Accounts receivable, net of allowances 2,304,641 2,871,108
Inventory 476,143 505,787
Costs and estimated earnings in excess of
billings 1,469,239 1,703,186
Other current assets 220,202 162,831
----------- -----------
Total current assets 5,207,534 5,404,470
Property and equipment, net 1,120,923 1,227,089
Purchased intangibles, net 429,333 491,015
Other assets 138,500 138,500
----------- -----------
Total assets $ 6,896,290 $ 7,261,074
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loan payable $ 1,585,000 $ 985,000
Accounts payable 666,352 1,259,812
Accrued expenses 374,579 294,167
Current portion of long term liabilities 106,259 107,755
Deferred maintenance revenue 523,223 439,697
Other current liabilities 452,139 451,613
----------- -----------
Total current liabilities 3,707,552 3,538,044
Capital lease obligation 110,273 137,006
Royalties payable 222,590 228,883
Shareholders' equity:
Common stock 8,261,048 8,255,348
Accumulated deficit (5,405,173) (4,898,207)
----------- -----------
Total shareholders' equity 2,855,875 3,357,141
----------- -----------
Total liabilities and shareholders' equity $ 6,896,290 $ 7,261,074
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SPANLINK COMMUNICATIONS, INC
STATEMENT OF OPERATIONS
For the three months and six months ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
--------------------------------- -------------------------------
% %
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Revenue $3,027,361 $2,865,657 5.6 $5,308,112 $5,198,518 2.1
Cost of revenue 1,263,571 1,171,119 7.9 2,377,027 2,169,188 9.6
----------- ----------- -------- ----------- ----------- -----
Gross profit 1,763,790 1,694,538 4.1 2,931,085 3,029,330 (3.2)
Gross profit as a percentage of
revenue 58.3% 59.1% 55.2% 58.3%
Operating expenses:
Sales, general and administrative 1,276,363 1,122,990 13.7 2,566,158 2,091,228 22.7
Research and product
development 413,458 353,219 17.1 811,581 653,549 24.2
----------- ----------- -------- ----------- ----------- ------
1,689,821 1,476,209 14.5 3,377,739 2,744,777 23.1
----------- ----------- -------- ----------- ----------- ------
Income (loss) from operations 73,969 218,329 (66.1) (446,654) 284,553
Interest expense, net 29,232 14,223 60,312 13,963
----------- ----------- ----------- -----------
Income (loss) before income
taxes 44,737 204,106 (78.1) (506,966) 270,590
Provision for income taxes 0 0 0 0
----------- ----------- ----------- -----------
Net income (loss) $44,737 $204,106 (78.1) $(506,966) $270,590
=========== =========== ======== =========== ===========
Basic and diluted net income
(loss) per share $0.01 $0.04 $(0.10) $0.05
Shares used in computing diluted
net income (loss) per share 5,273,400 5,280,183 5,107,175 5,231,494
</TABLE>
See accompany notes to financial statements.
<PAGE>
SPANLINK COMMUNICATIONS, INC.
CONDENSED STATEMENT OF CASH FLOWS
For the six months ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (506,966) $ 270,590
Reconciliation of net income (loss) to net cash
used by operating activities:
Depreciation and amortization 288,212 215,847
Changes in current assets and liabilities 342,196 (1,611,313)
---------------- ---------------
Net cash provided (used) by operating activities 123,442 (1,124,876)
---------------- ---------------
Cash flows from investing activities:
Additions to property and equipment (120,364) (110,593)
---------------- ---------------
Net cash used by investing activities (120,364) (110,593)
---------------- ---------------
Cash flows from financing activities:
Advances on bank credit line 600,000 850,000
Repayments on capital lease obligation (26,734) (24,718)
Repayments on royalties payable (6,293) (209,589)
Proceeds from employee common stock issuances 5,700 4,940
---------------- ---------------
Net cash provided by financing activities 572,673 620,633
---------------- ---------------
Net increase (decrease) in cash and cash equivalents 575,751 (614,836)
Cash and cash equivalents at beginning of period 161,558 703,658
---------------- ---------------
Cash and cash equivalents at end of period $ 737,309 $ 88,822
================ ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 86,598 $ 26,561
================ ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 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 June 30 are not necessarily
indicative of the results of operations for a full year.
NOTE 2 - USE OF ESTIMATES
The preparation of condensed interim financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Revenues
Total revenue increased 5.6% to $3,027,361 for the three-month period ended
June 30, 1999 from $2,865,657 for the comparable period in 1998. The increase
was due primarily to increased revenue from professional services, maintenance
and purchased products. Revenue for the six-month period ended June 30, 1999
increased 2.1% over the comparable period in 1998 due primarily to higher
revenues from professional services and maintenance contracts.
