<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1998
REGISTRATION NO. 333-55935
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DATALINK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MINNESOTA 7373 41-0856543
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
7423 WASHINGTON AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55439
(612) 944-3462
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GREG R. MELAND
CHIEF EXECUTIVE OFFICER
DATALINK CORPORATION
7423 WASHINGTON AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55439
(612) 944-3462
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JEFFREY C. ROBBINS, ESQ. JAMES C. MELVILLE, ESQ.
PAUL L. SCHULTZ, ESQ. MARY S. GIESLER, ESQ.
MESSERLI & KRAMER P.A. KAPLAN, STRANGIS AND KAPLAN, P.A.
150 SOUTH FIFTH STREET, SUITE 1800 90 SOUTH SEVENTH STREET, SUITE 5500
MINNEAPOLIS, MINNESOTA 55402 MINNEAPOLIS, MINNESOTA 55402
TELEPHONE: (612) 672-3600 TELEPHONE: (612) 375-1138
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED
MAXIMUM AMOUNT OF
AGGREGATE REGISTRATION
TITLE OF SHARES TO BE REGISTERED OFFERING PRICE(1) FEE(2)
<S> <C> <C>
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Common Stock, $0.001 par value.............................. $32,890,000 $9,703.00
- ------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
(2) The Registrant previously paid the registration fee with a prior filing of
the Registration Statement.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 16, 1998
PROSPECTUS
2,600,000 Shares
DATALINK LOGO
Common Stock
------------------
All of the 2,600,000 shares of Common Stock offered hereby are being
offered by Datalink Corporation ("Datalink" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$9.00 and $11.00 per share. See "Underwriting" for information relating to the
factors considered in determining the initial public offering price. The Company
has applied for quotation of the Common Stock on the Nasdaq National Market
under the symbol "DTLK."
------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
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Per Share.................. $ $ $
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Total(3)................... $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $500,000.
(3) The Company and a selling stockholder have granted to the Underwriters a
30-day option to purchase up to 320,000 and 70,000 additional shares of
Common Stock, respectively, on the same terms per share solely to cover
over-allotments, if any. The Company will not receive any proceeds from the
sale of shares by the selling stockholder. If this option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
------------------
The shares of Common Stock offered by this Prospectus are offered by the
several Underwriters, subject to prior sale, when, as and if delivered to and
accepted by them, and subject to the right of the Underwriters to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York, on or about , 1998.
------------------
Needham & Company, Inc.
CRUTTENDEN ROTH INCORPORATED LOGO
John G. Kinnard and Company,
Incorporated
The date of this Prospectus is , 1998.
<PAGE> 3
[PICTURES]
Inside Front Cover: Caption which reads as follows: "Access to and
Management of Data is Increasingly Critical and Represents a Key Competitive
Advantage." Datalink Logo at bottom center of page.
Gatefold layout: Pictures arranged within three circles depicting the links
between the Company's products and services and its customers' needs. Captions
within the pictures depicting the services provided by the Company read as
follows: "Analysis," "Technical Support," "Training," "Installation,"
"Maintenance, "Integration" and "Design." Captions outside of circles read as
follows: "An Extensive Product Line" and "Serving a Wide Range of Industries."
Caption at bottom of page will read as follows: "Datalink is an Independent
Storage Solutions Provider that Matches The Best of Breed Products With
Technical Expertise and Comprehensive Services and Support to Meet Each
Customer's Unique Needs."
------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING BIDS AND PURCHASES,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise specified or the context
otherwise requires, shares and per share information contained in this
Prospectus gives effect to the 690-for-1 stock split effected by the Company in
June 1998. Unless otherwise indicated, the information in this Prospectus does
not give effect to (i) 200,000 shares of Common Stock issued in connection with
the acquisition of Direct Connect Systems, Inc.; (ii) 950,000 shares of Common
Stock reserved for issuance under the Company's Incentive Compensation Plan,
including 332,500 shares of Common Stock reserved for issuance upon the exercise
of stock options to be granted under the Incentive Compensation Plan
contemporaneously with the closing of this offering; (iii) 250,000 shares of
Common Stock reserved for issuance under the Company's Employee Stock Purchase
Plan and (iv) 320,000 shares of Common Stock which may be purchased by the
Underwriters from the Company to cover over-allotments, if any. Further, unless
otherwise specifically indicated, references to the Company do not include its
newly acquired subsidiary, Direct Connect Systems, Inc. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed under the heading "Risk Factors," which
investors should carefully consider. See "Recent Development."
THE COMPANY
Datalink Corporation ("Datalink" or the "Company") analyzes, custom
designs, integrates or assembles, installs and supports high-end Open Systems
data storage solutions for end-users, value-added resellers ("VARs") and
original equipment manufacturers ("OEMs"). The Company has developed
engineering, sales and support capabilities to become an expert in applying the
best available storage technologies manufactured by the leading data storage
hardware and software companies to solve its customers' growing data storage
needs. These technologies include hard disk, RAID, magnetic tape, CD-ROM and
optical products. The Company also matches storage management software
technologies, including backup and recovery, archive, high availability and near
on-line storage to the specific needs of its customers. The Company's net sales
have grown from $24.1 million in 1993 to $71.3 million in 1997, a 31% annual
compound growth rate, and the Company's Subchapter S corporation net income has
grown from $1.0 million to $6.1 million, a 56% annual compound growth rate, over
the same period.
With the ongoing introduction of more advanced and powerful computers,
application software developers have introduced powerful, easier to use,
graphically oriented, memory intensive software packages. These software
applications have resulted in the enterprise-wide automation of an increasing
number of mission-critical business applications, including on-line transaction
processing, the Internet, intranets, pre-press, multimedia, imaging and data
warehousing. This automation has expanded the need for on-line storage,
uninterrupted access to data and fail-safe methods to backup and archive such
data. Accordingly, several independent market research firms have projected
significant growth over the next several years for the markets addressed by the
Company. According to Dataquest, Inc., an independent market research firm, the
worldwide RAID storage market for UNIX and Windows NT operating platforms was
approximately $12.8 billion in 1997 and is expected to grow at an annual
compound rate of 24% to approximately $37.0 billion by 2002. According to
Strategic Research Corp., an independent market research firm ("SRC"), the
worldwide market for tape automation backup storage products was approximately
$1.6 billion in 1996 and is expected to grow at an annual compound rate of 18%
to approximately $4.4 billion by 2002. According to SRC, the worldwide storage
management software market was approximately $1.4 billion in 1997 and is
expected to grow at an annual compound rate of 31% to approximately $3.0 billion
by 2000. Datalink competes in and has a minor share of the domestic segments of
these markets.
The need to distribute mission-critical data across an enterprise has led
organizations to increasingly rely upon complex Open Systems computing platforms
that link multiple application, file, database and communications servers of
differing vendors to networked computers. Despite this growing complexity,
corporate downsizing has led organizations to reduce their MIS staffs and has
led hardware and software suppliers to reduce their sales and marketing forces.
As a result of their more limited internal resources, organizations and
<PAGE> 5
suppliers are turning to external providers, such as the Company, to research,
design, implement and support information storage solutions that incorporate the
best available hardware and software technologies.
The Company's storage solutions are designed to provide its customers with
the optimal combination of performance, capacity, high availability, disaster
recovery, multi-platform support, permanence, scalability, centralized
management and cost. For end-users and VARs, Datalink's technical sales and
engineering teams assess each customer's information and storage retrieval
requirements and then design, integrate, install and support information storage
solutions incorporating the best available hardware and software products on the
market. For OEMs, Datalink's design and application engineers custom design and
test storage subsystems which the Company assembles for integration into the
OEM's own products.
Datalink's customers are located throughout the United States and span a
diverse group of data-intensive industries, including computer technology,
consumer products, education, financial services, government, health care,
insurance, professional services, telecommunications, transportation and
utilities. The Company's customers include Abbott Laboratories, American Express
Company, Andersen Worldwide, S.C., The Boeing Company, Dominion Resources, Inc.,
Gateway 2000, Inc., GE Medical Systems, Grand Metropolitan PLC, The Kemper
Insurance Companies, KPMG Peat Marwick L.L.P., Lucent Technologies, Inc., the
National Aeronautics Space Administration and the University of Chicago.
Datalink's broad industry experience enables the Company to understand
application and business issues specific to its customers and to design and
implement appropriate storage solutions.
The Company believes it differentiates itself from its competitors in
several ways. Because of Datalink's established, strong relationships with the
major information storage hardware and software suppliers, the Company often
participates in suppliers' new product development, evaluation, introduction,
marketing and quality control programs. The Company also believes that the
longevity of service of its engineering staff and sales force is a key factor to
earning and retaining the trust and confidence of the Company's customers and
suppliers. Sales to existing customers has exceeded 77% of the Company's net
sales in each of the last three years. Datalink further differentiates itself by
being an ISO 9001 registered organization that utilizes such standards to
consistently maintain high quality design, development, integration and
assembly, installation and service processes.
The Company's objective is to grow at a rate exceeding that of the industry
and enhance its position as a leading independent Open Systems storage solutions
provider. To achieve its objective, Datalink intends to build upon its record of
successfully addressing the evolving information storage management needs of its
customers. Key elements of the Company's business strategy are to (i) broaden
relationships with existing customers and leverage the Company's market presence
to attract new customers; (ii) continue to develop leading-edge storage
solutions for customers; (iii) expand its offering of professional consulting
services; (iv) expand geographically through internal growth and potential
acquisitions; and (v) maintain and continually improve the Company's high
standards for superior technical and sales service and support. The Company's
senior management team, which has worked together since 1991, has assembled an
experienced team of professionals to execute the Company's business strategy.
The Company was incorporated in Minnesota in 1963 under the name Stan
Clothier Co., Inc. In April 1987, the Company changed its name to Datalink
Corporation. The Company's executive offices are located at 7423 Washington
Avenue South, Minneapolis, Minnesota 55439. Datalink's telephone number is (612)
944-3462.
2
<PAGE> 6
RECENT DEVELOPMENT
On July 15, 1998, the Company acquired Direct Connect Systems, Inc.
("DCSI"), a Marietta, Georgia-based firm engaged in the analysis, custom design,
integration and support of high-end Open Systems data storage solutions
principally for end-users located in the Southeastern portion of the United
States. In addition to its Marietta headquarters, DCSI has field sales offices
in Herndon, Virginia, Charlotte, North Carolina, and Melbourne and Tampa,
Florida.
Under the terms of the acquisition, the Company acquired all of DCSI's
capital stock in exchange for $2 million cash and 200,000 shares of the
Company's Common Stock, subject to certain post-closing adjustments. DCSI's key
employees were also paid $500,000 in the aggregate under noncompetition
agreements.
THE OFFERING
Common Stock offered by the Company..... 2,600,000 shares
Common Stock to be outstanding after
this offering........................... 9,700,000 shares(1)(2)
Use of Proceeds......................... The net proceeds to the Company
from this offering will be used to
(i) distribute to the current
stockholders the previously taxed,
but undistributed, S corporation
earnings estimated at $8.9 million
had the termination occurred on
June 30, 1998; (ii) repay certain
outstanding indebtedness of
approximately $2.8 million and
(iii) fund the Company's growth and
expansion plans, including
potential acquisitions, working
capital and other general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol.................................. DTLK
- ------------
(1) Includes 200,000 shares of Common Stock issued to the stockholders of DCSI
which will be adjusted if the initial public offering price is not $10.00.
See "Recent Development."
(2) Excludes (i) 950,000 shares of Common Stock reserved for issuance under the
Company's Incentive Compensation Plan, including 332,500 shares of Common
Stock reserved for issuance upon the exercise of options to be granted under
the Incentive Compensation Plan contemporaneously with the closing of this
offering, (ii) 250,000 shares of Common Stock reserved for issuance under
the Company's Employee Stock Purchase Plan and (iii) 320,000 shares of
Common Stock which may be purchased by the Underwriters from the Company to
cover over-allotments, if any. See "Management -- Stock Incentive Plans" and
"Underwriting."
3
<PAGE> 7
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $24,146 $32,333 $38,048 $54,652 $71,255 $31,265 $36,627
Cost of sales......................... 19,405 25,907 30,356 42,872 55,719 24,462 27,644
------- ------- ------- ------- ------- ------- -------
Gross profit........................ 4,741 6,426 7,692 11,780 15,536 6,803 8,983
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing................. 1,495 1,891 2,487 3,607 5,191 2,187 3,055
General and administrative.......... 1,764 1,912 2,118 2,382 3,010 1,386 1,713
Engineering......................... 269 343 467 633 926 493 691
------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 3,528 4,146 5,072 6,622 9,127 4,066 5,459
------- ------- ------- ------- ------- ------- -------
Operating income...................... 1,213 2,280 2,620 5,158 6,409 2,737 3,524
Interest expense, net................. 192 243 306 286 333 166 105
------- ------- ------- ------- ------- ------- -------
Net income(1)......................... $ 1,021 $ 2,037 $ 2,314 $ 4,872 $ 6,076 $ 2,571 $ 3,419
======= ======= ======= ======= ======= ======= =======
Historical net income per share, basic
and diluted......................... $ 0.15 $ 0.30 $ 0.34 $ 0.71 $ 0.88 $ 0.37 $ 0.50
======= ======= ======= ======= ======= ======= =======
Weighted average shares outstanding,
basic and diluted................... 6,900 6,900 6,900 6,900 6,900 6,900 6,900
------- ------- ------- ------- ------- ------- -------
Pro forma income taxes(2)............. 2,430 1,028 1,333
------- ------- -------
Pro forma net income.................. $ 3,646 $ 1,543 $ 2,086
======= ======= =======
Pro forma net income per share, basic
and diluted(3)...................... $ 0.46 $ 0.20 $ 0.27
======= ======= =======
Shares used in computing pro forma
net income per share(3)............. 7,854 7,854 7,854
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-----------------------------------------------------------------
PRO FORMA
--------------------------------------------------
TERMINATION OF TERMINATION OF
PUT S CORPORATION
ACTUAL OPTIONS(4) STATUS(5) AS ADJUSTED(6)
----------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash...................................... $ 349 $ 349 $ 349 $12,337
Working capital........................... 7,184 7,184 (1,447) 22,233
Total assets.............................. 19,695 19,695 19,937 31,925
Common stock subject to put option........ 16,174 -- -- --
Stockholders' equity (deficiency)......... (7,304) 8,870 242 23,922
</TABLE>
- ------------
(1) For the periods presented, the Company was an S corporation and,
accordingly, was not subject to federal and state income taxes.
(2) Pro forma income taxes have been computed as if the Company was subject to
federal and state income taxes for the periods presented, based on the tax
laws in effect during those periods. See Notes 2 and 3 of the Notes to the
Company's Financial Statements.
(3) Pro forma net income per share is computed by dividing pro forma net income
by the weighted average number of shares outstanding for the period, after
giving effect to the estimated number of shares that would be required to be
sold at the initial public offering price (after deducting the underwriting
discount) to fund a distribution to the current stockholders of all
previously taxed, but undistributed, S corporation earnings, estimated at
$8.9 million had the termination occurred on June 30, 1998. The Company does
not have any common stock equivalents. See "Termination of S Corporation
Status and Put Option and Dividend Policy" and Note 3 of the Notes to the
Company's Financial Statements.
(4) Adjusted to give pro forma effect to the reclassification of the Company's
Common Stock subject to put option into stockholders' equity, reflecting
termination of these put options upon the closing of this offering. See
"Termination of S Corporation Status and Put Option and Dividend Policy" and
Note 9 of the Notes to the Company's Financial Statements.
(5) Adjusted to give pro forma effect upon the closing of this offering to (i)
the pro forma adjustment described in (4) above, (ii) a final S corporation
distribution payable to the current stockholders, representing all
previously taxed, but undistributed, S corporation earnings, estimated at
$8.9 million had the termination occurred on June 30, 1998 and (iii) a net
deferred tax asset which will be recorded by the Company as a result of the
termination of its S corporation status, estimated at $242,000 had such
termination occurred on March 31, 1998. See "Termination of S Corporation
Status and Put Option and Dividend Policy" and Note 3 of the Notes to the
Company's Financial Statements.
(6) Adjusted to give effect to (i) the pro forma adjustments described in (5)
above and (ii) the sale by the Company of 2,600,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $10.00 per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."
4
<PAGE> 8
RISK FACTORS
This Prospectus contains certain forward-looking statements, including the
plans and objectives of management for the business, operations and economic
performance of the Company. The forward-looking statements and associated risks
set forth in this Prospectus may include or relate to, among other things, the
ability of the Company to maintain its close working relationships with its
suppliers, expand its customer base, consummate strategic acquisitions of
businesses and integrate such acquisitions into the Company's operations, the
projected growth in the market for data storage solutions and competition. These
forward-looking statements may be identified by qualifiers such as "intends,"
"believes" and "anticipates," among other terms. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved. Further, and in addition to the other information contained in this
Prospectus, the following risk factors should be carefully considered in
evaluating the Company and its business prospects before purchasing shares
offered by this Prospectus.
DEPENDENCE ON SUPPLIER RELATIONSHIPS
The Company relies on its relationships with its suppliers to provide
access to products and new technology necessary to design and implement
leading-edge storage solutions for its customers. The Company does not have
long-term contracts with any of its suppliers and relies upon a limited number
of suppliers for several key products and components. For example, the Company
purchases disk drives manufactured primarily by Quantum Corporation ("Quantum")
and Seagate Technology, Inc. ("Seagate"), digital linear tape products
manufactured primarily by Storage Technology Corporation, Quantum and ATL
Products, Inc. and redundant array of independent disks ("RAID") products
manufactured primarily by CLARiiON, a division of Data General Corporation. The
Company's reliance on its suppliers involves several risks, including an
inadequate supply of required products and components, price increases, late
deliveries and poor product and component quality. These risks are particularly
significant with respect to the Company's suppliers of disk drives because, in
order to meet product performance requirements, the Company must obtain disk
drives with extremely high quality and capacity. In addition, there is currently
a significant market demand for disk drives, tape drives and RAID controllers,
and from time to time the Company may experience product and component
shortages, selective supply allocations and increased prices of such products
and components. Although to date the Company has been able to purchase its
requirements of such products and components, there can be no assurance that the
Company will be able to obtain its full requirements of such products and
components in the future or that prices of such products and components will not
increase. In addition, there can be no assurance that problems with respect to
quantity and quality of such products and components and timeliness of
deliveries will not occur. Disruption or termination of the supply of products
and components from suppliers for any reason could delay shipments of the
Company's products and could have a material adverse effect on the Company's
business, operating results or financial condition. See "Business -- Business
Strategy" and "-- Products."
COMPETITION
The market for Open Systems storage is intensely competitive. The Company
competes primarily with traditional suppliers of computer systems such as Compaq
Computer Corporation ("Compaq"), Digital Equipment Corporation ("Digital"),
Hewlett-Packard Company ("Hewlett-Packard"), International Business Machines
Corp. ("IBM"), Silicon Graphics, Inc. ("Silicon Graphics") and Sun Microsystems,
Inc. ("Sun"), which market storage systems as well as other computer products.
The Company also competes with independent storage system suppliers to the
high-end Open Systems market, including Box Hill Systems Corp., EMC Corporation,
MTI Technology Corporation and numerous VARs, resellers, distributors and
consultants. In addition, the Company's customers and prospective customers may
elect to develop in-house storage systems expertise.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than the
Company and, as a result, may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, to devote greater resources
to
5
<PAGE> 9
the development, promotion and sale of products than the Company or to deliver
competitive products at a lower end-user price. Some of the Company's
competitors include its suppliers, who may dedicate or acquire greater sales and
marketing resources in the future to provide Open Systems storage solutions than
at present and could terminate their relationships with the Company. Other
suppliers may also enter the market and compete with the Company. The Company
expects competition will increase as a result of industry consolidation. Current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
may result in price reductions, reduced operating margins and loss of market
share, any of which could have a material adverse effect on the Company's
business, operating results or financial condition. See "Business --
Competition."
COMPETITIVE PRICING
Competitive pricing pressures in the data storage market have had and may
have an adverse effect on the Company's business, operating results or financial
condition. There also has been, and may continue to be, a willingness on the
part of certain large competitors to reduce prices in order to preserve or gain
market share, which cannot be foreseen by the Company. The Company believes that
pricing pressures are likely to continue as competitors develop more competitive
product offerings. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in significant part upon the
continued contributions of its executive officers, other key management and
sales, engineering and other technical personnel, many of whom would be
difficult to replace. In particular, the Company is highly dependent upon the
services of Greg R. Meland, Chief Executive Officer; Robert D. DeVere, Chief
Financial Officer; Scott D. Robinson, Vice President of Engineering and Stephen
M. Howe, Vice President of Sales. The Company does not have employment,
noncompetition or nondisclosure agreements with any of its officers or
employees. Accordingly, the Company's employees may voluntarily terminate their
employment with the Company at any time. The loss of any employee who is
critical to the Company's success could have a material adverse effect on the
Company's business, operating results or financial condition. In addition, the
Company's future operating results depend in part upon its ability to attract,
train, retain and motivate qualified management, technical, sales and support
personnel for its operations. Competition for qualified employees in the data
storage industry, and particularly with respect to engineers with Open Systems
storage solutions experience, is intense. Competitive factors that could affect
the Company's ability to attract and retain such personnel include compensation,
benefits, equity incentives and geographic location. There can be no assurance
that the Company will be successful in attracting or retaining such key
personnel, and the failure of the Company to recruit and retain additional key
personnel could materially and adversely affect the Company's business,
operating results or financial condition. See "Business -- Technical Services."
