U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 10, 1999, there were 5,107,739 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
March 31, 1999 and December 31, 1998
Condensed Statement of Operations 4
for the three month periods ended
March 31, 1999 and 1998
Condensed Statement of Cash Flows 5
for the three month periods ended
March 31, 1999 and 1998
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis 7-9
of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION 10
SIGNATURES 11
<PAGE>
SPANLINK COMMUNICATIONS, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 48,396 $ 161,558
Accounts receivable, net of allowances 3,465,643 2,871,108
Inventory 462,524 505,787
Costs and estimated earnings in excess of billings 1,017,059 1,703,186
Other current assets 278,861 162,831
----------- -----------
Total current assets 5,272,483 5,404,470
Property and equipment, net 1,158,408 1,227,089
Purchased intangibles 460,174 491,015
Other assets 138,500 138,500
----------- -----------
Total assets $ 7,029,565 $ 7,261,074
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 2,035,000 $ 985,000
Accounts payable 523,270 1,259,812
Accrued expenses 313,299 294,167
Current portion of long term liabilities 109,705 107,755
Deferred maintenance revenue 398,275 439,697
Other current liabilities 489,619 451,613
----------- -----------
Total current liabilities 3,869,168 3,538,044
Capital lease obligation 121,176 137,006
Royalties payable 228,883 228,883
----------- -----------
Shareholders' equity:
Common stock 8,260,248 8,255,348
Accumulated deficit (5,449,910) (4,898,207)
----------- -----------
Total shareholders' equity 2,810,338 3,357,141
----------- -----------
Total liabilities and shareholders' equity $ 7,029,565 $ 7,261,074
=========== ===========
</TABLE>
<PAGE>
SPANLINK COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1999 1998 %
(unaudited) (unaudited) Change
<S> <C> <C> <C>
Revenue $ 2,280,751 $ 2,332,861 (2.2)
Cost of revenue 1,113,456 998,069 11.6
----------- ----------- ------
Gross profit 1,167,295 1,334,792 (12.5)
Gross profit as a percentage of revenue 51.2% 57.2%
Operating expenses:
Sales, general and administrative 1,289,795 968,238 33.2
Research and product development 398,123 300,330 32.6
----------- ----------- ------
1,687,918 1,268,568 33.1
----------- ----------- ------
Income (loss) from operations (520,623) 66,224
Interest income (expense) (31,080) 260
----------- -----------
Income (loss) before income taxes (551,703) 66,484
Provision for income taxes 0 0
----------- -----------
Net income (loss) $ (551,703) $ 66,484
=========== ===========
Basic and diluted net income (loss)
Per share $ (0.11) $ 0.01
Shares used in computing diluted
net income (loss) per share 5,107,739 5,080,500
</TABLE>
<PAGE>
SPANLINK COMMUNICATIONS, INC.
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1999 1998
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (551,703) $ 66,484
Reconciliation of net loss to net cash used by
operating activities:
Depreciation and amortization 144,106 120,580
Changes in current assets and liabilities (702,001) (406,514)
----------- -----------
Net cash used by operating activities (1,109,598) (219,450)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (44,584) (93,688)
----------- -----------
Net cash used by investing activities (44,584) (93,688)
----------- -----------
Cash flows from financing activities:
Proceeds from common stock issuances 4,900
Increase in loan payable 1,050,000
Repayments on capital lease obligation (13,880) (12,154)
----------- -----------
Net cash provided financing activities 1,041,020 (12,154)
----------- -----------
Net decrease in cash and cash equivalents (113,162) (325,292)
Cash and cash equivalents at beginning of period 161,558 703,658
----------- -----------
Cash and cash equivalents at end of period $ 48,396 $ 378,366
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 37,462 $ 8,069
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 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 March 31 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 revenues decreased 2.2% to $2,280,751 for the three-month period
ended March 31, 1999 from $2,332,861 for the comparable period in 1998. Royalty
revenue was lower for the three-month period ended March 31, 1999 due to
inventory overstocking in prior quarters by our OEM distributor. In addition,
hardware sales were lower in 1999. Revenue from all other product categories
increased with the largest dollar increases in direct sales of packaged software
and professional services.
Cost of Revenues
Cost of revenue increased 11.6% from $998,069 for the three-month period
ended March 31, 1998 to $1,113,456 for the three-month period ended March 31,
1999. The increase was due primarily to higher staffing levels and related
indirect costs.
Gross Profit
Gross profit decreased 12.5% to $1,167,295 for the three month period ended
March 31, 1999, as compared to the comparable quarter in 1998. Gross profit as a
percentage of total revenue decreased from 57.2% for the three-month period
ended March 31, 1998 to 51.2% for the three month period ended March 31, 1999
due primarily to increased staffing levels and lower revenue from high-margin
royalties.
Sales, General and Administrative
Sales, general and administrative expenses increased 33.2% to $1,289,795
for the three-month period ended March 31, 1999 from $968,238 for the three
month period ended March 31, 1998. The increase is due primarily to additional
staffing and related recruitment costs in the sales and marketing departments.
The costs of attending trade shows and providing advertising materials also
increased in 1999.
Research and Product Development
Research and product development expenses increased 32.6% from $300,330 for
the three-month period ended March 31, 1998 to $398,123 for the three-month
period ended March 31, 1999. The increase is due primarily to higher staffing
levels required by our new product development projects.
<PAGE>
Interest Income (Expense)
The Company recorded net interest expense of $31,080 for the three-month
period ended March 31, 1999, versus net interest income of $260 for the
comparable period in 1998. Interest expense in the current period reflects the
Company's borrowing levels under its credit facilities.
Income Taxes
The Company did not record a tax benefit for the three-month periods
ended March 31, 1999 and 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 $48,396 as of March 31, 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. In addition to that credit
line, the Company at March 31, 1999 borrowed an additional $350,000 from a
Company officer payable on demand at a six percent interest rate. The additional
borrowings are expected to be a short-term transition until the Company collects
several large receivables. 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 through 1999.
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).
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.
<PAGE>
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.
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: May 13, 1999 /s/ Brett A. Shockley
Brett A. Shockley
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1999 /s/ Timothy E. Briggs
Timothy E. Briggs
Chief Financial Officer
(Principal Financial and Accounting Office)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 48,396
<SECURITIES> 0
<RECEIVABLES> 3,465,643
<ALLOWANCES> 0
<INVENTORY> 462,524
<CURRENT-ASSETS> 5,272,483
<PP&E> 1,158,408
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,029,565
<CURRENT-LIABILITIES> 3,869,168
<BONDS> 0
0
0
<COMMON> 8,260,248
<OTHER-SE> (5,449,910)
<TOTAL-LIABILITY-AND-EQUITY> 7,029,565
<SALES> 2,280,751
<TOTAL-REVENUES> 2,280,751
<CGS> 1,113,456
<TOTAL-COSTS> 1,113,456
<OTHER-EXPENSES> 1,687,918
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,080
<INCOME-PRETAX> (551,703)
<INCOME-TAX> 0
<INCOME-CONTINUING> (551,703)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (551,703)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
