1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: June 30, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
--------- ---------
Commission file number: 00114367
DATALINK CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0856543
(State or other jurisdiction) (IRS Employer
of Incorporation) Identification Number)
7423 WASHINGTON AVENUE SOUTH
MINNEAPOLIS, MN 55439
(Address of Principal Executive Offices)
(612) 944-3462
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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
--- ---
2
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 8,772,537 shares as
of November 16, 1999.
EXPLANATORY NOTE
This Form 10-Q relates to quarterly periods prior to consummation of
Datalink Corporation's initial public offering. Datalink is filing this report
solely because Datalink's registration statement on Form 8-A under the
Securities Exchange Act of 1934, as amended, became effective on August 4, 1998,
sixty days after its initial filing.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This report on Form 10-Q
contains forward-looking statements, which reflect the Company's views with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below, which could cause actual results to differ materially from
historical results or those anticipated. The words "aim," "believe," "expect,"
"anticipate," "intend," "estimate" and other expressions which indicate future
events and trends identify forward-looking statements. Actual future results and
trends may differ materially from historical results or those anticipated
depending upon a variety of factors, including, but not limited to: the
Company's dependence on supplier relationships, competition in the market for
open systems storage, competitive pricing pressures, dependence of the Company
on key personnel, possible strain placed on the Company's resources by growth
and expansion, the Company's reliance of its suppliers to meet the needs of
rapid technological change, risks associated with possible future acquisitions,
fluctuations in quarterly operating results, risk associated with the Company's
use of proceeds from its initial public offering, the possibility of denial of
the Company's prior S corporation status by the Internal Revenue Service for any
or all of the periods during which the Company claimed such status and the
consequent tax burden on its income and the impact of Year 2000 issues on the
Company and its operations.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following financial statements and information contained in the
definitive Prospectus filed with the Securities and Exchange Commission on
August 6, 1999, pursuant to Rule 424(b)(1) under the Securities Act of 1933, SEC
File No. 333-55935 (the "Definitive Prospectus"), for Datalink Corporation are
incorporated herein by reference:
-- the "Consolidated Balance Sheets" on page F-6;
-2-
3
-- the columns labeled "Six Months Ended June 30, 1998 and 1999"
on page F-7 entitled "Consolidated Statements of Operations;"
-- the columns labeled "Six Months Ended June 30, 1998 and 1999" on
page F-9 entitled "Consolidated Statements of Cash Flows" and
-- the "Notes to Consolidated Financial Statements" beginning on page
F-10 and continuing through and including page F-19.
In addition, the following financial statements and notes are part of
Item 1:
DATALINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
THREE MONTHS ENDED
JUNE 30,
----------------------------------
1998 1999
------- -------
(UNAUDITED)
Net sales ...................................... $20,028 $29,843
Cost of sales .................................. 14,921 22,191
------- -------
Gross profit .............................. 5,107 7,652
Operating expenses:
Sales and marketing .......................... 1,627 3,373
General and
administrative ............................ 752 1,919
Engineering .................................. 376 614
------- -------
Operating income .......................... 2,352 1,746
Interest expense ............................... 51 109
------- -------
Income before income
taxes ........................................ 2,301 1,637
Income tax expense ............................. 39
------- -------
Net income...................................... $ 2,301 $ 1,598
======= =======
Historical net income per
share, basic and diluted ..................... $ 0.33 $ 0.27
======= =======
-3-
4
Weighted average shares
outstanding, basic and
diluted ................................... 6,900 6,004
Pro forma data:
Income before income
taxes on S corporation
income .................................... $2,301 $1,598
Pro forma income taxes ....................... 897 687
------ ------
Pro forma net income ......................... $1,404 $ 911
====== ======
Pro forma net income
per share basic and
diluted ................................... $ 0.17 $ 0.13
====== ======
Shares used in computing
pro forma net income
per share .................................... 8,139 7,243
====== ======
The accompanying notes are an integral part of the financial statements.
Datalink Corporation
Notes To Condensed Consolidated Statements of Operations (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated statements of
operations reflect all adjustments of a normal recurring nature, which are, in
the opinion of management, necessary for a fair presentation of the condensed
consolidated results of operations for the three month periods ended June 30,
1999 and 1998. These unaudited condensed consolidated statements of operations
and notes should be read in conjunction with the consolidated audited financial
statements and notes thereto included in Datalink's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission.
2. Net Income Per Share
Basic and diluted
Basic net income per share has been computed using the weighted average
number of shares outstanding. The diluted net income per share includes the
effect of common stock equivalents for each period. There were no common stock
equivalents for the three month periods ended June 30, 1999 and 1998.
-4-
5
Pro forma
Concurrent with the IPO, the Company terminated its status as an S
corporation and became subject to federal and state income taxes. Accordingly,
for informational purposes, the accompanying statements of operations for the
three months ended June 30, 1999 and 1998, include a pro forma adjustment for
the income taxes to have been recorded had the Company been a C corporation,
based on then applicable tax laws.
Pro forma net income per share is computed by dividing pro forma net
income by the weighted average number of shares and equivalent shares
outstanding for the applicable period after giving effect to the estimated
number of shares required to be sold at the IPO price and after deducting the
underwriting discounts to fund the distribution to the S corporation
stockholders of all previously taxed, but undistributed, S corporation earnings.