MANAGEMENT OF GROWTH
The Company's growth and expansion may place a significant strain on the
Company's administrative, operational and financial resources and increase
demands on the Company's professional and technical services, assembly,
integration, sales and marketing and customer service and support functions,
especially as the Company attempts to expand its geographic reach. To manage its
growth effectively, the Company will need to hire, train, motivate and manage
new management, technical, sales and administrative employees. In connection
with its planned geographic expansion, the Company will incur travel,
telecommunications and other incremental costs, as well as increased human
resource costs. The failure by the Company to generate sufficient revenues to
offset the costs of geographical expansion could have a material adverse effect
on the Company's business, operating results or financial condition. If the
growth in demand for products and services offered by the Company increases at a
significantly higher rate than anticipated, the Company may lack the technical
services and capacity necessary to satisfy such demand in a timely fashion, and
its customers may
6
<PAGE> 10
experience delivery delays or interruptions in technical service and support.
This risk may be exacerbated by the fact that the Company does not have
long-term purchase agreements with suppliers and may not have sufficient
inventory levels to support customer demand. There can be no assurance that the
Company will be able to manage expansion successfully or that the Company's
infrastructure, including but not limited to its systems, procedures and
controls, will be adequate to support such expansion. In addition, there can be
no assurance that the Company will be able to achieve commercial success and
maintain client service and support in a geographically expanded area of
operations at levels that it historically achieved and provided in its current
geographical areas. Failure to manage growth may have a material adverse effect
on the Company's business, operating results or financial condition. See
"Business -- Business Strategy."
RAPID TECHNOLOGICAL CHANGE
The Open Systems storage market in which the Company operates is
characterized by rapid technological change, frequent new product introductions
and evolving industry standards. Customer preferences in that market are
difficult to predict. As an independent solutions provider, the Company is
dependent upon its suppliers' hardware, software and interface products to meet
the needs of the Company's customers. The introduction of products embodying new
technologies by the Company's competitors and the emergence of new industry
standards could render hardware, software and interface products currently
marketed by the Company obsolete and unmarketable. The Company's success will
depend upon its ability to address the increasingly sophisticated needs of its
customers and to identify and introduce, on a timely basis, new competitive
products and applications of existing and new suppliers (including new software
and enhancements to existing software) that keep pace with technological
developments and emerging industry standards. There can be no assurance that the
Company will be successful in identifying, managing, developing, integrating or
assembling and marketing product enhancements or new products of its suppliers
that respond to technical change or evolving industry standards, that the
Company and its suppliers will not experience difficulties that could delay or
prevent the successful development, introduction or marketing of such products
or that its suppliers' new products and product enhancements will adequately
meet the requirements of the marketplace and achieve market acceptance. Further
risks inherent in its suppliers' new product introductions include the
uncertainty of price performance relative to products of competitors, including
competitors' responses to these new product introductions. The Company's
business, operating results or financial condition could be materially and
adversely affected if the Company or its suppliers were to be unsuccessful, or
to incur significant delays, in developing and introducing new products or
enhancements. See "Business -- Products."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company intends to pursue strategic acquisitions of businesses that
either expand or complement its business, such as the recently completed
acquisition of DCSI. A substantial portion of the Company's capital resources,
including a portion of the proceeds from this offering, could be used for
acquisitions. The Company will evaluate specific acquisition opportunities based
on prevailing market and economic conditions. Acquisitions could result in the
integration of dissimilar operations or assets, assimilation of new employees,
diversion of management time and resources, increases in administrative costs,
potential loss of key employees of an acquired company and additional costs
associated with obtaining any necessary financing. These factors and the
Company's lack of experience in negotiating, consummating and integrating
acquisitions could adversely affect the Company's business, operating results or
financial condition. This risk may be compounded by the Company's geographic
expansion or product diversification. Acquisitions also could result in dilution
to existing stockholders, including those purchasing shares of Common Stock in
this offering. The Company may encounter increased competition for acquisitions
in the future, which could result in acquisition prices that the Company does
not consider acceptable. An increase in acquisition prices could adversely
affect the Company's acquisition strategy. There can be no assurance that the
Company will be able to identify suitable acquisition candidates at acceptable
prices or succeed in integrating any acquired business into the Company's
existing business or in retaining key customers of acquired businesses. There
also can be no assurance that the Company will have or be able to obtain
sufficient capital to execute its acquisition strategy. See "Prospectus Summary
- -- Recent Development," "Use of Proceeds" and "Business -- Business Strategy."
7
<PAGE> 11
FLUCTUATIONS IN OPERATING RESULTS
The Company may experience significant fluctuations in future annual and
quarterly operating results because of a number of factors including, among
other things, the size and timing of customer orders, new product introductions
by suppliers and the market acceptance thereof, delays in product shipments or
other quality control difficulties, the ability of the Company to integrate any
acquired businesses, product returns, seasonality in storage system product
purchases, trends in the Open Systems storage industry in general, the
geographic and industry specific markets in which the Company is presently
active, or may be in the future, and the opening of new sales offices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
BROAD DISCRETION IN APPLICATION OF PROCEEDS
The Company has not designated any specific use for approximately $12.0
million of the net proceeds to the Company from the sale of Common Stock
described in this Prospectus (assuming an initial public offering price of
$10.00 per share). The Company intends to use these net proceeds to fund its
growth and expansion, to increase the Company's working capital and for general
corporate purposes which the management of the Company will determine from time
to time. Accordingly, the Board of Directors and management of the Company will
have significant flexibility in applying such remaining proceeds of this
offering. The failure of the Company's management to use such funds effectively
could have a material adverse effect on the Company's business, operating
results or financial condition. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PRIOR S CORPORATION STATUS AND DISTRIBUTION TO CURRENT STOCKHOLDERS
The Company historically has been treated as an S corporation for federal
and state income tax purposes. Unlike a C corporation, an S corporation is
generally not subject to income tax at the corporate level; instead, the S
corporation's income is taxed on the personal income tax returns of its
stockholders. The Company's status as an S corporation will terminate upon the
closing of this offering. If S corporation status were denied for any periods
prior to this termination by reason of a failure to satisfy the S corporation
election or eligibility requirements of the Internal Revenue Code, as amended
(the "Code"), the Company would be subject to tax on its income as if it were a
C corporation for those periods.
In connection with the termination of the Company's S corporation status,
the Company intends to make a distribution to the current stockholders of all
previously taxed, but undistributed, S corporation earnings of the Company. As
of June 30, 1998, this amount was approximately $8.9 million. The Company will
adjust the actual amount of the distribution to reflect the taxable income and
any stockholder distributions from July 1, 1998 through the termination of the S
corporation status upon the closing of this offering. Purchasers of Common Stock
in this offering will not receive any of this distribution. See "Use of
Proceeds," "Termination of S Corporation Status and Put Option and Dividend
Policy," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 12 of the Notes to the Company's Financial
Statements.
THIRD PARTY YEAR 2000 COMPLIANCE
In connection with the approach of the Year 2000, industry experts have
predicted a variety of adverse consequences, including catastrophic system
failures, that may result from organizations' computer systems having been
programmed to record and process year dates by two, rather than four, digits.
Although the Company believes that its new computer system will not experience
any Year 2000 problems, it cannot predict whether its suppliers, customers and
other organizations with whom the Company conducts business will in a timely
fashion bring their computer systems or product offerings into Year 2000
compliance. If the Company's suppliers or customers fail to complete any
required Year 2000 remediation of their computer systems or product offerings,
the Company could suffer delays in product delivery or in processing of payments
owed to the Company. In addition, if any products or components sold by the
Company to its customers were to fail, the Company could be liable to its
customers for damages and costs to the extent that the Company's
8
<PAGE> 12
suppliers do not cover such liability. Any such Year 2000 failures could have a
material adverse effect on the Company's business, operating results or
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
WARRANTY EXPOSURE
Products offered by the Company may contain defects in hardware, software
or workmanship that remain undetected or that may not become apparent until
after commercial shipment. Any loss or delay in customer or market acceptance
attributable to such defects or any material replacement or repair expenses due
to any such defects could have a material adverse effect on the Company's
business, operating results or financial condition.
As a solutions provider, the Company supports and administers the
pass-through of its suppliers' own standard warranties which run from one to
five years. The Company contracts with a number of its suppliers and other
independent service organizations to provide on-site maintenance and repair
services. If a supplier were to fail to meet its warranty obligations to the
Company, the Company might be liable to its customers. There can be no assurance
that suppliers will be willing or able to honor their warranties, that the
Company may not incur its own warranty costs or that the Company's repair and
maintenance subcontractors will perform their services in a timely and proper
manner. See "Business -- Technical Services."
RESTRICTIONS ON DIVIDENDS
Other than the planned S Corporation distribution, the Company does not
anticipate paying any dividends in the foreseeable future. In addition, the
Company's credit agreement with Norwest Bank Minnesota, N.A. (the "Credit
Agreement"), prohibits the Company from paying dividends to its stockholders.
Accordingly, investors who have a need for current income should not purchase
the shares offered hereby.
DILUTION
Purchasers of the Common Stock offered hereby will incur an immediate and
substantial dilution of $7.48 per share, or 74.8%, in the net tangible book
value per share of Common Stock from the assumed initial public offering price
of $10.00 per share. If the Company issues additional shares of capital stock
for any reason, purchasers of the shares offered hereby may incur additional
dilution. See "Dilution."
CONTROL BY CURRENT STOCKHOLDERS
Immediately following this offering, the current stockholders of the
Company, including the former DCSI stockholders, will beneficially own
approximately 73.2% of the outstanding Common Stock (approximately 70.2% if the
Underwriters' over-allotment option is exercised in full). As a result, the ten
current stockholders will continue to be able to elect the entire Board of
Directors and to control the outcome of all other matters requiring stockholder
approval. Such voting concentration may have the effect of delaying or
preventing a change in management or control of the Company. See "Recent
Development" and "Principal Stockholders."
ABSENCE OF PRIOR PUBLIC MARKET FOR THE COMMON STOCK; POTENTIAL VOLATILITY OF
TRADING PRICE
Prior to this offering, there has been no public market for the Common
Stock. Although the Company has applied for the quotation and trading of the
Common Stock on the Nasdaq National Market, there can be no assurance that an
active public market will develop or that the initial public offering price will
correspond to the price at which the Common Stock will trade in the public
market subsequent to this offering. The initial public offering price for the
Common Stock has been determined by negotiations between the Company and the
Representatives. See "Underwriting."
The market price of the Common Stock may be volatile and may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of technical innovations, new
products or services by the Company, its suppliers or its competitors, changes
in estimates by
9
<PAGE> 13
securities analysts of the Company's future financial performance, general
market conditions and other factors. In addition, the stock market has from time
to time experienced significant price and volume fluctuations which, in no
relationship to operating performance, have adversely affected the market prices
of securities of some companies.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock after this offering could
adversely affect the market price of the Common Stock. Although only the
2,600,000 shares (2,990,000 shares if the Underwriters' over-allotment option is
exercised in full) being sold in this offering will be available for sale in the
public market immediately after the offering, 6,900,000 shares of Common Stock
owned by six current stockholders will be eligible for sale in the public market
beginning 180 days after the date of this Prospectus, subject to the volume and
manner of sale limitations imposed by Rule 144 under the Securities Act of 1933,
as amended (the "Securities Act"). Rule 144 generally provides that beneficial
owners of Common Stock who have held such Common Stock for one year may sell
within a three-month period a number of shares not exceeding the greater of 1%
of the total outstanding shares or the average weekly trading volume of the
shares during the four calendar weeks preceding such sale. Future sales of
restricted Common Stock under Rule 144 could negatively impact the market price
of the Common Stock. Pursuant to the terms of the underwriting agreement between
the Company and the Representatives of the Underwriters, Common Stock owned by
the six current stockholders, as well as option holders, may not be sold for 180
days from the date of this Prospectus, but Needham & Company, Inc. may waive
this requirement. See "Shares Eligible for Future Sale."
UNDESIGNATED SHARES; CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Articles of Incorporation authorize the
issuance of 50 million undesignated shares. The Company's Board of Directors has
the authority to issue any or all of the undesignated shares, including the
authority to establish the rights, preferences and classes of the undesignated
shares, without stockholder approval. In addition, the Company is subject to
certain anti-takeover provisions of the Minnesota Business Corporation Act.
These provisions may, in certain circumstances, deter or discourage takeover
attempts and other changes in control of the Company not approved by the Board
of Directors. See "Description of Capital Stock."
10
<PAGE> 14
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,600,000 shares of Common Stock offered by the Company hereby at an assumed
initial offering price of $10.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses, are estimated to
be approximately $23.7 million ($26.7 million if the Underwriters'
over-allotment option is exercised in full). In addition to the purposes set
forth below, this offering is intended to provide a public market for Datalink's
Common Stock and to facilitate future access to the public capital markets. The
Company anticipates that it will use the net proceeds approximately as follows:
<TABLE>
<CAPTION>
APPLICATION OF NET PROCEEDS AMOUNT
--------------------------- ------
<S> <C>
Distribution of S corporation earnings to the current
stockholders.............................................. $ 8.9 million
Repayment of certain indebtedness........................... 2.8 million
Growth and expansion, working capital and general corporate
purposes.................................................. 12.0 million
-------------
Total....................................................... $23.7 million
=============
</TABLE>
The Company plans to use a portion of the net proceeds of this offering to
fund the final S corporation distribution to the current stockholders. This
distribution will constitute all of the previously taxed, but undistributed, S
corporation earnings. As of June 30, 1998, such earnings were approximately $8.9
million. See "Termination of S Corporation Status and Put Option and Dividend
Policy." See Note 12 of the Notes to the Company's Financial Statements.
The Company also intends to use a portion of the net proceeds of this
offering to repay all borrowings under the Credit Agreement. As of June 30,
1998, the balance under the Credit Agreement was $2.8 million. The Company will
have up to $10.0 million available under the Credit Agreement following the
offering subject to limitations based on percentages of eligible accounts
receivable and inventories. Upon the closing of this offering, the borrowings
under the Credit Agreement will bear interest at the bank's reference rate;
however, the Company may periodically borrow funds under the Credit Agreement at
LIBOR plus 1.95%. The Credit Agreement terminates on May 31, 2000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 5 of the Notes to the
Company's Financial Statements.
Approximately $12.0 million of the net proceeds of this offering will be
used to fund the Company's growth and expansion plans and for working capital
and general corporate purposes. As part of its growth and expansion plans, the
Company intends to pursue strategic acquisitions that either expand or
complement its business. See "Business -- Business Strategy."
Pending such uses, the Company intends to invest the net proceeds of this
offering in short-term, investment-grade, interest-bearing securities.
11
<PAGE> 15
TERMINATION OF S CORPORATION STATUS AND PUT OPTION AND DIVIDEND POLICY
In January 1988, the Company elected to be treated as an S corporation and
since then has been, and through the closing date of the offering will be,
subject to taxation under Subchapter S of the Code and comparable state tax
regulations. As a result, the Company's earnings have been taxed for federal and
state income tax purposes directly to the stockholders rather than to the
Company. Upon conversion from S corporation to C corporation status, the Company
will become subject to federal and state corporate income taxes.
In connection with the termination of the Company's S corporation status
upon the closing of this offering, the Company will make a distribution to the
current stockholders of all previously taxed, but undistributed, S corporation
earnings of the Company. As of June 30, 1998, such earnings were approximately
$8.9 million. The actual amount of the distribution will be adjusted to reflect
the taxable income and any stockholder distributions from July 1, 1998 through
the termination of the S corporation status. Following the termination of its S
corporation status, the Company will record a net deferred tax asset on its
balance sheet which will ultimately increase retained earnings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and Note 12 of the Notes to the Company's
Financial Statements.
The Company and six of its current stockholders entered into a Stock
Purchase Agreement (the "Stock Purchase Agreement') effective April 1, 1992 that
restricts the right of stockholders to dispose of or encumber any shares of the
Company's Common Stock and dictates the terms for transfer of the shares. The
Stock Purchase Agreement originally provided that upon the death, disability or
termination of employment, each stockholder is required to put his shares to the
Company and the Company is obligated to purchase all shares owned by that
stockholder at a price determined pursuant to the terms of the Stock Purchase
Agreement. In November 1996, the Stock Purchase Agreement was amended to allow a
retired stockholder to retain his shares until the retired stockholder or his
legal representative exercises the put option which requires the Company to
purchase his shares, or until such stockholder's death. Because the Company's
Common Stock is subject to these put options, the accreted value of the Common
Stock (determined pursuant to the terms of the Stock Purchase Agreement) has
been excluded from stockholders' equity. The Stock Purchase Agreement, including
the put options, will be terminated contemporaneously with the closing of this
offering. See "Selected Historical and Pro Forma Financial Data,"
"Capitalization" and Notes 3 and 9 of the Notes to the Company's Financial
Statements.
The Company currently intends to retain any net income for use in its
business and does not anticipate paying any cash dividends on its capital stock
in the foreseeable future other than in connection with the termination of the
Company's S corporation status. Any future declaration and payment of dividends
will be subject to the discretion of the Company's Board of Directors, will be
subject to applicable law and will depend upon the Company's results of
operations, earnings, financial condition, cash requirements, future prospects
and other factors deemed relevant by the Board of Directors. In addition, the
Credit Agreement prohibits the Company from paying dividends to C corporation
stockholders.
12
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998, on an actual basis, on a pro forma basis to give effect to the
termination of the put options on the Company's Common Stock, on a pro forma
basis to give effect to the termination of the Company's S Corporation status
and on a pro forma basis as adjusted to give effect to the sale of the 2,600,000
shares of Common Stock offered by the Company hereby based upon an assumed
initial public offering price of $10.00 per share and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------------------------------------------
PRO FORMA
--------------------------------------------
TERMINATION TERMINATION OF
OF PUT S CORPORATION AS
ACTUAL OPTIONS(2) STATUS(3) ADJUSTED(4)
------ ----------- -------------- -----------
<S> <C> <C> <C> <C>
Common Stock, subject to put option, $0.001
par value; 50,000,000 shares authorized;
6,900,000 shares issued and outstanding..... $16,174 $ -- $ -- $ --
Stockholders' equity (deficiency):
Common Stock, $0.001 par value; 50,000,000
shares authorized; 6,900,000 shares
issued and outstanding actual and
9,500,000 shares issued and outstanding
as adjusted(1)........................... -- 7 7 10
Additional paid-in capital.................. -- -- -- 23,677
Retained earnings (accumulated deficit)..... (7,304) 8,863 235 235
------- ------ ---- -------
Total stockholders' equity (deficiency)..... (7,304) 8,870 242 23,922
------- ------ ---- -------
Total capitalization.......................... $ 8,870 $8,870 $242 $23,922
======= ====== ==== =======
</TABLE>
- ------------
(1) Excludes (i) 200,000 shares of Common Stock issued in connection with the
acquisition of DCSI, (ii) 950,000 shares of Common Stock reserved for
issuance under the Company's Incentive Compensation Plan, including 332,500
shares of Common Stock reserved for issuance upon the exercise of options to
be granted under the Incentive Compensation Plan contemporaneously with the
closing of this offering, (iii) 250,000 shares of Common Stock reserved for
issuance under the Company's Employee Stock Purchase Plan and (iv) 320,000
shares of Common Stock which may be purchased by the Underwriters from the
Company to cover over-allotments, if any. See "Recent Development,"
"Management -- Stock Incentive Plans" and "Underwriting."
(2) Adjusted to give pro forma effect to the reclassification of the Company's
Common stock subject to put options into stockholders' equity, reflecting
termination of these put options upon the closing of this offering. See
"Termination of S Corporation Status and Put Option and Dividend Policy" and
Notes 3 and 9 of the Notes to the Company's Financial Statements.
(3) Adjusted to give pro forma effect to (i) the pro forma adjustment described
in (2) above, (ii) a final S corporation distribution to the current
stockholders, representing all previously taxed, but undistributed, S
corporation earnings, estimated at $8.9 million had the termination occurred
on June 30, 1998, (iii) a net deferred tax asset which will be recorded by
the Company as a result of the termination of its S corporation status,
estimated at $242,000 had such termination occurred on June 30, 1998. See
"Termination of S Corporation Status and Put Option and Dividend Policy" and
Notes 2 and 3 of Notes to the Company's Financial Statements.
(4) Adjusted to give pro forma effect to (3) above and the sale by the Company
of 2,600,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $10.00 per share and the application of the
estimated net proceeds therefrom. See "Use of Proceeds," and Notes 2 and 3
of the Notes to the Company's Financial Statements.