Cost of Revenue
Cost of revenue increased 7.9% to $1,263,571 for the three-month period
ended June 30, 1999 from $1,171,119 for the three-month period ended June 30,
1998. The increase was due primarily to higher costs to support the increase in
sales. Cost of revenue increased 9.6% for the six-month period ended June 30,
1999 versus the comparable period in 1998 due primarily to the same reason as
the three-month period.
Gross Profit
Gross profit increased 4.1% to $1,763,790 for the three-month period ended
June 30, 1999. Gross profit as a percentage of total revenue decreased to 58.3%
for the three-month period ended June 30, 1999 from 59.1% for the three-month
period ended June 30, 1998. Gross margin as a percentage of total revenue was
55.2% for the six-month period ended June 30, 1999 compared to 58.3% for the
comparable period in 1998. The gross margin decrease for both the three-month
and six-month periods as a percentage of total revenue was due primarily to
product mix changes and higher payroll and fringe benefits costs.
Sales, General and Administrative
Sales, general and administrative expenses increased 13.7% to $1,276,363
for the three-month period ended June 30, 1999 from $1,122,990 for the
three-month period ended June 30, 1998. The increase is due primarily to
increased payroll and fringe benefit costs in 1999. Sales, general and
administrative expenses increased 22.7% for the six-month period ended June 30,
1999 to $2,566,158 from $2,091,228 for the same period in 1998. The increase
resulted from higher payroll and fringe benefit costs.
Research and Product Development
Research and product development expenses increased 17.1% to $413,458 for
the three-month period ended June 30, 1999 from $353,219 for the three-month
period ended June 30, 1998. The increase is due primarily to additional staffing
and higher payroll and fringe benefits. Research and development expenses
increased 24.2% for the six month period ended June 30, 1999 to $811,581 from
$653,549 for the comparable period in 1998 due primarily again to the Company's
higher staffing levels and increased payroll and benefit expenses.
<PAGE>
Interest Expense, Net
The Company recorded net interest expense of $29,232 for the three-month
period ended June 30, 1999, versus net interest expense of $14,223 for the
comparable period in 1998. Net interest expense for the six-month period ended
June 30, 1999 was $60,312 versus net interest expense of $13,963 for the
comparable period in 1998. The changes from 1998 to 1999 in each case reflect
the Company's higher borrowing levels under its bank credit line in 1999.
Income Taxes
The Company did not record a tax benefit for the six-month period ended
June 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 $737,309 as of June 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 June 30, 1999, the
Company had outstanding borrowings under its line of credit totaling $1,585,000.
The Company believes that its current cash resources combined with projected
operating cash flow and its available credit facilities 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.
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).
<PAGE>
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 September 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
September 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.
The Company's Annual Meeting of Shareholders was held on
Wednesday, May 12, 1999, at 4:00 p.m. local time, at the
offices of the Company. The following items were approved by a
majority of the shareholders:
a) Election of Brett A. Shockley and Thomas F. Madison as
directors to hold office for a term expiring at the annual
meeting in 2002. The vote totals were 4,966,392 FOR nominees
and 8,670 shares WITHHELD. Other current board members, with
terms shown, are as follows:
Term Expiring
-------------
Joseph D. Mooney 2000
Loren A. Singer, Jr. 2000
Bruce E. Humphrey 2001
b) Approval of an increase of shares reserved under the Company's
1996 Omnibus Stock Plan from 1,000,000 to 1,300,000. The vote
totals were 3,448,617 FOR; 83,423 AGAINST; and 23,320 ABSTAIN;
and 1,419,603 broker's non-votes.
Item 5. Other Information.
Not Applicable.
<PAGE>
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: August 13, 1999 /s/ Brett A. Shockley
Brett A. Shockley
Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 /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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 737,309
<SECURITIES> 0
<RECEIVABLES> 2,304,641
<ALLOWANCES> 0
<INVENTORY> 476,143
<CURRENT-ASSETS> 5,207,534
<PP&E> 1,120,923
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,896,290
<CURRENT-LIABILITIES> 3,707,553
<BONDS> 0
0
0
<COMMON> 8,261,048
<OTHER-SE> (5,405,173)
<TOTAL-LIABILITY-AND-EQUITY> 6,896,290
<SALES> 5,308,112
<TOTAL-REVENUES> 5,308,112
<CGS> 2,377,027
<TOTAL-COSTS> 2,377,027
<OTHER-EXPENSES> 3,377,739
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,312
<INCOME-PRETAX> (506,966)
<INCOME-TAX> 0
<INCOME-CONTINUING> (506,966)
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<EPS-BASIC> (.10)
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