3. Comprehensive Income
The Company has no comprehensive income other than net income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information contained under the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of the
Definitive Prospectus is incorporated herein by reference except for (i) the
full-year 1998, 1997 and 1996 information under the caption "Results of
Operations" and (ii) the information under the caption "Comparison of Years
Ended December 31, 1998, 1997 and 1996." References to the "offering" mean
Datalink's initial public offering of its Common Stock.
In addition, the following information is part of this Item 2:
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net Sales. Net sales increased $9.8 million, or 49.0%, to $29.8 million
for the three months ended June 30, 1999, from $20.0 million for the comparable
period in 1998. The increased sales were primarily attributable to the July 1998
acquisition of DCSI, the hiring of DCSI's and other new sales and engineering
personnel and the opening of new sales offices. Additionally, the higher sales
reflect the increasing demand for more complex data storage products, which has
resulted in higher equipment, software and services revenues.
Gross Profit. Gross profit as a percentage of net sales remained
relatively constant at 25.6% for the three months ended June 30, 1999, as
compared to 25.5% for the comparable period in 1998. Although the Company
increased its percentage of sales of large, sophisticated storage systems to
end-user customers, which typically have generated higher margins than sales to
VAR and OEM customers, this was offset by higher installation and maintenance
contract costs.
-5-
6
Sales and Marketing. Sales and marketing expenses totaled 11.3% of net
sales for the three months ended June 30, 1999, compared to 8.1% of net sales
for the comparable period in 1998. The Company has incurred increased costs
relating to the hiring of new sales and marketing personnel in addition to
absorbing the incremental costs related to the operations of DCSI. Approximately
70% of sales and marketing costs are directly variable with sales.
General and Administrative. General and administrative expenses were
6.4% of net sales for the three months ended June 30, 1999, compared to 3.8% of
net sales for the comparable period in 1998. Of the increased general and
administrative expenses, approximately $205,000 or 0.7% of net sales for the
three months ended June 30, 1999 was amortization of identifiable intangible
assets and goodwill related to the Company's acquisition of DCSI. Depreciation
expense related to the Company's new information systems implemented in late
1998 increased significantly from the comparable period in 1998. In addition,
rent and communications expense increased relative to the comparable period in
1998 due primarily to the acquisition of DCSI and the opening of additional
sales offices. Profit sharing and professional services expenses also increased
relative to the comparable period in 1998.
Engineering. Engineering expenses increased to 2.0% of net sales for
the three months ended June 30, 1999, compared to 1.9% of net sales for the
comparable period in 1998. The Company has continued to add new engineering
personnel and has increased the compensation levels for its engineers in order
to more effectively compete for engineering human resources. Additionally, the
Company's costs for engineering travel have increased as sales have increased.
Income Taxes. The Company has elected to be taxed as an S corporation
under the provisions of the Internal Revenue Code (the "Code") and comparable
state income tax law. Under those provisions, the Company's income is reported
on the individual tax returns of the Company's stockholders. As such, the
Company is generally not subject to corporate income taxes. The only exceptions
are a few states that do not recognize the S corporation status. The $39,000
shown as tax expense for the three months ended June 30, 1999 is the tax
provision related to these states.
Concurrent with the closing of the Company's proposed initial public
offering, the Company's S corporation status will terminate and its taxable
income will be subject to federal and state C corporation income tax regulation.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As of the date hereof, the Company is not involved in any material
legal proceedings.
-6-
7
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) In June 1999, the Company authorized the grant of non-incentive
options under its Incentive Plan to the four non-employee directors that vested
coincident with the first closing on the Company's initial public offering to
purchase an aggregate of 36,000 shares of the Company's Common Stock. These
options are exercisable for ten years from the date of grant at an exercise
price of $7.50 per share. In June and July 1999, the Company authorized the
grant of incentive options under the Incentive Plan to 130 employees of the
Company to purchase an aggregate of 711,300 shares of the Company's Common
Stock. All of the incentive options vest 25% per year over four years and, once
vested, will be exercisable for ten years from the date of the Board action at
an exercise price of $7.50 per share. The Company believes that the grant of all
of these options (which occurred coincident with the first closing of the
Company's initial public offering) was exempt from registration under the
Securities Act of 1933, as amended, because no sale of securities occurred.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 11, 1999, the stockholders of the Company voted by unanimous
written action to approve an amendment and restatement of the Datalink
Corporation Incentive Compensation Plan increasing the authorized number of
options and other rights thereunder to cover up to 1,350,000 shares and to
provide for annual options grants to non-employee directors commencing as of the
Company's 2000, rather than 1999, annual meeting of stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 -- Financial Data Schedule (Edgar filing only)
99.1 -- Pages of the Definitive Prospectus (deemed to be filed only to
the extent as incorporated by reference into this report above).
(b) Reports on Form 8-K: The Company did not file any current reports
on Form 8-K during the second three months of the Company 1999 fiscal year.
-7-
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATALINK CORPORATION
By /s/ Daniel J. Kinsella
--------------------------------------------------
Daniel J. Kinsella, Chief Financial Officer
Date: November 16, 1999
-8-