13
<PAGE> 17
DILUTION
The net tangible book value (deficit) of the Company as of June 30, 1998
was $(7.3) million, or $(1.06) per share. Net tangible book value (deficit) per
share is equal to the Company's total tangible assets less total liabilities and
the Company's Common Stock subject to put option, divided by the total number of
shares of Common Stock outstanding. After giving effect to (i) the termination
of the put option on the Company's Common Stock, (ii) the final S corporation
distribution to the current stockholders, estimated at $8.9 million had the
termination occurred on June 30, 1998, (iii) the net deferred tax asset which
will be recorded by the Company as a result of the termination of its S
corporation status, estimated at $242,000 had such termination occurred on June
30, 1998 and (iv) the sale by the Company of 2,600,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $10.00 per share
and after deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company, the adjusted net tangible
book value of the Company as of June 30, 1998 would have been $23.9 million, or
$2.52 per share. This represents an immediate increase in net tangible book
value of $3.58 per share to the existing stockholders and an immediate dilution
in net tangible book value of $7.48 per share to investors purchasing shares of
Common Stock in this offering. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $10.00
Net tangible book value (deficit) per share at June 30,
1998................................................... $(1.06)
Increase attributable to termination of put option on
Common Stock........................................... 2.34
Decrease attributable to the final S corporation
distribution, net of increase attributable to deferred
tax asset recognition.................................. (1.25)
Increase in net tangible book value per share attributable
to new investors....................................... 2.49
Net tangible book value per share after the offering........ 2.52
------
Dilution per share to new investors......................... $ 7.48
======
</TABLE>
The following table summarizes as of June 30, 1998, the number of shares
purchased from the Company, the total consideration paid to the Company and the
average price per share paid by the Company's existing stockholders and by the
new investors after the sale of 2,600,000 shares of Common Stock by the Company
at an assumed initial public offering price of $10.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... 6,900,000 72.6% $ 100 --% $ --
New investors............................ 2,600,000 27.4 26,000,000 100.0 10.00
--------- ----- ----------- ----- ------
Total............................... 9,500,000 100.0% $26,000,100 100.0% $ 2.74
========= ===== =========== ===== ======
</TABLE>
The foregoing calculations do not give effect to (i) 200,000 shares of
Common Stock issued in connection with the acquisition of DCSI, (ii) 950,000
shares of Common Stock reserved for issuance under the Company's Incentive
Compensation Plan, including 332,500 shares of Common Stock reserved for
issuance upon the exercise of options to be granted under the Incentive
Compensation Plan contemporaneously with the closing of this offering, (iii)
250,000 shares of Common Stock reserved for issuance under the Company's
Employee Stock Purchase Plan and (iv) 320,000 shares of Common Stock which may
be purchased by the Underwriters from the Company to cover over-allotments, if
any. See "Recent Development," "Management -- Stock Incentive Plans" and
"Underwriting."
14
<PAGE> 18
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth certain selected historical financial and
pro forma data of Datalink as of and for each of the five years in the period
ended December 31, 1997 and as of June 30, 1998 and for each of the six month
periods ended June 30, 1997 and 1998. The selected historical financial data as
of December 31, 1996 and 1997 and for each of the three years in the period
ended December 31, 1997 have been derived from the historical financial
statements of Datalink, audited by PricewaterhouseCoopers LLP, independent
accountants, and included elsewhere in this Prospectus. The selected historical
financial data as of December 31, 1995 has been derived from the historical
financial statements of Datalink, audited by PricewaterhouseCoopers LLP. The
selected historical financial data as of December 31, 1993 and 1994 and for each
of the two years in the period ended December 31, 1994 have been derived from
the historical financial statements of Datalink, audited by Hansen, Jergenson,
Nergaard & Co., L.L.P. The selected historical financial data as of June 30,
1998 and for the six-month periods ended June 30, 1997 and 1998 have been
derived from unaudited financial statements of the Company which have been
prepared on the same basis as the audited financial statements and, in the
opinion of the Company, reflect all adjustments necessary (consisting only of
normal recurring adjustments) for the fair presentation of the Company's
financial position and results of operations for such periods. Results for
interim periods are not necessarily representative of the results to be expected
for a full year, and historical results are not necessarily indicative of the
results of operations to be expected in the future. The information contained in
the following table should also be read in conjunction with "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and related notes included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $24,146 $32,333 $38,048 $54,652 $71,255 $31,265 $36,627
Cost of sales................................... 19,405 25,907 30,356 42,872 55,719 24,462 27,644
------- ------- ------- ------- ------- ------- -------
Gross profit.................................. 4,741 6,426 7,692 11,780 15,536 6,803 8,983
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing........................... 1,495 1,891 2,487 3,607 5,191 2,187 3,055
General and administrative.................... 1,764 1,912 2,118 2,382 3,010 1,386 1,713
Engineering................................... 269 343 467 633 926 493 691
------- ------- ------- ------- ------- ------- -------
Total operating expenses........................ 3,528 4,146 5,072 6,622 9,127 4,066 5,459
------- ------- ------- ------- ------- ------- -------
Operating income................................ 1,213 2,280 2,620 5,158 6,409 2,737 3,524
Interest expense, net........................... 192 243 306 286 333 166 105
------- ------- ------- ------- ------- ------- -------
Net income(1)................................... $ 1,021 $ 2,037 $ 2,314 $ 4,872 $ 6,076 $ 2,571 $ 3,419
======= ======= ======= ======= ======= ======= =======
Historical net income per share, basic and
diluted....................................... $ 0.15 $ 0.30 $ 0.34 $ 0.71 $ 0.88 $ 0.37 $ 0.50
======= ======= ======= ======= ======= ======= =======
Weighted average shares outstanding, basic and
diluted....................................... 6,900 6,900 6,900 6,900 6,900 6,900 6,900
------- ------- ------- ------- ------- ------- -------
Pro forma income taxes(2)....................... 2,430 1,028 1,333
------- ------- -------
Pro forma net income............................ $ 3,646 $ 1,543 $ 2,086
======= ======= =======
Pro forma net income per share, basic and
diluted(3).................................... $ 0.46 $ 0.20 $ 0.27
======= ======= =======
Shares used in computing pro forma net income
per share(3).................................. 7,854 7,854 7,854
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
----------------------------
PRO FORMA
--------------
AS OF DECEMBER 31,
---------------------------------------------- TERMINATION OF
1993 1994 1995 1996 1997 ACTUAL PUT OPTIONS(4)
---- ---- ---- ---- ---- ------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................... $ 142 $ 294 $ 111 $ 222 $ 1,163 $ 349 $ 349
Working capital............ 1,605 2,424 3,003 5,330 6,761 7,184 7,184
Total assets............... 6,028 9,314 8,689 15,355 18,705 19,695 19,695
Common stock subject to put
option................... 1,698 3,425 5,351 9,339 13,874 16,174 --
Stockholders' equity
(deficiency)............. (483) (1,331) (2,286) (3,296) (5,744) (7,304) 8,870
<CAPTION>
AS OF JUNE 30, 1998
----------------------------
PRO FORMA
----------------------------
TERMINATION OF
S CORPORATION AS
STATUS(5) ADJUSTED(6)
-------------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash....................... $ 349 $12,337
Working capital............ (1,447) 22,233
Total assets............... 19,937 31,925
Common stock subject to put
option................... -- --
Stockholders' equity
(deficiency)............. 242 23,922
</TABLE>
- ------------
(1) For the periods presented, the Company was an S corporation and,
accordingly, was not subject to federal and state income taxes.
15
<PAGE> 19
(2) Pro forma income taxes have been computed as if the Company was subject to
federal and state income taxes for the periods presented, based on the tax
laws in effect during those periods. See Notes 2 and 3 of the Notes to the
Company's Financial Statements.
(3) Pro forma net income per share is computed by dividing pro forma net income
by the weighted average number of shares outstanding for the period, after
giving effect to the estimated number of shares that would be required to be
sold at the initial public offering price (after deducting the underwriting
discounts) to fund a distribution to the current stockholders of all
previously taxed, but undistributed, S Corporation earnings, estimated at
$8.9 million had the termination occurred on June 30, 1998. The Company does
not have any common stock equivalents. See "Termination of S Corporation
Status and Put Option and Dividend Policy" and Note 3 of the Notes to the
Company's Financial Statements.
(4) Adjusted to give pro forma effect to the reclassification of the Company's
Common Stock subject to put option into stockholders' equity, reflecting
termination of these put options upon the closing of this offering. See
"Termination of S Corporation Status and Put Option and Dividend Policy" and
Note 9 of the Notes to the Company's Financial Statements.
(5) Adjusted to give pro forma effect to (i) the pro forma adjustment described
in (4) above, (ii) a final S corporation distribution payable to the current
stockholders, representing all previously taxed, but undistributed, S
corporation earnings, estimated at $8.9 million had the termination occurred
on June 30, 1998 and (iii) a net deferred tax asset which will be recorded
by the Company as a result of the termination of its S corporation status,
estimated at $242,000 had such termination occurred on June 30, 1998. See
"Termination of S Corporation Status and Put Option and Dividend Policy" and
Note 3 of the Notes to the Company's Financial Statements.
(6) Adjusted to give effect to (i) the pro forma adjustments described in (5)
above and (ii) the sale by the Company of 2,600,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $10.00 per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."
16
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Financial Statements, including the Notes thereto, and the other information
included herein. The following information also includes forward-looking
statements, the realization of which may be impacted by certain important
factors discussed under "Risk Factors."
OVERVIEW
Datalink analyzes, custom designs, integrates or assembles, installs and
supports high-end Open Systems storage solutions using products and components
manufactured by various suppliers in order to meet its customers' requirements.
The Company has developed engineering, sales and support capabilities to become
an expert in applying the best available storage technologies manufactured by
the leading data storage hardware and software companies to solve its customers'
growing data storage needs. These technologies include hard disk, RAID, magnetic
tape, CD-ROM and optical products. The Company also matches storage management
software technologies, including backup and recovery, archive, high availability
and near on-line storage, to the specific needs of its customers. The Company's
net sales and net income have grown at a compound annual rate of 31% and 56%,
respectively, over the past five years.
The Company was founded in 1963 as Stan Clothier Co., Inc. and operated as
a manufacturer's representative for technology products and components. In 1987,
the Company was renamed Datalink Corporation to reflect the Company's transition
to a distributor of data storage products. Beginning with the hiring of Greg R.
Meland in 1991, the current management team recognized that rapid and complex
changes in data storage technology would lead businesses and organizations
increasingly to seek external expertise to address their data storage needs.
Accordingly, the Company made the strategic decision to focus on providing its
customers with complete data storage solutions encompassing the best technology
available. By developing engineering expertise and high quality customer service
and support, Datalink became a leader in providing data storage solutions.
Datalink's customers include end-users, VARs and OEMs. The Company works
closely with end-users and VARs to assess their informational storage and
retrieval requirements and to design, integrate, install, and support
information storage solutions incorporating the best hardware and software
products on the market. For OEM customers, the Company's team of design and
application engineers custom design storage subsystems, which are integrated
into the OEM's own products. In general, the Company realizes higher gross
margins on net sales to end-users and OEMs based on the high value-added nature
of such sales.
The Company realizes substantial repeat business from its existing
customers. During 1997, 1996 and 1995, sales to existing customers represented
79.9%, 77.7% and 82.6%, respectively, of net sales. Management believes that
this repeat business is attributable to the Company's high level of technical
expertise and customer service and support.
Datalink sells its products through its direct sales force located in
Minneapolis and 11 field offices. The Company has continued to grow its sales
force and open new sales office locations in anticipation of increased demand
for the Company's products and services. The Company selects new sales office
locations based upon perceived demand for the Company's products and services.
Datalink has experienced, and expects to continue to experience, an increase in
sales and marketing expenses disproportionate to the increase of net sales in
connection with the opening of new sales offices. This is due primarily to the
lead time (six months or longer) generally associated with generating business
in the new territory.
As an independent storage solutions provider, Datalink updates its product
offerings to match advancements by its suppliers of hardware and software
technology. Although the Company often has advance knowledge of forthcoming
product releases because of its close working relationship with its suppliers,
the impact of these advancements on the Company's results of operations are
often difficult to predict. The Company's customers may delay purchases upon
learning of actual or rumored new product introductions. In addition, changes in
technology may significantly affect the pricing or profitability of products.
17
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
financial data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
YEARS ENDED DECEMBER 31, (UNAUDITED)
----------------------------- -------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 79.8 78.4 78.2 78.2 75.5
----- ----- ----- ----- -----
Gross profit............................... 20.2 21.6 21.8 21.8 24.5
----- ----- ----- ----- -----
Operating expenses:
Sales and marketing........................ 6.5 6.6 7.3 7.0 8.3
General and administrative................. 5.6 4.4 4.2 4.4 4.7
Engineering................................ 1.2 1.2 1.3 1.6 1.9
----- ----- ----- ----- -----
Total operating expenses................ 13.3 12.2 12.8 13.0 14.9
----- ----- ----- ----- -----
Operating income............................. 6.9% 9.4% 9.0% 8.8% 9.6%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net Sales. Net sales include sales of products and software integrated for
end-user and VAR customers, products assembled by the Company for OEM customers
and revenues from billable installation, repair and maintenance services.
Datalink recognizes product revenues as its products are shipped or following
customer acceptance for products under evaluation. Net sales increased $5.4
million or 17.1% to $36.6 million for the six months ended June 30, 1998, from
$31.3 million for the comparable period in 1997. The increase primarily resulted
from an increase in volume, principally attributable to increases in sales of
products to end-user customers and revenues from maintenance contracts partially
offset by decreases in sales to VAR and OEM customers.
Gross Profit. Cost of sales consists primarily of the cost of components
purchased from suppliers. Gross profit as a percentage of net sales increased to
24.5% for the six months ended June 30, 1998, from 21.8% for the comparable
period in 1997. This increase was principally attributable to the Company's
increasing sales of large storage systems to end-user customers.
Sales and Marketing. Sales and marketing expenses include wages and
commissions paid to the Company's sales and marketing personnel, travel and
entertainment costs and advertising, promotion and trade show expenses. Sales
and marketing expense increased $867,000 or 39.6% to $3.1 million, or 8.3% of
net sales, for the six months ended June 30, 1998, from $2.2 million, or 7.0% of
net sales, for the comparable period in 1997. This increase was primarily
attributable to additional sales commission associated with sales growth, the
hiring of new marketing personnel and increased advertising costs.
General and Administrative. General and administrative expenses include
wages for administrative personnel, profit sharing contributions, professional
fees, communication expenses and rent and related facility expenses. General and
administrative expenses increased $327,000 or 23.6% to $1.7 million, or 4.7% of
net sales, for the six months ended June 30, 1998, as compared to $1.4 million,
or 4.4% of net sales, for the comparable period in 1997. This increase was
principally attributable to increases in administrative personnel and related
expenses and professional fees.
Engineering. Engineering expenses include employee wages, travel and
training expenses for the Company's professional engineers and technicians and
professional fees to obtain various independent laboratory certifications of
storage subsystems designed by the Company for OEM customers. Engineering
expenses increased $198,000 or 40.2% to $691,000, or 1.9% of net sales, for the
six months ended June 30,
18
<PAGE> 22
1998, from $493,000, or 1.6% of net sales, for the comparable period in 1997.
This increase was primarily attributable to the addition of new engineering
personnel and increased travel expenses.
Operating Income. Operating income increased $788,000 or 28.8% to $3.5
million, or 9.6% of net sales, for the six months ended June 30, 1998, from $2.7
million, or 8.8% of net sales, for the comparable period in 1997. The increase
as a percentage of net sales was principally attributable to the increase in
gross profit without a commensurate increase in operating expenses.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Net Sales. Net sales increased 30.4% to $71.3 million in 1997 and increased
43.6% to $54.7 million in 1996. Net sales were $38.0 million in 1995. These
increases were principally attributable to an increase in sales of large RAID
and tape backup storage systems to end-user customers.
Gross Profit. Gross profit as a percentage of net sales increased to 21.8%
in 1997 from 21.6% in 1996 and 20.2% in 1995. These increases were primarily due
to the Company's increasing sales of large storage systems to end-user
customers.
Sales and Marketing. Sales and marketing expenses increased 43.9% to $5.2
million in 1997 and increased 45.0% to $3.6 million in 1996. Sales and marketing
expenses were $2.5 million in 1995. As a percentage of net sales, sales and
marketing expenses were 7.3% in 1997, 6.6% in 1996 and 6.5% in 1995. The
increases as a percentage of net sales over these years were principally
attributable to an increase in commissions paid to the Company's sales
representatives on large storage system sales to end-user customers and to the
hiring of new sales representatives in anticipation of future growth.
General and Administrative. General and administrative expenses increased
26.4% to $3.0 million in 1997 compared to 1996 and increased 12.5% to $2.4
million in 1996 compared to $2.1 million in 1995. As a percentage of net sales,
general and administrative expenses were 4.2% in 1997, 4.4% in 1996 and 5.6% in
1995. The dollar increase in general and administrative expenses was primarily
attributable to increases in administrative personnel and related expenses. The
decrease as a percentage of net sales over such periods was principally
attributable to the significant increase in net sales over these periods.
Engineering. Engineering expenses increased 46.4% to $926,000 in 1997 as
compared to 1996 and increased 35.6% to $633,000 in 1996 as compared to $466,000
in 1995. Engineering expenses as a percentage of net sales were 1.3% in 1997 and
1.2% in both 1996 and 1995. The dollar increase over these years was primarily
attributable to the addition of new engineering personnel and increased travel
expenses.
Operating Income. Operating income increased 24.2% to $6.4 million in 1997
as compared to 1996 and 96.8% to $5.2 million in 1996 as compared to $2.6
million in 1995. As a percentage of net sales, operating income was 9.0% in
1997, 9.4% in 1996 and 6.9% in 1995. The decrease in operating income as a
percentage of net sales in 1997 was principally attributable to the investment
in sales and marketing expenses in anticipation of future sales growth. The
increase in operating income as a percentage of net sales in 1996 was
principally attributable to the significant increase in net sales.
19
<PAGE> 23
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain unaudited quarterly financial data
of the Company for each quarter of 1996 and 1997 and the first quarter of 1998.
In the opinion of the Company's management, this unaudited information has been
prepared on the same basis as the audited information and includes all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------------------
1996 1997 1998
---------------------------------------- ---------------------------------------- ------------------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $10,842 $12,686 $13,871 $17,253 $15,266 $15,999 $19,269 $20,721 $16,599 $20,028
Gross profit......... 2,190 2,784 3,033 3,773 3,260 3,543 4,044 4,689 3,876 5,107
Operating income..... 834 1,351 1,141 1,832 1,077 1,660 1,585 2,086 1,173 2,351
Net income........... 771 1,271 1,075 1,755 1,004 1,567 1,482 2,023 1,118 2,301
Pro forma net
income(1).......... 457 753 638 985 602 940 890 1,214 682 1,404
</TABLE>
- ------------
(1) Pro forma net income has been computed as if the Company was a C corporation
and had been subject to federal and state income taxes during all of the
periods presented. See Notes 2 and 3 of the Notes to the Company's Financial
Statements.
The Company has experienced and expects to continue to experience quarterly
variations in its net sales as a result of a number of factors including, among
other things, the length of the sales cycle with end-user customers for large
storage system evaluations and purchases, the significant lead time in designing
storage subsystems for OEM customers, new product introductions by suppliers and
the market acceptance thereof, delays in product shipments or other quality
control difficulties, the ability of Datalink to integrate any acquired
businesses, product returns, trends in the Open Systems storage industry in
general, the geographic and industry specific market in which Datalink is
presently active, or may be in the future, and the opening of new field sales
offices. Net sales also tend to be lower in the summer months and higher in the
quarter ending December 31 reflecting the timing of purchase decisions by the
Company's customers.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital
requirements through cash flows generated from operations and supplemental bank
borrowings. Working capital was $7.2 million, $6.8 million and $5.3 million at
June 30, 1998 and December 31, 1997 and 1996, respectively. The increase was
primarily attributable to an increase in cash and net accounts receivable offset
by a decrease in inventories and an increase in borrowings under the Credit
Agreement.
Cash provided by operating activities was $2.3 million for the six months
ended June 30, 1998. Cash used in investing activities was $390,000 for the six
months ended June 30, 1998 resulting primarily from expenditures for purchases
of new accounting software and computer equipment. Cash used in financing
activities was $2.7 million for the six months ended June 30, 1998 resulting
primarily from the payment of $2.7 million of dividends, and a net decrease in
borrowings under the Company's Credit Agreement of approximately $1.1 million,
offset by approximately $1.0 million of net book basis cash overdrafts.
Cash provided by operating activities for 1997, 1996 and 1995 was $4.6
million, $2.5 million and $2.3 million, respectively, reflecting the Company's
increasing sales and net income. Cash used in investing activities during 1997,
1996 and 1995 was $766,000, $337,000 and $286,000, respectively. These uses
reflected expenditures for computer and office equipment and improvements to
support increasing sales volumes, including the opening of new field sales
offices. Cash used in financing activities in 1997, 1996 and 1995 was
20
<PAGE> 24
$2.8 million, $2.0 million and $2.2 million, respectively. These uses of cash
relate primarily to net repayments of borrowings under the Company's Credit
Agreement and to dividends paid to the stockholders. These dividends totaled
$4.0 million, $1.9 million and $1.3 million in 1997, 1996 and 1995,
respectively, and were distributed to the stockholders primarily to provide
liquidity to pay their income tax liabilities resulting from the Company's S
corporation taxable income.
At June 30, 1998, the Company's borrowings consisted of $2.8 million owed
under the Credit Agreement. The Credit Agreement permits the Company to borrow
up to $10.0 million on a revolving basis with borrowings limited by eligible
accounts receivable and inventories. Upon the closing of this offering, the
borrowings under the Credit Agreement will bear interest at the bank's reference
rate; however, the Company may periodically borrow funds under the Credit
Agreement at LIBOR plus 1.95%. The Credit Agreement terminates on May 31, 2000.
Borrowings under the Credit Agreement are collateralized by the Company's cash,
accounts receivable, intangibles, inventories and equipment. The Company intends
to use a portion of the net proceeds of this offering to repay all borrowings
under the Credit Agreement.
The Company plans to use a portion of the net proceeds of this offering to
fund the final S corporation distribution to the current stockholders. This
distribution will constitute all of the previously taxed, but undistributed, S
corporation earnings. As of June 30, 1998, such earnings were approximately $8.9
million. The actual amount of the distribution will be adjusted to reflect the
taxable income and any stockholder distributions from July 1, 1998 through the
termination of the S corporation status upon the closing of this offering.
On July 15, 1998 the Company acquired DCSI. Under terms of the agreement,
the Company acquired all of DCSI's capital stock in exchange for $2 million of
cash and 200,000 shares of the Company's Common Stock, subject to certain
post-closing adjustments, and the Company paid an aggregate amount of $500,000
of cash to certain employees of DCSI in connection with noncompetition
agreements.
The Company believes that funds generated from operations, together with
the net proceeds of this offering, available credit under its Credit Agreement
and trade credit from suppliers will be sufficient to finance its current
operations and planned capital expenditure requirements for at least the next
twelve months.
Inflation. The Company does not believe that inflation has had a material
effect on its results of operations in recent years; however, there can be no
assurance that the Company's business will not be adversely affected by
inflation in the future.
Year 2000 Compliance. The Company has completed an assessment of its
internal systems and believes that these systems will not experience any Year
2000 problems. The Company is in the process of assessing the Year 2000
compliance of its supplier and customer systems and supplier products installed
at customer sites. If the Company's suppliers or customers fail to complete any
required Year 2000 remediation of their computer systems or product offerings,
the Company could suffer delays in product delivery or could experience delays
in customer payments. In addition, if any products or components sold by the
Company to its customers were to fail, the Company could be liable to its
customers for damages and costs to the extent that the Company's suppliers do
not cover such liabilities. Any such Year 2000 failures could have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
Recently Issued Accounting Standards. Effective at year-end 1998, the
Company will adopt Statement of Financial Accounting Standard No. 131 (SFAS No.
131), "Disclosure About Segments of an Enterprise and Related Information,"
which requires disclosure of segment data in a manner consistent with that used
by an enterprise for internal management reporting and decision making. The
Company believes that it will report its operations as a single segment under
SFAS No. 131.
21
<PAGE> 25
BUSINESS
THE COMPANY
Datalink analyzes, custom designs, integrates or assembles, installs and
supports high-end Open Systems storage solutions for end-users, VARs and OEMs.
Datalink has become a leading independent storage solutions provider by matching
its technical expertise and quality products with comprehensive service and
support to meet each customer's specific needs. The Company's storage solutions
are designed to provide the optimal combination of performance, capacity, high
availability, disaster recovery, multi-platform support, permanence,
scalability, centralized management and cost.
INDUSTRY OVERVIEW
The reliable access to and management of data is increasingly critical and
represents a key competitive advantage to business, government, educational and
nonprofit organizations. In recent years, organizations ranging from small
businesses and nonprofit entities to large, multinational enterprises have
increased their use of computers for collecting, analyzing and distributing
information to improve productivity. Historically, most computing environments
were controlled by expensive, host-based mainframes and minicomputers having
proprietary operating systems ("Closed Systems"). This limited the ability of
these computers to communicate outside their own environment. The selection of
these Closed Systems was largely based upon the processing power generated by
the computer's central processing unit ("CPU"). This CPU centered architecture
was considered the most important aspect of designing an organization's
management information system ("MIS"). In a Closed Systems computing
environment, end-user applications were limited by the hardware and operating
system architectures offered by the manufacturer. As the number of applications
grew and the need to distribute computing power directly to users became
increasingly important, organizational demand for an appropriate systems
solution dictated operating architectures linking multiple application, file,
database and communications servers to networked computers ("Open Systems").
The increased use of Open Systems hardware and software computing
environments creates the need for flexible and comprehensive data storage
solutions capable of serving multiple and evolving computer platforms.
Consequently, organizations are changing the way they manage data from a CPU
centered view to a new information centered model that requires the sharing,
management and protection of mission critical information across the enterprise.
Open Systems architecture permits organizations to utilize hardware and software
products and components available from various suppliers.
In addition to the challenges presented by the Open Systems computing
environment, computer processing power has continued to increase at a rapid rate
with the ongoing introduction of new and more powerful CPUs. Application
software developers are taking advantage of CPU advancements by introducing
powerful, easier to use, graphically oriented, memory intensive software
packages. These software applications have resulted in the automation of an
increasing number of mission-critical business applications, including on-line
transaction processing, the Internet, intranets, pre-press, multimedia, imaging
and data warehousing. This automation expands the need for on-line storage,
uninterrupted access to data and fail-safe methods to backup and archive such
data. Although substantial, the increase in storage device performance has
lagged the increase in processing power, creating an input/output performance
gap that continues to widen. This performance gap has increased the need for
high performance storage systems that accelerate on-line access to stored data
while providing continuous protection of this data.
Although demand for complex storage solutions is increasing, corporate
downsizing has led organizations to reduce their in-house MIS staffs.
Accordingly, organizations rely on external providers to research, design,
implement and support information storage solutions that incorporate the best
hardware and software technologies available and are compatible with
organizations' often large and complex distributed computer networks and Open
Systems operating system architectures. At the same time, reduced profit margins
have led suppliers to downsize their sales and marketing forces. As a result,
both customers and suppliers increasingly seek independent solutions providers,
such as Datalink, with knowledge and experience in Open Systems data storage.
According to Dataquest, Inc., an independent market research firm, the worldwide
RAID storage market for UNIX and Windows NT operating platforms was
approximately $12.8 billion in
22
<PAGE> 26
1997 and is expected to grow at an annual compound rate of 24% to approximately
$37.0 billion by 2002. According to SRC, an independent market research firm,
the worldwide market for tape automation backup storage products was
approximately $1.6 billion in 1996 and is expected to grow at an annual compound
rate of 18% to approximately $4.4 billion by 2002. According to SRC, the
worldwide storage management software market was approximately $1.4 billion in
1997 and is expected to grow at an annual compound rate of 31% to approximately
$3.0 billion by 2000.
THE DATALINK SOLUTION
Datalink analyzes, custom designs, integrates or assembles, installs and
supports high-end Open Systems storage solutions for end-users, VARs and OEMs.
Datalink has become a leading independent storage solutions provider by matching
its technical expertise and quality products with comprehensive service and
support to meet each customer's specific needs. The Company's storage solutions
are designed to provide the optimal combination of performance, capacity, high
availability, disaster recovery, multi-platform support, permanence,
scalability, centralized management and cost. Datalink's strengths include the
following:
Comprehensive Storage Solutions. Datalink delivers comprehensive,
state-of-the-art information storage solutions tailored to meet the specific
needs of each end-user, VAR and OEM. The Company works closely with end-users
and VARs to assess their information storage and retrieval requirements and to
design, integrate, install and support information storage solutions
incorporating the best available hardware and software products on the market.
For OEM customers, Datalink's team of design and application engineers custom
design and test storage subsystems. The Company assembles these products for
integration into the OEM's own products. Datalink's storage solutions
incorporate a broad range of scaleable and high-performance technologies
including hard disk, RAID, magnetic tape, CD-ROM and optical products. The
Company also matches storage management software technologies, including backup
and recovery, archive, high availability and near on-line storage management
products, to the specific needs of its customers. Datalink's Open Systems
expertise extends to all major operating systems and hardware platforms.
Technological Leadership. Datalink provides a high level of technical
expertise to its customers. The Company's engineers each specialize in one or
more Open Systems operating platforms and technologies, affording the in-depth
knowledge and hands-on experience required to provide comprehensive Open Systems
storage solutions. The engineers continually evaluate and test emerging and
existing technologies to ensure the Company consistently delivers the best
available hardware and software products to its customers. Because of Datalink's
established, strong relationships with the major information storage hardware
and software suppliers, the Company often participates in suppliers' new product
development, evaluation, introduction, marketing and quality control programs.
This collaboration with suppliers enables the Company to identify and market
innovative new hardware and software products, exchange critical information and
implement joint corrective action programs in order to maximize quality.
Superior Service and Technical Support. Datalink's engineers work closely
with the field account executives and inside sales representatives to provide
superior technical design and support services. To serve its customers' needs,
Datalink operates eleven locations throughout the United States, four of which
also serve as regional technical centers with in-house engineering capabilities.
Datalink further differentiates itself by being an ISO 9001 registered
organization. The Company utilizes ISO 9001 standards to consistently maintain
high quality design, development, integration and manufacturing, installation
and service processes. The Company's emphasis on providing high quality customer
services enhances its sales and marketing efforts and supplier relationships.
BUSINESS STRATEGY
Datalink's objective is to grow at a rate exceeding that of the industry
and to enhance its position as a leading independent Open Systems storage
solutions provider. To achieve this objective, the Company intends to build upon
its record of successfully addressing the evolving information storage
management needs of its customers. Key elements of this strategy are:
23
<PAGE> 27
Leverage Market Presence. Datalink intends to expand its business by
broadening its relationships with existing customers and by utilizing its market
presence and technical expertise to attract new customers. The Company believes
that the longevity of service of its sales representatives and engineering staff
will continue to be critical to building and maintaining long-term, trusting
relationships with Datalink's existing and prospective customers. In addition,
the Company's broad experience in a diverse group of data intensive industries
enables Datalink to understand application and business issues specific to
customers operating within a given industry and to recommend and implement the
appropriate storage solution.
Maintain Technological Leadership. Datalink intends to continue to develop
leading-edge storage solutions for its customers. Datalink intends to
continually develop and add expertise to its engineering staff and to continue
its close working relationships with its suppliers in order to maintain
expertise in Open Systems storage solution design and implementation.
Develop Professional Consulting Services. Datalink intends to continue to
develop and enhance its ability to provide its customers with comprehensive
professional consulting services. Utilizing the expertise of its professional
engineers, Datalink intends to assist its customers in the total assessment,
planning, design, implementation and ongoing management of enterprise-wide data
storage solutions.
Expand Geographically. Datalink intends to continue its geographic
expansion throughout the continental United States and believes significant
opportunity also exists to serve the global data storage needs of its
multinational corporate customers and prospective customers. The Company intends
to expand by opening new sales and regional technical center offices and by
evaluating potential acquisitions of businesses perceived by management to
complement the Company's strategic business objectives.
Maintain Superior Service and Support. Datalink intends to maintain and
continually improve its high standards for superior technical and sales service
and support. The Company intends to continue use of its ISO 9001 quality system
and procedures and to continue recruiting and retaining experienced sales and
technical team members.
TECHNICAL SERVICES
Datalink's engineers, technicians and customer support personnel take an
active role in all phases of designing, delivering and supporting storage
solutions for the Company's customers in a manner that maximizes system
availability and performance. The Company combines its Open Systems experience,
high level technical skills and responsiveness to provide its customers with the
utmost in comprehensive service, training and support. Datalink's technical
support and customer service functions operate under ISO 9001 standards of
operation to ensure the highest quality.
End-User and VAR Services. Datalink's engineers work closely with the field
account executives and inside sales representatives to determine each customer's
specific needs. After gaining a thorough understanding of the customers' needs,
Datalink's engineers analyze available hardware and software technologies and,
together with the field account executives, develop a specifically tailored,
state-of-the-art storage solution. In order to assure quality, the Datalink
technical team performs the installation, customer specific configuration and
functional testing of each storage solution. Once installation is complete,
Datalink's engineers conduct comprehensive, on-site storage solution training
for customers and provide ongoing technical support. In addition, the Company
periodically provides advanced in-house and out service training courses.
OEM Services. Datalink's engineering team enhances the capabilities of its
OEM customers by designing custom storage subassemblies and enclosures to each
customers' specifications. When requested by the customer, Datalink obtains the
necessary agency and governmental approvals relating to safety, emissions and
radio frequency immunity (including Underwriter's Laboratory and European "CE"
certifications) for the subassemblies it designs. Datalink fully documents all
custom subassemblies for ease of replication and service.
Technical Support. Datalink's technical support services provide
comprehensive, proactive and responsive assistance. The Company's customer help
desk acts as a single point of contact during regular business hours for all
ongoing support, repair and maintenance services. The help desk is staffed by
technical support
24
<PAGE> 28
analysts trained to solve technical issues and to assist the Company's
engineering staff in troubleshooting escalated problems. The help desk staff
also acts as Datalink's primary interface with suppliers' technical support
organizations.
Datalink's team of engineers augments the help desk staff in providing
advanced technical support when required. Each engineer specializes in one or
more Open Systems operating platforms and technologies, affording the in-depth
knowledge and hands-on experience required to provide comprehensive Open Systems
storage solutions.
Maintenance and Repair Services. Datalink supports and administers the
pass-through of its suppliers' own standard warranties which run from one to
five years. In addition, Datalink provides a suite of comprehensive maintenance
and repair service options under the Company's DataCare(TM) service program. The
Company offers a variety of on-site service options, including four-hour
guaranteed response time service seven days per week, 24 hours per day. The
Company contracts with a number of its suppliers and other independent service
organizations to provide on-site maintenance and repair services dispatched by
the Company. For customers that do not have on-site service, Datalink's Advance
Exchange program delivers replacement products and components on the next
business day.
PRODUCTS
Datalink continually updates its product offerings to match advancements by
its suppliers in storage technology. Datalink's creative engineering and sales
teams design solutions that incorporate hardware, software and interface
products selected in response to each customer's specific requirements. These
products include the following:
Hardware Products. Datalink selects from among a variety of storage
products and components sold by leading suppliers that offer differing
performance characteristics and costs. These storage products and components
include magnetic (hard) disk, magnetic tape and optical disk storage
technologies.
HARD DISK TECHNOLOGIES. Hard disk storage is a traditional, but
relatively expensive, on-line method to store and access large amounts of
information. Several hard disks can be combined to create a scaleable
storage system or a RAID storage system. RAID systems allocate data across
multiple hard disk drives and allow the server to access these drives
simultaneously, thus increasing system storage and input/output
performance. RAID algorithms allow lost data on any drive to be recreated,
thus ensuring the integrity of RAID-protected data even in the event of a
disk drive failure. In addition, RAID systems can incorporate redundant
power, cooling and processing components for additional fault tolerance.
System administrators normally consider magnetic or hard disks, whether
free-standing or integrated in RAID systems, to be at the top of the
storage class in terms of performance because of their fast access times
(in milliseconds) and fast transfer rates (5-16 MB per second). The
potential loss of data contained on magnetic or hard disks due to human
error or catastrophic failure necessitates the use of a backup storage
system to protect the stored information.
MAGNETIC TAPE TECHNOLOGIES. Magnetic tape storage technologies are
typically integrated into environments that require backing up large
amounts of information to protect from accidental data loss and facilitate
disaster recovery. Due to its high capacity and relatively lower cost,
magnetic tape storage is also effective for near on-line, archive and
hierarchical storage management ("HSM") activities. A variety of tape drive
technologies are available, including those utilizing digital linear tape,
advanced intelligent tape ("AIT"), 8 mm tape, 4 mm digital data storage
("DDS") and high performance helical scan technologies. Magnetic tape
autoloaders and libraries integrate multiple tape drives and media
cartridges with robotics to increase capacity and automation.
OPTICAL DISK TECHNOLOGIES. Although slower than magnetic disks in
terms of access and transfer speeds, optical disk technologies are a
cost-effective solution for near on-line and archive storage. Optical disk
technologies include magneto-optical ("MO"), write-once-read-many ("WORM")
and compact disk -- read only memory ("CD-ROM") products. Capacities range
from 650 megabytes (CD-ROM) to 2.6 GB (MO optical disk) per cartridge. MO
optical disk capacities are expected to increase to 5.2 GB
25
<PAGE> 29
in the near future. A developing optical technology, digital versatile disk
("DVD"), is expected to offer approximately 7.2 times the storage capacity
of a single CD-ROM. Similar to magnetic tape systems, multiple optical
disks can be combined in a jukebox to permit automated access and increased
capacity.
Software Products. Datalink integrates software management tools into its
customer solutions from leading storage software developers. The latest advances
include enterprise storage solutions for backup and recovery, HSM, archive,
management and configuration, high availability and media management
capabilities. These tools enable system administrators to allocate the use of
storage technologies among user groups or tasks, centrally manage distributed
storage technologies, retrieve, transfer and backup data from and between
several devices, perform "hot" database backups during business hours, run
management reports and establish standard policies. Software advancements also
enable these tools to integrate into centralized management frameworks. These
expanded management capabilities, as well as the ability to diagnose system
failures, increasingly will become important as Fibre Channel interfaces permit
the locating of backup storage devices in secure, remote facilities.
Interface Products. Systems administrators traditionally have connected
storage technologies directly to servers utilizing "point-to-point" connections
via the Small Computer Systems Interface ("SCSI"), and its successor, Ultra
SCSI. Because of distance limitations and limited bandwidth, SCSI-based
connections do not allow storage technologies to be easily shared with other
servers. With the innovation of Fibre Channel, a new serial interface, networks
can transfer data to disk and RAID storage subsystems at higher speeds, over
greatly increased distances and among a greater number of server and other
device connections than through the use of SCSI or Ultra SCSI interfaces.
Datalink currently deploys Fibre Channel interfaces with high-end, hard disk and
RAID storage systems and expects to integrate Fibre Channel interfaces with
other storage technologies in the future.
As Open Systems information storage needs continue to grow, industry
experts predict the rapid deployment of storage area networks ("SANs") which
will link physically separated storage and backup technologies to the other
servers via a dedicated, high-speed network. The Company believes that SANs will
be enabled principally by Fibre Channel technology and by "clustering" software.
Fibre Channel allows high speed connections (100-200 MB per second) between and
among a greater number of hosts and storage technologies on the SAN, while
clustering software allows for the interconnection of multiple hosts to multiple
storage devices. The Company expects that SANs will enable organizations to
implement scaleable storage and backup solutions that are faster, easier to
manage and protect, offer a higher degree of data availability and can be shared
by a greater multiple of servers than current distributed Open Systems storage
systems.
CUSTOMERS
Datalink serves large end-user, VAR and OEM customers throughout the United
States in a diverse group of data intensive industries. Datalink's broad
industry experience enables the Company to understand application and business
issues specific to each customer and to design and implement appropriate storage
solutions. The Company enjoys strong relationships with its customers, which is
reflected in significant repeat business. In each of the last three years sales
to existing customers has exceeded 77% of the Company's net sales. No single
customer represented more than 5% of the Company's net sales in 1997 or 1996,
nor 10% or more of the Company's net sales in 1995. Some of the customers of the
Company include the following:
END-USER CUSTOMERS
<TABLE>
<CAPTION>
COMPUTER TECHNOLOGY CONSUMER PRODUCTS EDUCATION
------------------- ----------------- ---------
<S> <C> <C>
Gateway 2000, Inc. Anheuser-Busch, Inc. University of Chicago
Imation, Inc. Dayton Hudson Corporation University of Minnesota
Silicon Graphics Grand Metropolitan PLC University of Washington
FINANCIAL SERVICES GOVERNMENT HEALTH CARE
------------------ ---------- -----------
American Express Company Fermi National Accelerator Laboratory Abbott Laboratories
Chicago Board of Trade National Aeronautics Space Administration Medtronic, Inc.
Swiss Bank Corporation United States Coast Guard Mayo Clinic Foundation
</TABLE>
26
<PAGE> 30
<TABLE>
<CAPTION>
END-USER CUSTOMERS (CONTINUED)
INSURANCE PROFESSIONAL SERVICES TELECOMMUNICATIONS
--------- --------------------- ------------------
<S> <C> <C>
Allstate Insurance Company A.G. Edwards, Inc. Lucent Technologies, Inc.
CNA Financial Corporation IBM Motorola, Inc.
The Kemper Insurance Companies KPMG Peat Marwick L.L.P. Sprint Corporation
</TABLE>
<TABLE>
<CAPTION>
TRANSPORTATION UTILITIES
-------------- ---------
<S> <C>
The Boeing Company The Detroit Edison Company
Northwest Airlines Corporation Dominion Resources, Inc.
UAL Corporation Northern States Power Company
</TABLE>
VAR CUSTOMERS
<TABLE>
<S> <C>
Andersen Worldwide, S.C. Forsythe McArthur Associates
DST Systems, Inc. IBM
Electronic Data Systems Corporation OPM Information Systems, Inc.
</TABLE>
OEM CUSTOMERS
<TABLE>
<S> <C>
GE Medical Systems National Computer Systems, Inc.
Lockheed Martin Corporation Rockwell International Corporation
Sagem Morpho, Inc. Siemens Medical Systems, Inc.
</TABLE>
SALES AND MARKETING
The Company markets and sells its products and services throughout the
United States primarily through a direct sales force. The field account
executives are complemented by a high (1.4 to 1) ratio of inside sales
representatives. In addition to its Minneapolis headquarters, the Company has
eleven field sales offices in order to serve its customers' needs more
efficiently. Three of the field sales offices serve as regional technical
centers and are staffed with their own engineers. These field sales offices are
located in the following metropolitan areas:
<TABLE>
<CAPTION>
FIELD LOCATION YEAR ESTABLISHED
-------------- ----------------
<S> <C>
Chicago, Illinois........................................... 1989
St. Louis, Missouri......................................... 1990
Milwaukee, Wisconsin........................................ 1992
Seattle, Washington......................................... 1992
Grand Rapids, Michigan...................................... 1995
Indianapolis, Indiana....................................... 1995
Washington, D.C............................................. 1996
Denver, Colorado............................................ 1997
New York, New York.......................................... 1997
San Jose, California........................................ 1998
Boston, Massachusetts....................................... 1998
</TABLE>
In addition to these eleven field sales offices, the Company's recently
acquired subsidiary will continue to operate the DCSI offices located in the
following metropolitan areas:
<TABLE>
<CAPTION>
FIELD LOCATION YEAR ESTABLISHED
-------------- ----------------
<S> <C>
Atlanta, Georgia............................................ 1993
Charlotte, North Carolina................................... 1995
Washington, D.C. ........................................... 1996
Melbourne, Florida.......................................... 1997
Tampa, Florida.............................................. 1997
</TABLE>
27
<PAGE> 31
The field account executives and inside sales representatives work closely
with the Company's engineering team in evaluating the Open Systems storage needs
of existing and prospective customers and in designing high quality, cost
effective solutions. To ensure quality service, Datalink assigns each customer a
specific field account executive and inside sales representative. The inside
sales representatives proactively share responsibility with the field account
executives in soliciting new and repeat business and in maintaining consistent
customer contact. The Company believes that the longevity of service of its
sales force is a key factor to earning and retaining the trust and confidence of
the Company's customers and differentiates Datalink from many other storage
solution providers that have greater sales force turnover.
In addition to the efforts of its field account executives and inside sales
representatives, Datalink engages in a variety of other marketing activities
designed to attract new business and retain customer loyalty. The Company
regularly attends major trade shows, conducts in-house and out service training
and informational seminars, publishes a quarterly newsletter and advertises its
services in several targeted national business publications.
INTEGRATION AND ASSEMBLY OPERATIONS
Datalink assembles and integrates hardware and software products and
components acquired from the Company's various suppliers. The Company designs
customized enclosures for most OEM products. The assembled units are then
subjected to a system level test to ensure performance to specifications in the
anticipated end-user computing environment. The Company's integration and
assembly operations are also ISO 9001 registered. In accordance with these
standards, the Company has designed its integration and assembly operations with
similar quality procedures to those of its hardware suppliers. Datalink's close
working relationship with its suppliers generally enables the Company to
exchange critical information and implement joint corrective action programs to
ensure the quality of its finished products, to reduce costs and the investment
in inventory and to access critical products and components for large or
unanticipated orders when required. The Company believes that its current
facilities are adequate to meet its integration and assembly needs in the
foreseeable future.
ISO 9001 QUALITY SYSTEM
In May 1996, Datalink completed an approximately three-year process of
obtaining an ISO 9001 Certificate of Registration from KPMG Quality Registrar
for its quality system described under the American National Standards
Institute. This internationally recognized endorsement of ongoing quality
management is designed to assure consistent quality products and services. The
Company believes its ISO 9001 registration represents a substantial competitive
advantage to Datalink in attracting and retaining business.
Datalink employs ISO 9001 standards of operation for its design,
development, integration and assembly, installation and service processes. These
quality initiatives streamline the quality assurance programs and implementation
procedures for the Company's customers. Datalink's quality assurance team
constantly monitors the Company's processes and procedures, identifies areas for
improvement and efficiently implements corrective and preventive actions.
Suppliers to the Company are required to be ISO 9001 registered or otherwise
meet Datalink's rigid supplier qualification standards.
SUPPLIER RELATIONSHIPS
As an independent solutions provider, Datalink continually evaluates and
tests new and emerging technologies from other companies to ensure that the
Company's solutions incorporate state-of-the-art, high-end, cost-effective Open
Systems technologies. This enables Datalink to maintain its technological
leadership in Open Systems storage solutions, to identify new and innovative
products and applications and to maintain confidence among the Company's
customers and suppliers in the Company's expertise.
Datalink has strong, established relationships with the major information
storage hardware and software suppliers. The Company's expertise in Open System
environments, including UNIX, Windows NT and Novell NetWare, and in-depth
knowledge of all major hardware platforms, including Digital, Hewlett-Packard,
IBM, Silicon Graphics and Sun, has earned Datalink preferred status with its
principal suppliers.
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<PAGE> 32
This enables the Company to often participate in these suppliers' new product
development, evaluation, introduction, marketing and quality control programs.
These collaborations enable the Company to identify and market innovative new
hardware and software products, exchange critical information and implement
joint corrective action programs in order to maximize quality. In addition, the
Company's close working relationships with its principal suppliers fosters
substantial cross-marketing opportunities.
COMPETITION
The market for Open Systems storage is intensely competitive. Datalink
competes primarily with traditional suppliers of computer systems such as
Compaq, Digital, Hewlett-Packard, IBM, Silicon Graphics and Sun, which market
storage systems as well as other computer products. The Company also competes
against independent storage system suppliers to the high-end Open Systems
market, including Box Hill Systems Corp., EMC Corporation, MTI Technology
Corporation and numerous VARs, resellers, distributors and consultants. In
addition, the Company's customers and prospective customers may elect to develop
in-house storage systems expertise.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than the
Company, and as a result, may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, to devote greater resources
to the development, promotion and sale of products than the Company or to
deliver competitive products at a lower end-user price. Some of Datalink's
competitors include its suppliers, who may dedicate or acquire greater sales and
marketing resources in the future to provide Open Systems storage solutions than
at present and could terminate their relationships with the Company. Other
suppliers may also enter the market and compete with the Company. Datalink
expects competition will increase as a result of industry consolidation. Current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
may result in price reductions, reduced operating margins and loss of market
share, any of which could have a material adverse effect on the Company's
business, operating results or financial condition. See "Risk Factors --
Competition."
EMPLOYEES
As of June 30, 1998, Datalink had a total of 77 full-time employees, of
whom 20 were engaged in engineering, technical support, customer service and
integration and assembly operations, 38 were engaged in sales and marketing and
19 were engaged in general management and administration. The Company's future
performance depends in significant part upon the continued service of its key
technical and senior management personnel. None of the Company's employees are
unionized or subject to a collective bargaining agreement. The Company has
experienced no work stoppages and believes that its employee relations are good.
Additionally, the Company's DCSI subsidiary acquired on July 15, 1998, had a
total of 33 full-time employees, of whom 11 were engaged in engineering,
technical support, customer service and integration and assembly operations, 15
were engaged in sales and marketing and 7 were engaged in general management and
administration.
FACILITIES
Datalink's principal engineering operations and its integration, assembly
and customer service operations are located at the Company's 26,653 square foot,
leased executive and administrative facility in Minneapolis, Minnesota. The
lease, which expires in December 1999, provides the Company with certain rights
to take additional space in the building. The Company's landlord is a
partnership whose partners consist of Datalink's current stockholders. See
"Certain Transactions." Datalink believes that the facility is adequate for its
needs in the foreseeable future. The Company also leases certain remote
facilities for its field sales and engineering personnel. Datalink believes that
these facilities are adequate for its needs in the foreseeable future and that
it will be able to locate suitable additional facilities as the Company expands
geographically.
29
<PAGE> 33
MANAGEMENT
The names and ages of the executive officers and directors of the Company,
and their positions and offices presently held, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Greg R. Meland............................ 45 President, Chief Executive Officer and
Director
Robert D. DeVere.......................... 47 Chief Financial Officer
Stephen M. Howe........................... 40 Vice President-Sales
Scott D. Robinson......................... 38 Vice President-Engineering
Robert M. Price........................... 67 Chairman of the Board and Director
James E. Ousley*.......................... 52 Director
Margaret A. Loftus*....................... 53 Director
Paul F. Lidsky*........................... 45 Director
</TABLE>
- ------------
*Member of Audit and Compensation Committees.
Greg R. Meland joined Datalink in 1991 as its Vice President of Sales and
Engineering and became President and Chief Executive Officer in 1993. Between
1979 and 1991, Mr. Meland served in various sales and marketing positions with
the Imprimis disk drive subsidiary of Control Data Corporation (which was sold
to Seagate in 1989), most recently as the North Central U.S. Director of Sales.
Robert D. DeVere joined Datalink in 1990 as its Chief Financial Officer.
Between 1987 and 1989, Mr. DeVere was employed by Copal Systems, Inc., a
photofinishing equipment distributor, most recently as Operations Manager. He
was Controller of Crown Oil Company between 1986 and 1987. From 1983 to 1986,
Mr. DeVere worked for a subsidiary of Ecodyne Ltd., most recently as Controller.
He was a staff auditor with Ernst & Whinney between 1980 and 1983. Mr. DeVere is
a Certified Public Accountant.
Stephen M. Howe joined Datalink in 1989 as a field account executive and
became Vice President-Sales in 1997. Between 1982 and 1989, he was employed by
Teltrend Inc., a telecommunications equipment manufacturer, most recently as
Assistant Vice President of Operations. Mr. Howe was a sales representative for
Hamilton Avnet Corp., an electronics distributor, between 1980 and 1982.
Scott D. Robinson joined Datalink in 1989 as its Chief Engineer and became
Vice President - Engineering in 1993. Between 1983 and 1989, he was employed by
Minnesota Mining and Manufacturing Company, most recently as an Advanced
Electrical Engineer in the Digital Imaging Applications Center. Mr. Robinson
received his B.S. in Electrical Engineering in 1982 from Marquette University
and his M.S. in Electrical Engineering in 1989 from the University of Minnesota.
Robert M. Price was elected as the Chairman of the Board and a director of
Datalink in June 1998. Mr. Price has been President of PSV, Inc., a technology
consulting business located in Burnsville, Minnesota, since 1990. Between 1961
and 1990, he served in various executive positions, including as Chairman and
Chief Executive Officer, with Control Data Corporation. Mr. Price also serves on
the Board of Directors of International Multifoods Corporation, Tupperware
Incorporated, Fourth Shift Corporation, Affinity Technology Group, Inc., and
Public Service Company of New Mexico. Mr. Price is Mr. Meland's father-in-law.
James E. Ousley was elected as a director of Datalink in June 1998. Since
1992, Mr. Ousley has been Chief Executive Officer of Control Data Systems, Inc.,
a leading systems integrator and provider of electronic commerce solutions.
Between 1968 and 1992, Mr. Ousley served in various sales, marketing and
operational executive positions with Control Data Corporation, most recently as
President of the Computer Products Group. Mr. Ousley is also a director of Bell
Microproducts, Inc. and ActiveCard, Inc.
Margaret A. Loftus was elected as a director in June 1998. Ms. Loftus is an
owner in Loftus Brown-Wescott, Inc., a business consulting firm, which she
co-founded in 1989. Between 1976 and 1988, she was employed by Cray Research,
Inc., most recently as Vice President of Software. Ms. Loftus is also a director
of Analysts International Corporation.
30
<PAGE> 34
Paul F. Lidsky was elected as a director of Datalink in June 1998. Since
1997, Mr. Lidsky has been the President and Chief Executive Officer of OneLink
Communications, Inc., a telecommunications company. Between 1992 and 1997, Mr.
Lidsky was employed by Norstan, Inc., a comprehensive technology services
company, most recently as Executive Vice President of Strategy and Business
Development. Mr. Lidsky is also a director of OneLink Communications, Inc. and
Ancor Communications, Incorporated.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee and an
Audit Committee. Mr. Ousley, Ms. Loftus and Mr. Lidsky are the members of the
Compensation and Audit Committees. The Compensation Committee will review on
behalf of, and make recommendations to, the Board of Directors with respect to
the compensation of executive officers and will administer the Company's
Incentive Compensation Plan and make recommendations to the Board of Directors
with respect to the plan and the grant of options to persons eligible under the
plan. The Audit Committee's functions will include assessing the independence
and recommending to the Board of Directors the engagement of the Company's
independent accountants and reviewing with such accountants the plans for and
the results and scope of their auditing engagement and certain other matters
relating to their services to the Company.
DIRECTOR COMPENSATION
Contemporaneously with the closing of this offering, the Company will grant
to each of Mr. Price, Mr. Ousley, Ms. Loftus and Mr. Lidsky stock options to
purchase 6,000 shares of the Company's Common Stock at an exercise price equal
to the initial public offering price per share on the cover page of this
Prospectus. These options will vest on the date of the closing of this offering
and will expire ten years from the date of grant. Additionally, commencing with
the Company's 1999 annual stockholders' meeting, the Company intends to
compensate each director who is neither an employee nor an affiliate of Datalink
with an annual grant of options to purchase 3,000 shares of the Company's Common
Stock. These options will be exercisable commencing one year after the date of
grant; provided, however, that if a director fails to serve until the annual
stockholder's meeting immediately succeeding the grant of the options, the
number of shares of Common Stock that may be purchased by such director shall be
pro rated based upon the length of time such departing director actually served.
The options will be exercisable at the fair market value of the Company's Common
stock on the date of grant and expire ten years after the date of grant. All
directors will be reimbursed for expenses incurred in connection with attendance
at Board and committee meetings.
INDEMNIFICATION AGREEMENTS
The Company has entered into an agreement with each director providing for
indemnification to the fullest extent permitted under Minnesota law against
liability for damages and expenses, including attorneys' fees, arising out of
threatened, pending or completed legal actions, suits or proceedings by reason
of the fact that such person is or was a director, officer or employee of the
Company. The agreement will permit the director to demand certain advances
against, or the creation of a trust for, expenses to be incurred in defending
any covered claim. Insofar as the indemnification agreement may cover
liabilities arising under the Securities Act, the Company has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
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<PAGE> 35
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information regarding compensation paid during each of the Company's last three
years to (i) the Company's Chief Executive Officer and (ii) the Company's other
executive officers whose salary, bonus and other compensation exceeded $100,000
in 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(1) COMPENSATION(2)
--------------------------- ---- ------ --------------- ---------------
<S> <C> <C> <C> <C>
Greg R. Meland,.......................... 1997 $ 83,000 $141,000 $7,750
President(3) 1996 75,000 122,000 7,750
1995 67,000 102,000 7,120
Robert D. DeVere,........................ 1997 93,000 6,000 $5,786
Chief Financial Officer 1996 86,000 6,000 5,592
1995 76,000 6,000 4,795
Stephen M. Howe,......................... 1997 77,000 108,000 $7,750
Vice President -- Sales(3) 1996 69,000 94,000 7,706
1995 69,000 113,000 7,120
Scott D. Robinson,....................... 1997 102,000 6,000 $5,872
Vice President -- Engineering 1996 95,000 6,000 5,853
1995 84,000 6,000 5,033
</TABLE>
- ------------
(1) Includes car allowance of $6,000 for each named executive officer.
(2) Represents matching and profit sharing contributions made by the Company to
each named executive officers' account under the Company's 401(k) Plan.
(3) Other Annual Compensation includes sales commissions for each of these
executive officers.
Employment Arrangements. The Company does not have employment,
non-competition or non-disclosure agreements with any of its executive officers
or employees. Messrs. Meland, DeVere, and Robinson will be paid salaries in 1998
of $250,000, $125,000 and $130,000, respectively. Mr. Howe will receive a salary
in 1998 of $90,000 plus a sales commission payment based upon the Company's
profitability. Each of the Company's executive officers will also receive a car
allowance of $500 per month.
STOCK INCENTIVE PLANS
The Company's Employee Stock Purchase Plan (the "Purchase Plan") and the
Incentive Compensation Plan (the "Incentive Compensation Plan" and with the
Purchase Plan collectively referred to as the "Stock Incentive Plans") were
adopted by the Company and its stockholders in June 1998. The Stock Incentive
Plans provide the employees of the Company an opportunity to invest in shares of
Common Stock. In some instances, these purchases may be on terms more favorable
than would otherwise be available. The Company believes that, by aligning the
interests of the participants and the Company, the implementation of the Stock
Incentive Plans will strengthen the commitment of the participants to the
Company's success.
Purchase Plan. The Company has reserved 250,000 shares of Common Stock for
issuance under the Purchase Plan, subject to equitable adjustments as the
Compensation Committee (as defined above) may deem necessary to prevent dilution
or the enlargement of rights of participants as a result of, among other things,
changes in the Company's capitalization or corporate structure. The Purchase
Plan will be administered by the Compensation Committee and is intended to
qualify under Section 423 of the Code. Pursuant to the Purchase Plan, each
eligible employee, as of the start of any purchase period, will be granted an
option to purchase a designated number of shares of Common Stock. The purchase
price of shares of Common Stock to participating employees will be 85% of the
lower of the fair market value of the Company's Common Stock on the first and
last trading days of the relevant purchase period. Payments for shares purchased
under the
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<PAGE> 36
Purchase Plan will be made in the time and manner specified by the Compensation
Committee. An employee may terminate his or her participation in the Purchase
Plan by giving a notice of withdrawal to the Company sufficiently in advance of
the last trading day of the relevant purchase period, and all funds contributed
to date will be refunded to such employee.
Employees are eligible to participate in the Purchase Plan if they (i) are
customarily employed by the Company for more than twenty hours per week and five
months in any calendar year and (ii) will not, immediately upon purchasing
shares under the Purchase Plan, own directly or indirectly 5% or more of the
total combined voting power of all outstanding shares of all classes of stock of
the Company. Notwithstanding the foregoing, no employee may purchase shares
under the Purchase Plan (or any other plan of the Company intended to qualify
under Section 423 of the Code) in any calendar year with an aggregate fair
market value (as determined on the first day of the relevant purchase period) in
excess of the lesser of 10% of such employee's salary or the maximum value
allowed under the Code. Participation in the Purchase Plan ends automatically
upon termination of employment with the Company. Rights granted under the
Purchase Plan are not transferable other than by will or the laws of descent and
distribution.
The Board may at any time amend or terminate the Purchase Plan so long as
such amendment or termination does not result in the failure of rights issued
under the Purchase Plan to meet the requirements for employee stock purchase
plans as defined in Section 423 of the Code.
Incentive Compensation Plan. The Company has reserved 950,000 shares of
Common Stock for issuance under the Incentive Compensation Plan. The Incentive
Compensation Plan will be administered by the Compensation Committee. The
Compensation Committee will have full authority, subject to the provisions of
the Incentive Compensation Plan, to determine, among other things, the persons
to whom awards under the Incentive Compensation Plan ("Awards") will be made,
the exercise price, vesting, size and type of such Awards, and the specific
performance goals, restrictions on transfer and circumstances for forfeiture
applicable to Awards.
Awards may be made to employees and non-employee directors of the Company
or affiliates and other individuals designated by the Compensation Committee. A
variety of Awards may be granted under the Incentive Compensation Plan including
stock options, stock appreciation rights ("SARs"), restricted stock, performance
shares, performance units, cash-based awards, phantom shares and other
share-based awards as the Compensation Committee may determine. Stock options
granted under the Incentive Compensation Plan may be either incentive stock
options intended to qualify under Section 422 of the Code or nonqualified stock
options not so intended.
Provisions regarding the extent to which a participant shall have the right
to exercise and/or receive payment for any Award following termination of the
participant's employment, directorship or other relationship with the Company
shall be determined at the discretion of the Board. In the event of a "change of
control" (as defined in the Incentive Compensation Plan), (i) all outstanding
options and SARs granted under the Incentive Compensation Plan will become
immediately exercisable and remain exercisable throughout their entire term,
(ii) any performance-based conditions imposed with respect to outstanding Awards
shall be deemed to be fully earned and a pro rata portion of each such
outstanding Award granted for all outstanding performance periods shall become
payable in shares of Common Stock, in the case of Awards denominated in shares
of Common Stock, and in cash, in the case of Awards denominated in cash, with
the remainder of such Award being canceled for no value and (iii) all
restrictions imposed on restricted stock that are not performance-based shall
lapse. The Board may make equitable adjustments, including with respect to the
number and kind of shares issuable under, and the exercise price relating to,
Awards as the Board may deem necessary to prevent dilution or accretion of the
rights of participants under the Incentive Compensation Plan as a result of
changes in the Company's corporate structure or capitalization.
Awards under the Incentive Compensation Plan are not transferable other
than by will or by the laws of descent and distribution, unless otherwise
provided by the Board. The Board may amend or terminate the Incentive
Compensation Plan except that no amendment shall be made without stockholder
approval if such approval is necessary to comply with any applicable regulatory
or tax requirements. Notwithstanding the foregoing, in no event may an Award be
granted under the Incentive Compensation Plan after June 2008.
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<PAGE> 37
Option Grants. Contemporaneously with the closing of this offering, the
Company will grant certain directors and employees of the Company and DCSI stock
options to purchase an aggregate of 332,500 shares of Common Stock under the
Incentive Compensation Plan. These options will be exercisable at an exercise
price equal to the initial public offering price shown on the cover page of this
Prospectus. The options granted to the directors will vest on the date of the
closing of this offering. The options granted to the employees will vest over a
five-year period, with 20% of the options vesting each year, commencing on the
first anniversary of the closing of this offering. All of these options will
expire ten years from the date of grant.
THE 401(K) PLAN
The Company has a salary deferral plan, the Datalink Corporation 401(k)
Plan (the "401(k) Plan"), which is intended to qualify under Sections 401(a) and
401(k) of the Code. Company employees are eligible to participate in the 401(k)
Plan beginning on the first day of the quarter immediately succeeding the
commencement of their employment with the Company. Participants may make
elective salary reduction contributions to the 401(k) Plan up to a maximum of
10% of their eligible annual compensation, subject to a dollar limit established
by law (which limit was $9,500 in 1997). Pursuant to the terms of the 401(k)
Plan, the Company is required to match 50% of the participants contribution up
to the first 6% of the participants' eligible compensation. The cost of the
Company's contributions to the 401(k) Plan for the years ended December 31,
1995, 1996 and 1997, and for the six months ended June 30, 1997 and 1998 were
approximately $79,000, $97,000, $126,000, $71,000 and $94,000, respectively. In
addition, at the discretion of the Board of Directors, the Company may
contribute to a profit sharing portion of the 401(k) Plan to the extent
permitted by the Code. The cost of contributions to the profit sharing portion
of the 401(k) Plan for the years ended December 31, 1995, 1996 and 1997 were
approximately $91,000, $157,000 and $164,000, respectively. The Company did not
make any profit sharing contributions to the 401(k) Plan for the six months
ended June 30, 1997 and 1998.
Participants are fully vested at all times in the amounts they contribute
to the 401(k) Plan and are always 100% vested upon early or normal retirement.
Participants vest at a rate of 20% per year and are fully vested in the
Company's matching and discretionary profit sharing contributions after five
years. Benefits under the 401(k) Plan generally are distributable after the age
of 59 1/2 or become payable upon separation from service, retirement, death or
disability.
CERTAIN TRANSACTIONS
In February 1997, the Company entered into a lease agreement for its
principal executive offices with Edina Southwest Partners, a Minnesota general
partnership ("Edina Partners"). In June 1997, Edina Partners sold the property
containing the Company's principal executive offices (the "Property") to 7423
Washington Avenue L.L.P., a Minnesota limited liability partnership ("Washington
Avenue L.L.P."), of which six of the Company's current stockholders own, in the
aggregate, 100% of the units of interest. Contemporaneously with the purchase of
the Property, Washington Avenue L.L.P. executed promissory notes in favor of
Norwest Bank Minnesota, N.A. (the "Norwest Note") and Stanley I. Clothier,
Trustee of the Stanley I. Clothier Revocable Trust (the "Clothier Note"). The
Company has agreed to guarantee the payments under these notes.
Contemporaneously with the closing of this offering, the Company's obligations
to guarantee these notes will terminate. As of June 30, 1998, the balances on
the Norwest Note and Clothier Note were approximately $939,000 and $1.4 million,
respectively.
Additionally, the Washington Avenue L.L.P. agreement provides that in the
event that gross revenues of the partnership are insufficient to pay the
operating costs of the Property and other necessary business or administrative
expenses, the partners, individually and as current stockholders of Datalink,
agree to take any and all steps necessary to cause the Company to increase its
lease payments on the space it is occupying or to lease additional space in the
Property in order to fund such deficit. Contemporaneously with the closing of
this offering, the Company's obligations to fund such deficit will terminate.
The rent paid by the Company to Washington Avenue L.L.P. in 1997 and the first
quarter of 1998 was approximately $197,000 and $51,000, respectively.
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<PAGE> 38
The Company entered into a deferred compensation agreement with Mr.
Clothier, a current stockholder and a former officer and director of the
Company, whereby the Company is obligated to pay Mr. Clothier (or a designated
beneficiary) $7,000 per month for 60 months beginning January 1996. Interest
expense under this agreement was $27,794, $24,942 and $10,191 for the years
ended December 31, 1996 and 1997 and for the six months ended June 30, 1998,
respectively.
All material and affiliated transactions and loans made after the date of
this Prospectus will be made or entered into on terms that are no less favorable
to the Company than those that can be obtained from unaffiliated third parties,
and all such future material affiliated transactions and loans, and any
forgiveness of loans, must be approved by a majority of the independent,
non-affiliated members of the Board of Directors who do not have an interest in
the transaction.
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<PAGE> 39
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Common Stock as of the date of this Prospectus and as adjusted
for the sale of shares offered hereby, by: (i) each person who beneficially owns
5% or more of the Common Stock, (ii) the selling stockholder, (iii) each of the
Company's executive officers and directors, and (iv) by all executive officers
and directors of the Company as a group. Unless otherwise noted, each person or
group identified has sole voting and investment power with respect to the shares
shown.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE OF SHARES
BENEFICIALLY BENEFICIALLY OWNED(1)(2)
OWNED PRIOR TO ---------------------------
AND AFTER THE PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OFFERING(1) THE OFFERING THE OFFERING
------------------------ -------------- ------------ ------------
<S> <C> <C> <C>
Greg R. Meland(3)....................................... 3,450,690 48.6% 35.6%
Robert D. DeVere(3)..................................... 1,095,720 15.4% 11.3%
Stephen M. Howe(3)...................................... 712,080 10.0% 7.3%
Joseph J. Kaye(3)....................................... 712,080 10.0% 7.3%
Scott D. Robinson(3).................................... 584,430 8.2% 6.0%
Stanley I. Clothier(3)(4)............................... 345,000 4.9% 3.6%
Robert M. Price(5)...................................... 6,000 * *
James E. Ousley(5)...................................... 6,000 * *
Margaret A. Loftus(5)................................... 6,000 * *
Paul F. Lidsky(5)....................................... 6,000 * *
All executive officers and directors as a group (8
persons).............................................. 5,866,920 82.4% 60.3%
</TABLE>
- ------------
* less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting power and investment
power with respect to shares. Shares issuable upon the exercise of
outstanding stock options that are currently exercisable or become
exercisable within 60 days from the date hereof, are considered outstanding
for the purpose of calculating the percentage of Common Stock owned by such
person and owned by a group, but not for the purpose of calculating the
percentage of Common Stock owned by any other person.
(2) Includes 200,000 shares of Common Stock issued in connection with the
acquisition of DCSI.
(3) The address of each of these individuals is: c/o Datalink Corporation, 7423
Washington Avenue South, Minneapolis, Minnesota 55439.
(4) Assumes no exercise of the Underwriters' over-allotment option. The
agreement between the Company, Mr. Clothier and the Underwriters provides
that if the over-allotment option is exercised only in part, the
Underwriters will first purchase shares from Mr. Clothier, up to a maximum
amount of 70,000 shares, and then purchase any additional shares from the
Company. If the Underwriters purchase at least 70,000 shares pursuant to
their over-allotment option, then Mr. Clothier would beneficially hold
275,000 shares or 2.8%. See "Underwriting."
(5) Includes 6,000 options which such director may exercise upon the closing of
this offering.
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<PAGE> 40
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 50,000,000 shares, par value $0.001 of
undesignated capital stock. Until otherwise designated by the Board of directors
of the Company, all authorized shares are deemed to be Common Stock. As of the
date of this offering, 7,100,000 shares of Common Stock, including the 200,000
shares issued in connection with the acquisition of DCSI, were outstanding and
upon closing of this offering, 332,500 shares will be subject to outstanding
options granted under the Company's Incentive Compensation Plan.
COMMON STOCK
Each share of Common Stock is entitled to one vote on all matters submitted
to a vote of the stockholders. Stockholders do not have cumulative voting
rights, the absence of which will, in effect, allow the holders of a majority of
the outstanding shares of Common Stock to elect all the directors then standing
for election. After the completion of the offering hereby and assuming no
exercise of any stock options or the Underwriters' over-allotment option, the
current stockholders will own approximately 73.2% of the Common Stock.
Subject to the rights and preferences of the Preferred Stock, if any, each
share of Common Stock has an equal and ratable right to receive dividends, when,
as and if declared by the Company's Board of Directors, out of any funds legally
available for the payment thereof. In the event of the liquidation, dissolution
or winding up of the Company, after satisfaction of amounts payable to creditors
and distribution to the holders of outstanding Preferred Stock, if any, of
amounts to which they may be preferentially entitled, holders of the Common
Stock are entitled to share ratably, on a per share basis, in the assets
available for distribution to the stockholders.
Holders of Common Stock are not entitled to conversion or preemptive
rights. All outstanding shares of Common Stock are, and when issued, the shares
of Common Stock to be issued in connection with this offering, will be, fully
paid and nonassessable.
UNDESIGNATED STOCK
The Board of Directors of the Company generally has the power to issue
shares of capital stock without stockholder approval. The Board of Directors is
authorized to establish the rights, preferences and limitations of this
undesignated stock and to divide such shares into classes, with or without
voting rights. The ability of the Board of Directors to issue additional shares
could impede or deter an unsolicited tender offer or takeover proposal regarding
the Company. Shares of undesignated stock could be issued with terms, provisions
and rights which would make more difficult and, therefore, less likely, a
takeover of the Company not approved by the Board of Directors. The rights of
the holders of the Common Stock could be adversely affected by the future
issuance of undesignated stock.
CERTAIN PROVISIONS OF MINNESOTA LAW
The Company is governed by the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act. These anti-takeover provisions may
eventually operate to deny stockholders the receipt of a premium for their
Common Stock. Section 302A.671 basically provides that the shares of a
corporation acquired in a "control share acquisition" have no voting rights
unless voting rights are approved by the stockholders in a prescribed manner. A
"control share acquisition" is generally defined as an acquisition of beneficial
ownership of shares that would, when added to all other shares beneficially
owned by the acquiring person, entitle the acquiring person to have voting power
of 20% or more in the election of directors. Section 302A.673 prohibits a public
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an "interested shareholder," unless the "business
combination" is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions. An "interested
shareholder" is a person who is the beneficial owner of 10% or more of the
corporation's voting stock. Reference is made to the detailed terms of Sections
302A.671 and 302A.673 of the Minnesota Business Corporation Act.
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<PAGE> 41
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the Common Stock is Norwest Bank
Minnesota, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
9,700,000 shares of Common Stock (assuming the Underwriters' over-allotment
option is not exercised). Of these outstanding shares, the 2,600,000 shares of
Common Stock sold in this offering will be freely tradeable without restriction
under the Securities Act, except for any shares purchased by an "affiliate" of
the Company (as that term is defined in the Securities Act), which will be
subject to the resale limitations under Rule 144 adopted under the Securities
Act. The 7,100,000 shares of Common Stock held by the current stockholders are
"restricted" securities within the meaning of Rule 144 and may not be resold in
a public distribution except in compliance with the registration requirements of
the Securities Act or pursuant to Rule 144.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has beneficially
owned restricted shares for at least one year but less than two years, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock
(approximately 97,000 shares immediately after the offering) or (ii) the average
weekly trading volume during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the Commission. Sales pursuant to
Rule 144 are subject to certain requirements relating to manner of sale, notice
and availability of current public information about the Company. A person (or
persons) other than an "affiliate" who has beneficially owned his or her shares
for at least two years is entitled to sell such shares pursuant to Rule 144(k)
without regard to the limitations described above. As defined in Rule 144, an
"affiliate" of an issuer is a person who directly, or indirectly through the use
of one or more intermediaries, controls, or is controlled by, or is under common
control with, such issuer. Rule 144A under the Securities Act as currently in
effect permits the immediate sale by current holders of restricted shares of all
or a portion of their shares to certain qualified institutional buyers described
in Rule 144A, subject to certain conditions.
The current stockholders have agreed that they will not sell any shares of
capital stock of the Company, either publicly or privately, without the prior
consent of Needham & Company, Inc. for a period of 180 days from the date of
this Prospectus.
The Company has reserved an aggregate of 950,000 shares of Common Stock for
issuance pursuant to the Incentive Compensation Plan. Upon the closing of this
offering, options to purchase a total of 332,500 shares of Common Stock will be
granted to certain employees and directors of the Company under the Incentive
Compensation Plan. Additionally, the Company has reserved an aggregate of
250,000 shares of Common Stock for issuance pursuant to the Employee Stock
Purchase Plan. As of the date of this Prospectus, no shares of Common Stock have
been issued under the Employee Stock Purchase Plan. The Company intends to file
a registration statement on Form S-8 under the Securities Act within 30 days
after the date of this Prospectus to register the shares to be issued pursuant
to the Incentive Compensation Plan and Employee Stock Purchase Plan,
respectively. Shares of Common Stock issued under these plans after the
effective date of such registration statements will be freely tradeable in the
public market, subject to the lock-up restrictions and subject in the case of
sales by affiliates to the amount, manner of sale notice and public information
requirements of Rule 144.
There has been no prior market for the Common Stock and there can be no
assurance that a significant public market for the Common Stock will develop or
be sustained after the offering contemplated by this Prospectus. Sales of
substantial amounts of Common Stock in the public market could adversely affect
the market price of the Common Stock.
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<PAGE> 42
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), for whom Needham & Company, Inc.,
Cruttenden Roth Incorporated and John G. Kinnard and Company Incorporated are
acting as representatives (the "Representatives"), have severally agreed to
purchase an aggregate of 2,600,000 shares of Common Stock from the Company at
the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus, in the amounts set
forth opposite their respective names below.
<TABLE>
<CAPTION>
UNDERWRITER PARTICIPATION
----------- -------------
<S> <C>
Needham & Company, Inc......................................
Cruttenden Roth Incorporated................................
John G. Kinnard and Company, Incorporated...................
---------
Total.................................................. 2,600,000
=========
</TABLE>
The underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of Common Stock offered hereby if any of
such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock directly to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to certain securities dealers at such price less a concession of not more
than $ per share. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $ per share to certain other dealers. After
the shares of Common Stock are released for sale to the public, the offering
price and other selling terms may from time to time be varied by the
Underwriters. No change in such terms shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company and Stanley I. Clothier have granted to the Underwriters an
option, exercisable within 30 days after the date of this Prospectus, to
purchase up to 320,000 and 70,000 additional shares of Common Stock,
respectively, at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus. The agreement
between the Company, Mr. Clothier and the Underwriters provide that if the
over-allotment option is exercised only in part, the Underwriters will first
purchase shares from Mr. Clothier, up to a maximum amount of 70,000 shares, and
then purchase any additional shares from the Company. The Underwriters may
exercise such option solely to cover over-allotments, if any, made in connection
with the sale of Common Stock offered hereby. To the extent that the
Underwriters exercise the over-allotment option, each Underwriter will be
committed, subject to certain conditions, to purchase a number of additional
shares of Common Stock which is proportionate to such Underwriter's initial
commitment as set forth in the table above.
The Company, its officers and directors and current stockholders have
agreed that, during the period beginning from the date of this Prospectus and
continuing to and including the date 180 days after the date of this Prospectus,
they will not offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock, any securities of the Company which are substantially similar
to the shares of Common Stock or which are convertible or exchangeable for
securities which are substantially similar to the shares of Common Stock other
than pursuant to the Incentive Compensation Plan or the Purchase Plan without
the prior written consent of Needham & Company, Inc., except for the shares of
common Stock offered in connection with this offering.
39
<PAGE> 43
The Representatives have informed the Company that they do not expect sales
to accounts over which the underwriters exercise discretionary authority to
exceed 5% of the total number of shares of Common Stock offered by them.
Prior to this offering, there has not been a public market for the Common
Stock of the Company. Consequently, the initial public offering price of the
Common Stock was determined by arms-length negotiation between the Company and
the Representatives of the Underwriters. Among the factors to be considered by
the Company and the Representatives in pricing the Common Stock are the results
of operations, the current financial condition and future prospects of the
Company, the experience of management, the amounts of ownership to be retained
by the current stockholders, the general condition of the economy and the
securities markets, the demand for similar securities of companies considered
comparable to the Company and other factors deemed relevant.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
In connection with the offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with the Exchange Act pursuant to which such persons may bid for or purchase
Common Stock for the purpose of stabilizing its market price. The Underwriters
also may create a short position for the account of the Underwriters by selling
more Common Stock in connection with the offering than they are committed to
purchase from the Company, and in such case may purchase Common Stock in the
open market following completion of the offering to cover all or a portion of
such shares of Common Stock or may exercise the Underwriters' over-allotment
option referred to above. In addition, the Representatives, on behalf of the
Underwriters, may impose "penalty bids" under the contractual arrangements with
the Underwriters whereby the Representatives may reclaim from an Underwriter (or
dealers participating in the offering), for the account of the other
Underwriters, the selling concession with respect to Common Stock that is
distributed in the offering but subsequently purchased for the account of the
Underwriters in stabilization or syndicate covering transactions or otherwise.
Any of these activities may stabilize or maintain the price of the Common Stock
at a level above which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and if they are undertaken
they may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Messerli & Kramer P.A., Minneapolis, Minnesota. Certain legal matters
will be passed upon for the Underwriters by Kaplan, Strangis and Kaplan, P.A.,
Minneapolis, Minnesota.
EXPERTS
The balance sheets of Datalink Corporation as of December 31, 1996 and 1997
and the statements of operations, retained earnings (accumulated deficit) and
cash flows for each of the three years in the period ended December 31, 1997
included in this Prospectus have been included herein in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of that firm as experts in accounting and auditing.
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<PAGE> 44
CHANGE IN ACCOUNTANTS
In November 1997, the Company engaged PricewaterhouseCoopers LLP (formerly
known as Coopers & Lybrand L.L.P.) as its independent public accountants to
audit the financial statements as of December 31, 1995, 1996 and 1997 and for
each of the three years ended December 31, 1997. The decision to dismiss Hansen,
Jergenson, Nergaard & Co., LLP and engage PricewaterhouseCoopers LLP as the
Company's independent public accountants was approved by the Board of Directors.
The report of Hansen, Jergenson, Nergaard & Co., LLP as of December 31, 1996 and
for the year then ended, not included herein, does not contain an adverse
opinion or a disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. During the Company's two most
recent fiscal years and the subsequent interim period preceding the former
auditors' dismissal, there were no disagreements with the former auditors on any
matters of accounting principles or practices, financial statement disclosure or
auditing scope or procedures which, if not resolved to the former auditor's
satisfaction, would have caused them to make reference to the subject matter in
their report. Prior to retaining PricewaterhouseCoopers LLP, the Company did not
consult with PricewaterhouseCoopers LLP regarding the application of accounting
principles to a specified transaction, the type of audit opinion that might be
rendered on the Company's financial statements or any other matter.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
omits certain of the information contained in the Registration Statement and the
exhibits and schedules thereto on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder.
Statements contained in this Prospectus regarding the contents of any contract
or any other document are not necessarily complete and, in each such instance,
reference is hereby made to the copy of such contract or other document filed as
an exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of all or any part thereof may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street N.W., Judiciary
Plaza, Washington, D.C. 20549 at the prescribed rates. Also, the Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Web site is http://www.sec.gov.
41
<PAGE> 45
GLOSSARY
AIT........................... Advanced Intelligent Tape. An 8 mm helical scan
tape technology developed by Sony Corporation.
ARCHIVE....................... A repository for information separate from the
primary storage system. Data is often deleted
from the primary storage system once placed in
the archive system.
CLOSED SYSTEMS................ Computers or computing environments that rely
on proprietary components and use software
often only available from a single source.
CLUSTERING SOFTWARE........... Software that allows a user's software
application to interact with a cluster of host
servers as if the cluster were a single host.
Clustering software is designed to increase
both availability (by providing alternative
processing capacity in the event of a host
failure) and scaleability (by sharing resources
among a number of hosts in the cluster).
CPU........................... Central Processing Unit. A microprocessor chip
or circuit board that performs the bulk of data
processing in a computer.
DDS........................... Digital Data Storage. A 4mm helical scan tape
technology developed by Sony Corporation. Also
known as digital audio tape ("DAT").
DIGITAL LINEAR TAPE........... A half-inch, serpentine linear tape technology
originally developed by Digital but is now
designed, manufactured and marketed by Quantum.
DISK ARRAY.................... A number of disk drives grouped together into a
storage system and attached to a host computer
as a single unit. This grouping can achieve
superior performance and reliability over
single disk drives while providing enhanced
management capabilities.
FIBRE CHANNEL................. A new high speed serial interface standard
developed and recently formalized by the
American National Standards Institute.
GB............................ Gigagbyte. 1,024 megabytes.
HIGH AVAILABILITY............. The capability of a system to perform its
functions with extremely little downtime by
incorporating redundant components and systems.
HOT BACKUP.................... The capability of a storage system to be backed
up while the system remains powered on and
operative.
HSM........................... Hierarchical Storage Management. An information
storage system which automatically migrates the
least used data to a lower cost storage medium.
This data is transparently recalled to primary
storage when accessed by users.
INTERFACE..................... The circuit board and cabling used to connect a
host computer with its storage system. SCSI,
Ultra SCSI and Fibre Channel are three
predominant interface technologies used in the
Open Systems market.
MB............................ Megabyte. 1,048,576 bytes, a unit of
measurement for data storage.
42
<PAGE> 46
NEAR ON-LINE.................. Data appears on-line, but access is slower
(generally measured in seconds) than on-line
storage. Near on-line storage systems typically
use optical jukeboxes or tape-based libraries.
ON-LINE....................... Data stored in hard disk or disk array systems
using standard file systems that can be
accessed at speeds measured in milliseconds.
OPEN SYSTEMS.................. Computers or networked computing environments
based on published non-proprietary standards.
These environments are characterized by the
interoperability of computing and storage
systems from multiple suppliers.
PERMANENCE.................... The degree to which stored data is retained for
future access.
RAID.......................... Redundant Array of Independent Disks. A Disk
Array storage system with fault tolerance built
into its disk, power, cooling and/or processing
components.
SAN........................... Storage Area Network. A dedicated, high speed
network used to interconnect one or many shared
storage devices to multiple servers or cluster
servers.
SCSI.......................... Small Computer Systems Interface. A commonly
used interface standard developed by the
American National Standards Institute. This
standard defines the connection of peripheral
devices (primarily information storage) to host
computer systems.
ULTRA SCSI.................... The latest high performance version of the SCSI
specification which includes Ultra-1 (up to 40
MB per second) and Ultra-2 (up to 80 MB per
second) standards.
UNIX.......................... A multi-user, multi-tasking operating system
commonly used in Open Systems. Versions of UNIX
are available from a variety of suppliers.
WINDOWS NT.................... A multi-user, multi-tasking operating system
commonly used in Open Systems. Available only
from Microsoft Corporation.
43
<PAGE> 47
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Retained Earnings (Accumulated Deficit)....... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Datalink Corporation:
We have audited the accompanying balance sheets of Datalink Corporation as
of December 31, 1996 and 1997, and the related statements of operations,
retained earnings (accumulated deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Datalink Corporation as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 25, 1998, except as to
the first paragraph of Note 5 and
Note 11, as to which the date is
June 2, 1998 and Note 12, as to which
the date is July 15, 1998.
F-2
<PAGE> 49
DATALINK CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1998
(UNAUDITED)
---------------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------------
TERMINATION TERMINATION OF
DECEMBER 31, OF PUT S CORPORATION
------------------------- OPTIONS STATUS PRO FORMA
1996 1997 ACTUAL (NOTE 3) (NOTE 3) (NOTE 3)
---- ---- ------ ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.............................. $ 221,871 $ 1,163,107 $ 348,697 $ 348,697
Accounts receivable, net.......... 8,116,155 11,280,738 12,254,733 12,254,733
Inventories....................... 6,011,391 4,661,378 4,613,053 4,613,053
Other current assets.............. 75,151 78,705 676,730 676,730
Deferred income taxes............. $ 239,000 $ 239,000
----------- ----------- ----------- ----------- -----------
Total current assets............ 14,424,568 17,183,928 17,893,213 239,000 18,132,213
Property and equipment, net......... 898,515 1,478,122 1,757,671 1,757,671
Other assets........................ 31,587 42,503 44,550 44,550
Deferred income taxes............... 3,000 3,000
----------- ----------- ----------- ----------- -----------
Total assets.................... $15,354,670 $18,704,553 $19,695,434 $ 242,000 $19,937,434
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Book cash overdraft............... 1,044,136 1,044,136
Line of credit.................... 2,796,528 3,935,417 2,822,029 2,822,029
Accounts payable.................. 5,079,441 4,928,617 5,474,813 5,474,813
Accrued expenses.................. 1,160,078 1,493,317 1,299,169 1,299,169
Deferred compensation,
current portion................. 59,058 65,242 68,574 68,574
Distribution payable to
stockholders.................... 8,870,057 8,870,057
----------- ----------- ----------- ----------- -----------
Total current liabilities....... 9,095,105 10,422,593 10,708,721 8,870,057 19,578,778
Deferred compensation, less current
portion........................... 216,939 151,697 116,556 116,556
Commitments and contingencies
Common stock, subject to put option;
$0.001 par value, 50,000,000
shares authorized, 6,900,000
shares issued and outstanding..... 9,338,605 13,873,980 16,173,980 $(16,173,980)
Stockholders' equity (deficiency):
Common stock, $0.001 par value,
50,000,000 shares authorized,
6,900,000 shares issued and
outstanding..................... 6,900 6,900
Retained earnings (accumulated
deficit)........................ (3,295,979) (5,743,717) (7,303,823) 16,167,080 (8,628,057) 235,200
----------- ----------- ----------- ------------ ----------- -----------
Total stockholders' equity
(deficiency).................. (3,295,979) (5,743,717) (7,303,823) 16,173,980 (8,628,057) 242,100
----------- ----------- ----------- ------------ ----------- -----------
Total liabilities and
stockholders' equity
(deficiency).................. $15,354,670 $18,704,553 $19,695,434 $ $ 242,000 $19,937,434
=========== =========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 50
DATALINK CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------- ----------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales..................... $38,047,884 $54,651,868 $71,255,299 $31,265,615 $36,627,004
Cost of sales................. 30,355,954 42,872,380 55,719,303 24,462,282 27,644,047
----------- ----------- ----------- ----------- -----------
Gross profit............. 7,691,930 11,779,488 15,535,996 6,803,333 8,982,957
Operating expenses:
Sales and marketing......... 2,487,295 3,606,567 5,191,040 2,187,581 3,054,351
General and
administrative........... 2,117,694 2,382,166 3,010,450 1,386,362 1,713,109
Engineering................. 466,445 632,660 926,008 492,707 691,007
----------- ----------- ----------- ----------- -----------
Operating income......... 2,620,496 5,158,095 6,408,498 2,736,683 3,524,490
Interest expense.............. 306,182 285,905 332,562 166,139 105,496
----------- ----------- ----------- ----------- -----------
Net income.................... $ 2,314,314 $ 4,872,190 $ 6,075,936 $ 2,570,544 $ 3,418,994
=========== =========== =========== =========== ===========
Historical net income per
share, basic and diluted.... $ 0.34 $ 0.71 $ 0.88 $ 0.37 $ 0.50
=========== =========== =========== =========== ===========
Weighted average shares
outstanding, basic and
diluted.................. 6,900,000 6,900,000 6,900,000 6,900,000 6,900,000
Pro forma data
(unaudited -- see Note 3):
Income before income
taxes.................... $ 6,075,936 $ 2,570,544 $ 3,418,994
Pro forma income taxes...... 2,430,374 1,028,218 1,333,408
----------- ----------- -----------
Pro forma net income........ $ 3,645,562 $ 1,542,326 $ 2,085,586
=========== =========== ===========
Pro forma net income per
share -- basic and
diluted.................. $ 0.46 $ 0.20 $ 0.27
=========== =========== ===========
Shares used in computing pro
forma net income per share
(see Note 3)................ 7,853,770 7,853,770 7,853,770
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 51
DATALINK CORPORATION
STATEMENTS OF RETAINED EARNINGS (ACCUMULATED DEFICIT)
<TABLE>
<CAPTION>
TOTAL
-----
<S> <C>
Balance, December 31, 1994 (see Note 9)..................... $(1,330,997)
Net income.................................................. 2,314,314
Cash dividends of $0.19 per share........................... (1,342,400)
Accretion of common stock value............................. (1,926,492)
-----------
Balance, December 31, 1995.................................. (2,285,575)
Net income.................................................. 4,872,190
Cash dividends of $0.27 per share........................... (1,894,600)
Accretion of common stock value............................. (3,987,994)
-----------
Balance, December 31, 1996.................................. (3,295,979)
Net income.................................................. 6,075,936
Cash dividends of $0.58 per share........................... (3,988,299)
Accretion of common stock value............................. (4,535,375)
-----------
Balance, December 31, 1997.................................. (5,743,717)
Net income (unaudited)...................................... 3,418,994
Cash dividends of $0.39 per share (unaudited)............... (2,679,100)
Accretion of common stock value (unaudited)................. (2,300,000)
-----------
Balance, June 30, 1998 (unaudited).......................... $(7,303,823)
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 52
DATALINK CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------ ---------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income................... $ 2,314,314 $ 4,872,190 $ 6,075,936 $ 2,570,544 $ 3,418,994
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for bad debts... 11,034 69,109 27,235 15,000
Depreciation and
amortization............ 128,804 146,648 177,302 84,444 109,482
Loss on disposal of
property and
equipment............... 9,527 598
Changes in operating
assets and liabilities:
Accounts receivable..... 480,317 (3,321,609) (3,191,818) (673,424) (988,995)
Inventories............. 132,036 (2,921,963) 1,350,013 2,236,457 48,325
Other current assets.... (5,565) (36,031) (3,554) (41,193) (598,025)
Other assets............ (18,430) 4,556 (10,916) (14,093) (2,047)
Accounts payable........ (662,561) 3,106,571 (150,824) (1,233,063) 546,196
Accrued expenses........ (105,164) 599,324 333,239 (345,038) (194,148)
Deferred compensation... 54,675 (56,206) (59,058) (33,734) (31,809)
------------ ------------ ------------ ------------ ------------
Net cash provided by
operating activities.... 2,329,460 2,462,589 4,557,082 2,550,900 2,323,571
------------ ------------ ------------ ------------ ------------
Cash flows from investing
activities:
Purchase of property and
equipment................. (286,325) (337,363) (766,436) (459,404) (389,629)
------------ ------------ ------------ ------------ ------------
Cash flows from financing
activities:
Proceeds from borrowings on
line of credit............ 39,078,300 52,657,600 70,372,500 31,029,500 35,997,000
Principal payments on line of
credit.................... (39,712,195) (52,777,009) (69,233,611) (30,617,905) (37,110,388)
Dividends paid............... (1,342,400) (1,894,600) (3,988,299) (2,793,300) (2,679,100)
Principal payments on notes
payable, related
parties................... (250,000)
Book cash overdraft.......... 620,171 1,044,136
------------ ------------ ------------ ------------ ------------
Net cash (used in)
provided by financing
activities.............. (2,226,295) (2,014,009) (2,849,410) (1,761,534) (2,748,352)
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash.... (183,160) 111,217 941,236 329,962 (814,410)
Cash, beginning of year........ 293,814 110,654 221,871 221,871 1,163,107
------------ ------------ ------------ ------------ ------------
Cash, end of year.............. $ 110,654 $ 221,871 $ 1,163,107 $ 551,833 $ 348,697
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 53
DATALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS:
Datalink Corporation (the Company) analyzes, custom designs, integrates or
manufactures, installs and supports high-end Open Systems data storage solutions
for end-users, value-added resellers and original equipment manufacturers. In
May 1996, the Company became an ISO 9001 registered organization.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS
3
P
The financial statements as of June 30, 1998, and for the six months ended
June 30, 1997 and 1998, are unaudited. In the opinion of management, this
financial information includes all adjustments, consisting of normal recurring
adjustments, necessary to fairly present the financial information set forth
herein. The results of operations for the six months ended June 30, 1998, are
not necessarily indicative of the results to be expected for the full year.
CASH:
The Company maintains its cash principally with one financial institution.
INVENTORIES:
Inventories, principally consisting of data storage products and
components, are valued at the lower of cost or market with cost determined on a
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT:
Property and equipment, including purchased software, are stated at cost.
Depreciation is provided by charges to operations using the straight-line method
over the estimated useful lives of the assets (ranging from 5 to 10 years).
Leasehold improvements are amortized on a straight-line basis over the shorter
of their estimated useful lives or the underlying lease term. The costs and
related accumulated depreciation and amortization on asset disposals are removed
from the accounts and any gain or loss is included in operations. Major renewals
and betterments are capitalized, while maintenance and repairs are charged to
current operations when incurred.
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. Therefore, no provision or
liability for income taxes is reflected in the financial statements for the
Company.
Concurrent with the Company's proposed initial public offering (the
Offering), (see Note 11), the Company's S corporation status will terminate and
it will become subject to federal and state income taxes (see Note 3).
REVENUE RECOGNITION:
The Company recognizes product revenue as its products are shipped or
following customer acceptance for products under evaluation. The Company
provides an allowance for estimated returns when revenues are
F-7
<PAGE> 54
DATALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recognized. Revenues and expenses related to sales of maintenance contracts
fulfilled by third parties are recognized upon execution of the contracts.
NET INCOME PER SHARE:
Basic net income per share is computed using the weighted average number of
shares outstanding. The diluted net income per share includes the effect of
common stock equivalents, if any, for each period. The Company does not have any
common stock equivalents.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management's estimates relate to the
determination of the allowance for doubtful accounts receivable and reserves for
excess and obsolete inventories.
CONCENTRATION OF CREDIT RISK:
The Company's customer base is diversified; however, a substantial portion
of its customers are located in the upper Midwest. The Company does not require
collateral for customer accounts receivable. The Company performs ongoing credit
evaluations of its customers' financial condition and establishes allowances for
estimated uncollectible accounts when necessary.
BUSINESS SEGMENTS:
Effective at year end 1998, the Company will adopt SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
requires disclosure of segment data in a manner consistent with that used by an
enterprise for internal management reporting and decision making. The Company
believes that it will report its operations as a single segment under SFAS No.
131.
3. PRO FORMA DATA (UNAUDITED):
PRO FORMA BALANCE SHEET DATA:
The pro forma balance sheet of the Company as of June 30, 1998 reflects (i)
the reclassification of common stock subject to put option to stockholders'
equity to reflect termination of the put options concurrent with the Offering
(see Note 9), (ii) a distribution payable to the stockholders of the Company of
all previously taxed, but undistributed, S corporation earnings (estimated at
$8,870,057 had the termination occurred on June 30, 1998), and (iii) a net
deferred tax asset which will be recorded by the Company upon termination of its
S corporation status as a result of the Offering (estimated at $242,000 as of
June 30, 1998).
The deferred income tax asset will represent the tax effect of the
cumulative differences between the financial reporting and income tax bases of
assets and liabilities as of the termination of the S corporation status, and
will be recorded as an income tax benefit in the quarter in which the Offering
is completed. Deferred income taxes result from temporary differences between
financial reporting and income tax reporting based on enacted rates in effect
for periods in which these differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to an
amount expected to be realized. Income tax expense is the tax payable for the
period plus the change during the period in deferred tax assets and liabilities.
F-8
<PAGE> 55
DATALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The actual deferred tax asset recorded will be adjusted to reflect the
effect of operations from July 1, 1998 through the actual termination of the S
corporation status. In addition, the actual amount of the distribution will be
adjusted to reflect the S corporation's pro rata portion of the Company's 1998
taxable income and any stockholder distributions from July 1, 1998 through the
termination of the S corporation status.
PRO FORMA STATEMENT OF OPERATIONS DATA:
Concurrent with the Offering, the Company will terminate its status as an S
corporation and will be subject to federal and state income taxes. Accordingly,
for informational purposes, the accompanying statements of operations for the
year ended December 31, 1997 and the six months ended June 30, 1997 and 1998,
include a pro forma adjustment for the income taxes which would have been
recorded if the Company had been a C corporation, based on the tax laws in
effect during the period. The pro forma adjustment for income taxes does not
include a one-time income tax benefit related to the recognition of a net
deferred tax asset which will be recorded by the Company upon terminating its S
corporation status (estimated at $242,000 as of June 30, 1998).
PRO FORMA NET INCOME PER SHARE:
Pro forma net income per share is computed by dividing pro forma net income
by the weighted average number of shares outstanding (6,900,000 shares) for the
period, after giving effect to the estimated number of shares that would be
required to be sold at the initial public offering price, after deducting the
underwriting discount, to fund the distribution to the current stockholders of
all previously taxed, but undistributed, S corporation earnings, estimated at
$8,870,057 (or 953,770 shares) had the termination occurred on June 30, 1998.
The Company does not have any common stock equivalents.
4. SELECTED BALANCE SHEET INFORMATION:
The following provides additional balance sheet information as of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997 JUNE 30, 1998
---- ---- -------------
<S> <C> <C> <C>
Accounts receivable:
Accounts receivable.............................. $8,176,155 $11,340,738 $12,329,733
Less allowance for doubtful accounts............. 60,000 60,000 75,000
---------- ----------- -----------
$8,116,155 $11,280,738 $12,254,733
========== =========== ===========
Property and equipment:
Leasehold improvements........................... $ 132,784 $ 223,356 $ 225,167
Equipment........................................ 608,000 761,059 803,111
Computers and purchased software................. 914,652 1,262,249 1,606,520
---------- ----------- -----------
1,655,436 2,246,664 2,634,798
Less accumulated depreciation and amortization... 756,921 768,542 877,127
---------- ----------- -----------
$ 898,515 $ 1,478,122 $ 1,757,671
========== =========== ===========
Accrued expenses:
Commissions...................................... $ 644,165 $ 942,051 $ 831,718
Other............................................ 515,913 551,266 467,451
---------- ----------- -----------
$1,160,078 $ 1,493,317 $ 1,299,169
========== =========== ===========
</TABLE>
F-9
<PAGE> 56
DATALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. BORROWING ARRANGEMENTS:
Effective June 1, 1998, the Company renewed its revolving credit agreement
with a bank (the Credit Agreement). Under the Credit Agreement, the Company may
borrow up to $10,000,000 ($8,000,000 as of December 31, 1997) with borrowings
limited to the sum of 80% of eligible accounts receivable plus 35% of eligible
inventories, as defined. Borrowings under the Credit Agreement were $2,822,029
and $3,935,417 as of June 30, 1998 and December 31, 1997, respectively, with
interest at the bank's reference rate. Borrowings under the Credit Agreement
were $2,796,528 with interest at the bank's reference rate plus 0.50% as of
December 31, 1996. The bank's reference rate was 8.25%, 8.5% and 8.5% as of
December 31, 1996 and 1997 and June 30, 1998, respectively.
The line of credit is collateralized by substantially all assets of the
Company. The agreement includes various covenants, including requirements to
maintain certain levels of net income and tangible net worth and limitations on
the payment of dividends and property and equipment acquisitions.
Included in cash on the balance sheet is $114,000, $260,000 and $156,000 as
of December 31, 1996 and 1997 and June 30, 1998, respectively, which was held in
a restricted collateral cash account. These amounts were applied to reduce bank
borrowings in the month following the period end.
6. DEFERRED COMPENSATION AGREEMENT:
The Company has a deferred compensation agreement with a retired officer
who is also a stockholder. The Company is obligated to pay the retired officer
(or a designated beneficiary) $7,000 per month for 60 months beginning January
1996. The Company's obligation under the agreement is not funded. The present
value of the Company's liability related to the deferred compensation agreement
was $275,997, $216,939 and $185,130 as of December 31, 1996 and 1997 and June
30, 1998, respectively, with interest computed at 10%.
Interest expense related to the agreement was $27,794, $24,942, $13,266 and
$10,191 for the years ended December 31, 1996 and 1997 and for the six months
ended June 30, 1997 and 1998, respectively (none in 1995). The Company recorded
$54,675 of compensation expense related to the agreement in the year ended
December 31, 1995.
7. LEASE COMMITMENTS AND CONTINGENCIES:
The Company leases an office and warehouse facility under terms of an
operating lease with a partnership in which a stockholder of the Company is a
general partner. During 1997, the office and warehouse facility were sold to a
limited liability partnership in which all stockholders of the Company are
limited partners. In connection with the purchase of the property, the limited
liability partnership executed promissory notes in favor of a bank and a
stockholder of the Company. The Company has guaranteed payments due under these
notes. As of June 30, 1998, the balances of the notes payable to the bank and
the stockholder were $938,885 and $1,364,697, respectively. The lease expires in
December 1999. The Company also leases office space from nonaffiliated entities
under operating lease agreements that expire at various dates through 2000. In
addition to minimum rents, the leases require the Company to pay certain
operating costs of the lessor.
F-10
<PAGE> 57
DATALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, future minimum lease payments due under
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
RELATED
YEAR ENDED PARTY OTHER TOTAL
---------- ------- ----- -----
<S> <C> <C> <C>
1998..................................................... $151,464 $ 82,743 $234,207
1999..................................................... 151,464 46,153 197,617
2000..................................................... 21,420 21,420
-------- -------- --------
$302,928 $150,316 $453,244
======== ======== ========
</TABLE>
Total rent expense, including certain lessor operating costs charged to the
Company, is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30,
-------------------------------- --------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Related party............................. $132,511 $128,573 $197,363 $ 80,575 $ 83,248
Other..................................... 71,818 90,361 119,620 54,073 68,973
-------- -------- -------- -------- --------
$204,329 $218,934 $316,983 $134,648 $152,221
======== ======== ======== ======== ========
</TABLE>
8. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution retirement plan for eligible
employees. Employees may contribute up to 10% of their pretax compensation to
the 401(k) portion of the plan. The Company is required to match 50% of an
employee's contribution up to the first 6% of an employee's eligible
compensation. The cost of the Company's contributions to the 401(k) portion of
the plan for the years ended December 31, 1995, 1996 and 1997 and for the six
months ended June 30, 1997 and 1998, was $78,540, $97,350, $126,404, $70,727 and
$93,769, respectively.
At the discretion of the Board of Directors, the Company may also make
profit sharing contributions to the plan, to the extent permitted by the
Internal Revenue Code. The cost of the Company's profit sharing contributions to
the plan for the years ended December 31, 1995, 1996 and 1997 was $91,044,
$156,500 and $164,350, respectively. The Company did not make any profit sharing
contributions to the plan for the six months ended June 30, 1997 and 1998.
9. COMMON STOCK BUY-SELL AGREEMENT:
As of June 30, 1998, the Company and all of its stockholders had entered
into a Stock Purchase Agreement (the Agreement) effective April 1, 1992 that
restricts the right of each stockholder to dispose of or encumber any shares of
the Company's common stock and dictates terms for transfer of the shares. Upon
the death, disability or termination of employment, each stockholder is required
to put his shares to the Company, and the Company is obligated to purchase all
shares owned by that stockholder at a price determined pursuant to terms of the
Agreement. In connection therewith, the value of the common stock subject to put
options has been accreted to the value determined according to terms of the
Agreement. Effective November 1, 1996, the Agreement was amended to allow a
retired stockholder to retain his shares until either he or his legal
representative require the Company to purchase his shares, or until his death.
In connection with the Offering, and pursuant to accounting rules and
regulations applicable to public companies, the Company has adjusted its
financial statements to reclassify the carrying value of common stock pursuant
to the Agreement out of stockholders' equity. The effect of this restatement was
to increase the carrying value of common stock subject to the put options, and
decrease stockholders' equity by $3,424,119,
F-11
<PAGE> 58
DATALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$5,350,611, $9,338,605, and $13,873,980 and $16,173,980 as of December 31, 1994,
1995, 1996 and 1997, and June 30, 1998, respectively. The Company's earnings
available to common stockholders is the same as the Company's net income because
the accretion of the common stock to its put option value results from the same
put option terms for all common stockholders. Accordingly, the accretion of the
common stock to its put option value is allocable to all of the Company's common
stockholders.
The Company is the owner and beneficiary of term life insurance policies
with face values ranging from $1,605,000 to $9,472,000 insuring five of its
stockholders. The Company is also the owner and beneficiary of disability
insurance policies insuring five of its stockholders. Any proceeds from these
life and disability insurance policies would be used to fund at least a portion
of the Company's obligations under the Agreement in the event of death or
disability.
The Company is also the owner and beneficiary of two life insurance
policies with a combined face value of $1,000,000 insuring the life of the
retired stockholder. The cash surrender value of these policies was $26,587,
$25,547 and $25,547 as of December 31, 1996 and 1997 and June 30, 1998,
respectively, and is included in other assets.
10. SUPPLEMENTAL CASH FLOW INFORMATION:
The following provides supplemental information concerning the statements
of cash flows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ ----------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash paid for interest................. $314,919 $286,745 $327,496 $166,687 $100,709
Noncash transactions:
Purchase of property and equipment
included in accounts payable...... 158,000
</TABLE>
11. RECAPITALIZATION:
As discussed in Notes 2 and 3, the Company is contemplating an initial
public offering of 2,600,000 shares of its common stock (the Offering). In
connection therewith, on June 1, 1998, the Company's Board of Directors and
stockholders approved an amendment to the Company's Certificate of Incorporation
to be filed prior to the Offering to increase the number of authorized shares of
common stock to 50,000,000 and change the par value of the common stock to
$0.001. Pursuant to the Company's amended Certificate of Incorporation, all such
authorized shares are deemed to be common stock until otherwise designated by
the Board of Directors. Also, on June 1, 1998, the Company's Board of Directors
and stockholders authorized a 690-for-1 stock split of its common stock to be
effected prior to the Offering. The stock split has been retroactively reflected
in the accompanying financial statements.
In connection with the Offering, the Company has reserved an aggregate of
950,000 shares of common stock for issuance pursuant to the Company's Incentive
Compensation Plan. The terms of the plan allow for a variety of awards including
stock options, stock appreciation rights, restricted stock, performance shares,
performance units, cash-based awards, phantom shares and other share-based
awards as determined by the Company's Compensation Committee (the Committee).
Also, in connection with the Offering, the Company has reserved 250,000 shares
of common stock for issuance pursuant to the Company's Employee Stock Purchase
Plan. Under terms of the Employee Stock Purchase Plan, eligible employees will
be granted an option to purchase a designated number of shares of common stock
at a purchase price as determined by the Committee, but at no less than 85% of
the lower of the market price on the first or last day of the purchase period.
F-12
<PAGE> 59
DATALINK CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. BUSINESS ACQUISITION:
On July 15, 1998, the Company acquired Direct Connect Systems, Inc.
("DCSI"), a Marietta, Georgia-based firm engaged in the analysis, custom design,
integration and support of high-end Open Systems data storage solutions
principally for end-users located in the Southeastern portion of the United
States. In addition to its Marietta headquarters, DCSI has field sales offices
in Herndon, Virginia, Charlotte, North Carolina, and Melbourne and Tampa,
Florida.
Under terms of the acquisition, the Company acquired all of DCSI's capital
stock in exchange for $2 million cash and 200,000 shares of the Company's Common
Stock, subject to certain post-closing adjustments. Under terms of the
acquisition, certain DCSI employees were also paid $500,000 in the aggregate
under noncompetition agreements.
F-13
<PAGE> 60
GRAPHIC DESCRIPTION: MAP OF UNITED STATES SHOWING THE COMPANY'S CURRENT SALES
TERRITORIES.
<PAGE> 61
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH THIS PROSPECTUS RELATES, OR AN
OFFER IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED,
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 1
RISK FACTORS.......................... 5
USE OF PROCEEDS....................... 11
TERMINATION OF S CORPORATION STATUS
AND PUT OPTION AND DIVIDEND POLICY.. 12
CAPITALIZATION........................ 13
DILUTION.............................. 14
SELECTED HISTORICAL AND PRO FORMA
FINANCIAL DATA...................... 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 17
BUSINESS.............................. 22
MANAGEMENT............................ 30
CERTAIN TRANSACTIONS.................. 34
PRINCIPAL STOCKHOLDERS................ 36
DESCRIPTION OF CAPITAL STOCK.......... 37
SHARES ELIGIBLE FOR FUTURE SALE....... 38
UNDERWRITING.......................... 39
LEGAL MATTERS......................... 40
EXPERTS............................... 40
CHANGE IN ACCOUNTANTS................. 41
ADDITIONAL INFORMATION................ 41
GLOSSARY.............................. 42
FINANCIAL STATEMENTS.................. F-1
</TABLE>
------------------------
UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,600,000 Shares
DATALINK LOGO
Common Stock
---------------------
PROSPECTUS
---------------------
Needham & Company, Inc.
CRUTTENDEN ROTH INCORPORATED LOGO
John G. Kinnard and Company,
Incorporated
-----------
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions and the Representative's non-accountable
expense allowance, payable by the Company in connection with the sale of Common
Stock being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fee and the Nasdaq Stock Market listing fee.
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
SEC Registration Fee........................................ $ 9,703.00
NASD Filing Fee............................................. 3,789.00
Nasdaq Stock Market Listing Fee............................. 81,625.00
Accounting Fees and Expenses................................ 180,000.00
Legal Fees and Expenses..................................... 150,000.00
Printing Expenses........................................... 45,000.00
Blue Sky Fees and Expenses.................................. 5,000.00
Transfer Agent Fees and Expenses............................ 1,000.00
Miscellaneous............................................... 23,883.00
-----------
Total.................................................. $500,000.00
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Amended and Restated Articles of Incorporation limit the
liability of directors to the maximum extent permitted by the Minnesota Business
Corporation Act. Specifically, directors will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except for
liability due to (i) any breach of the duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) dividends or other
distributions of corporate assets that are in contravention of certain statutory
or contractual restrictions; (iv) violations of certain Minnesota securities
laws, or (v) any transaction from which the director derives an improper
personal benefit. Liability under the federal securities laws is not limited by
the Amended and Restated Articles of Incorporation.
The Minnesota Business Corporation Act requires that the Company indemnify
any director or officer made or threatened to be made a party to a legal
proceeding, by reason of the former or present official capacity of the person,
against judgments, penalties, fines, settlements and reasonable expenses
incurred in connection with the proceeding if certain statutory standards are
met. A "proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including a derivative
action in the name of the Company. Reference is made to the detailed terms of
the Minnesota indemnification statute (Minn. Stat. Section 302A.521) for a
complete statement of such indemnification rights. The Company's Amended and
Restated Articles of Incorporation also require the Company to provide
indemnification of these persons to the fullest extent of the Minnesota
indemnification statute.
The Company has entered into an indemnification agreement with each of its
directors and executive officers to provide him or her with specific contractual
assurances that the indemnification protection provided by the Minnesota
Business Corporation Act and the Company's Amended and Restated Articles of
Incorporation will be available to such director or officer and to provide for
the indemnification of and the advancing of expenses to such director or officer
to the fullest extent permitted by law. The Company also presently maintains
insurance to protect itself and its directors and officers against certain
liabilities, costs, and expenses arising out of claims or suits against such
directors and officers resulting from their service in such capacity.
II-1
<PAGE> 63
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Contemporaneously with the closing of this offering, the Company will grant
the four non-employee directors and 101 employees of the Company and DCSI
options to purchase an aggregate of 332,500 shares of the Company's Common
Stock, which options are exercisable at the initial public offering price shown
on the cover page of the Prospectus. The Company believes that the grant of
these options are exempt from registration under the Securities Act because no
sale of securities occurred. Additionally, in connection with the acquisition of
DCSI the Company issued 200,000 shares of Common Stock to four former
stockholders of DCSI, each of whom is an accredited investor. The Company
believes the sale of these shares is exempt from registration under Section 4(2)
of the Securities Act.
ITEM 16. EXHIBITS.
(a) Exhibits.
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of
Registrant.
3.2* Restated Bylaws of Registrant.
4.1 Specimen Common Stock Certificate.
5.1 Opinion of Messerli & Kramer P.A.
10.1* Employee Stock Purchase Plan.
10.2* Incentive Compensation Plan.
10.3* Credit Agreement with Norwest Bank Minnesota, N.A.
10.4* Form of Indemnification Agreement.
10.5 Lease Agreement with Washington Avenue L.L.P.
10.6 Deferred Compensation with Stanley I. Clothier.
10.7 Agreement and Plan of Reorganization with Direct Connect
Systems, Inc. (excluding schedules and Exhibits which the
Company will provide to the Commission upon request).
16.1 Letter from Hansen, Jergenson Nergaard & Co., LLP, regarding
change in certifying accountant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Hansen, Jergenson, Nergaard & Co., LLP.
23.3 Consent of Messerli & Kramer P.A. (included in Exhibit 5.1).
24.1* Power of Attorney (included in signature page).
27.1 Financial Data Schedule (Edgar filing only).
</TABLE>
- ------------
* previously filed as part of the Registration Statement
(b) Financial Statement Schedule
Report of Independent Accountants on Financial Statement Schedule.
Schedule II -- Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Commission such
indemnification is
II-2
<PAGE> 64
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officers or controlling persons of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
competent jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered herein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE> 65
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on July 15, 1998.
DATALINK CORPORATION
By: /s/ GREG R. MELAND
------------------------------------
Greg R. Meland
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS, IN THE
CAPACITIES AND ON THE DATES STATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GREG R. MELAND President and Chief Executive Officer July 15, 1998
- --------------------------------------------- and Director (Principal Executive
Greg R. Meland Officer)
/s/ ROBERT D. DEVERE Chief Financial Officer (Principal July 15, 1998
- --------------------------------------------- Financial and Accounting Officer)
Robert D. DeVere
/s/ GREG R. MELAND Director July 15, 1998
- ---------------------------------------------
Robert M. Price*
/s/ GREG R. MELAND Director July 15, 1998
- ---------------------------------------------
James E. Ousley*
/s/ GREG R. MELAND Director July 15, 1998
- ---------------------------------------------
Margaret A. Loftus*
/s/ GREG R. MELAND Director July 15, 1998
- ---------------------------------------------
Paul F. Lidsky*
</TABLE>
* Signed by Greg R. Meland as attorney-in-fact pursuant to a power of attorney
dated June 3, 1998, included in Exhibit 24.1 of the Registration Statement.
II-4
<PAGE> 66
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NO.
- -------------- ----------- --------
<C> <S> <C>
1.1* Form of Underwriting Agreement..............................
3.1* Amended and Restated Articles of Incorporation of
Registrant..................................................
3.2* Restated Bylaws of Registrant...............................
4.1 Specimen Common Stock Certificate...........................
5.1 Opinion of Messerli & Kramer P.A. ..........................
10.1* Employee Stock Purchase Plan................................
10.2* Incentive Compensation Plan.................................
10.3* Credit Agreement with Norwest Bank Minnesota, N.A. .........
10.4* Form of Indemnification Agreement...........................
10.5 Lease Agreement with Washington Avenue L.L.P. ..............
10.6 Deferred Compensation Agreement with Stanley I. Clothier....
10.7 Agreement and Plan of Reorganization with Direct Connect
Systems, Inc. (excluding Schedules and Exhibits which the
Registrant will provide to the Commission upon request). ...
16.1 Letter from Hansen, Jergenson, Nergaard & Co., LLP,
regarding change in certifying accountant...................
23.1 Consent of PricewaterhouseCoopers LLP.......................
23.2 Consent of Hansen, Jergenson, Nergaard & Co., LLP ..........
23.3 Consent of Messerli & Kramer P.A. (included in Exhibit
5.1)........................................................
24.1* Power of Attorney (included in signature page)..............
27.1 Financial Data Schedule (Edgar filing only).................
</TABLE>
- ------------
* previously filed as part of the Registration Statement
II-5
<PAGE> 67
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the financial statements of Datalink
Corporation as of December 31, 1996 and 1997, and for each of the three years in
the period ended December 31, 1997, which financial statements are included in
the Prospectus, we have audited the financial statement schedule listed in Item
16(b) herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material aspects, the information required to be included therein.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 25, 1998, except as
to the first paragraph of
Note 5 and Note 11, as to
which the date is June 2, 1998
and Note 12, as to which
the date is July 15, 1998
S-1
<PAGE> 68
DATALINK CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF (1) END OF
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS PERIOD
- ------------------------------------------------------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts................ 1995 $ 60,000 $ 11,034 $ 26,034 $ 45,000
1996 45,000 69,109 54,109 60,000
1997 60,000 27,235 27,235 60,000
Allowance for Inventory Obsolescence........... 1995 $ 15,000 $113,713 $118,713 $ 10,000
1996 10,000 181,661 91,661 100,000
1997 100,000 -- 75,000 25,000
</TABLE>
- ------------
(1) Deductions reflect write-offs of customer accounts receivable, net of
recoveries or disposals of inventories, net of obsolescence reserve
adjustments.
S-2
<PAGE> 1
<TABLE>
<S> <C> <C>
COMMON SHARES COMMON SHARES
NUMBER SHARES
- --------------------------- ---------------------------
DATALINK LOGO
- --------------------------- ---------------------------
</TABLE>
INCORPORATED UNDER THE LAWS OF THE STATE OF:
MINNESOTA
<TABLE>
<S> <C>
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP: 237934 10 4
</TABLE>
THIS CERTIFIES THAT
IS THE OWNER OF
SHARES OF FULLY PAID AND NONASSESSABLE COMMON STOCK, PAR VALUE $.001 PER
SHARE, OF
----------------
----------------
- ----------------------------------------------
----------------------------------------------
---------------
---------------
DATALINK CORPORATION
TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR
BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY
ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE TRANSFER
AGENT AND REGISTRAR.
WITNESS THE FACSIMILE SIGNATURES OF THE CORPORATION'S DULY AUTHORIZED
OFFICERS.
DATED:
LOGO SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 2
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
(MINNEAPOLIS, MINNESOTA) TRANSFER AGENT AND REGISTRAR
BY AUTHORIZED SIGNATURE
<PAGE> 3
DATALINK CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS, A FULL STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND
RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF THE SHARES OF EACH
CLASS OR SERIES AUTHORIZED TO BE ISSUED BY THE CORPORATION AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS,
SO FAR AS THEY HAVE BEEN DETERMINED, AND THE AUTHORITY OF THE BOARD OF DIRECTORS
OF THE CORPORATION TO DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF
SUBSEQUENT CLASSES OR SERIES.
THE FOLLOWING ABBREVIATIONS, WHEN USED IN THE INSCRIPTION ON THE FACE OF
THIS CERTIFICATE, SHALL BE CONSTRUED AS THOUGH THEY WERE WRITTEN OUT IN FULL
ACCORDING TO APPLICABLE LAWS OR REGULATIONS:
<TABLE>
<S><C>
UNIF GIFT MIN ACT--
TEN COM -- as tenants in common _________Custodian ________________________
(Cust) (Minor)
TEN ENT -- as tenants by the entireties under Uniform Transfers to Minors
Act____________ ___________________________
JT TEN -- as joint tenants with right of (State)
survivorship and not as tenants
in common
UNIF TRF MIN ACT-- ______________ Custodian (until age _______ )
(Cust)
_______________ under Uniform Transfers
to Minors Act ______________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received ________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL
SECURITY OR OTHER
IDENTIFYING NUMBER OF
ASSIGNEE
____________________________________
________________________________________________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
______________________________________________________________________ Shares
of the capital stock represented by the within Certificate,
and do hereby irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named
Corporation with full power of substitution in the premises.
Dated _______________________________________________
_______________________________________________
NOTICE: THE SIGNATURE(S) TO THE ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED
By __________________________________________________________
<PAGE> 1
EXHIBIT 5.1
July 15, 1998
Datalink Corporation
7423 Washington Avenue South
Minneapolis, Minnesota 55439
Re: Initial Public Offering
Ladies and Gentlemen:
We have acted as counsel to you in connection with the filing of a
Registration Statement on Form S-1, SEC File No. 333-55935 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Act"), with
respect to the registration of 2,990,000 shares of Common Stock of Datalink
Corporation, a Minnesota corporation (the "Shares"). We have examined such
documents, records and matters of law as we have deemed necessary for purposes
of this opinion. Based thereon, we are the opinion that the Shares are duly
and validly authorized for issuance and, when issued and paid for, as described
in the Registration Statement, will be validly issued, fully paid and
nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to our name under the heading "Legal Matters" in
the Prospectus. In giving such consent, we do not hereby admit that we come
within the category of persons whose consent is required under Section 7 of the
Act or the rules and regulations of the Securities and Exchange Commission
promulgated under the act.
Very truly yours,
/s/Messerli & Kramer P.A.
<PAGE> 1
EXHIBIT 10.5
EDINA SOUTHWEST BUILDING
LEASE AGREEMENT
THIS LEASE is made and entered into this 26th day of FEBRUARY, 1997 by and
between EDINA SOUTHWEST PARTNERS, a general partnership hereinafter referred to
as "LESSOR" and DATALINK CORPORATION hereinafter referred to as "LESSEE".
WITNESSETH:
In consideration of the mutual covenants, promises, and agreements herein
contained, the parties do hereby agree as follows:
1. DESCRIPTION OF THE PREMISES
LESSOR does hereby lease to LESSEE and LESSEE does hereby lease and take
from LESSOR certain premises consisting of approximately 26,653 square feet
within the building at 7423 WASHINGTON AVENUE SOUTH, EDINA, MINNESOTA
hereinafter referred to as "Premises." These Premises are identified in the
building plans as Suite 2-9 and are more specifically designated in Exhibit "A"
which is made a part hereof. The Premises is measured from the outside of
all exterior walls to the center of tenant division and common area walls and is
hereafter referred to as the "leased premises."
2. TERM
This lease shall be for a term of THREE (3) YEARS commencing on the FIRST
day of JANUARY, 1997 and terminating on the LAST day of DECEMBER, 1999.
3. USE OF PREMISES
It is agreed that the leased premises shall be used by the LESSEE for
OFFICES, LIGHT ASSEMBLY, STORAGE, AND RECEIVING/SHIPPING OF THE LESSEE'S GOODS
AND RELATED ACTIVITIES and for no other purpose; subject to all local, state,
and federal laws and regulations regarding the use of the premises.
4. PARKING AND DRIVES
The LESSEE, its employees, and invitees shall have the nonexclusive right
to use the common driveways and parking lots along with the other tenants,
invitees and customers of the building. The use of such driveways and parking
facilities are subject to such reasonable rules and regulations as the LESSOR
may impose. No more than 60 parking spaces are to be occupied at any one time
by the LESSEE, its employees and invitees. The LESSEE further agrees not to
use, or permit the use by its employees, the parking areas for the overnight
storage of automobiles or other vehicles without the written permission of the
LESSOR.
5. NET LEASE
This is a "net" Lease, and LESSOR shall not be required to provide any
services or do any acts in connection with the leased premises not specifically
set forth in this Lease. As hereinafter further described in the Lease the
LESSEE is responsible for and shall pay all utility charges, trash removal, its
proportionate share of real estate taxes including installments of special
assessments and its proportionate share of the building's operating expenses.
For purposes of computing the share of the building that is leased to the
LESSEE, it is mutually determined and agreed that the net rentable are of the
building consists of 76,243 square feet, that the leased premises of LESSEE is
26,653 square feet, and accordingly, the LESSEE's percentage and proportionate
share for purposes of allocating real estate taxes and assessments and
operating expenses is 34.96%. Also, for the partial years at the beginning and
end of this Lease, the "LESSEE" shall only be responsible for its share of
costs for the portion of the year that the Lease is in effect.
6. RENT
LESSEE shall pay as annual rent for the leased premises, the sum of ONE
HUNDRED THIRTY-FIVE THOUSAND EIGHT HUNDRED SIXTY-FOUR DOLLARS AND NO/100
($135,864.00) payable in equal monthly installments of ELEVEN THOUSAND THREE
HUNDRED TWENTY-TWO DOLLARS AND NO/100 ($11,322.00) in advance of the first
business day of each month during the full term hereof. In the event the
original term hereof shall commence on a day other than the first day of a
month, then a prorate rent payment shall be made paying the rent through the
end of the first partial month. All rental payments required hereunder shall
be paid to LESSOR at such place as LESSOR indicates on the rent statement of
may otherwise direct in writing from time to time. ALSO SEE PARAGRAPHS #24 AND
34.
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<TABLE>
<CAPTION>
APPROXIMATE AREAS
-----------------
FOR RENTAL CALCULATIONS ACTUAL FINISH
<S> <C> <C> <C> <C>
Office: 1st floor 9282 SF 13,678 SF
2nd floor 1740 SF 1740 SF
Whse: 1st Floor 14,761 SF 10,365 SF
2nd Floor 0 SF 0 SF
Other: 1st Floor 0 SF 0 SF
2nd Floor 870 SF 870 SF
TOTAL AREA 26,653 SF
</TABLE>
7. TAXES AND SPECIAL ASSESSMENTS
Commencing with the real estate taxes and installments of special
assessments payable in the year this Lease commences the LESSEE shall pay to
LESSOR, as additional rent for and during the full term of this Lease, its
proportionate share of any and all such real estate taxes and installments of
special assessments which are levied, assessed or charged against the entire
property. As the dollar amount will not be known at the beginning of each
calendar year, LESSOR shall make a reasonable estimate of what the amount will
be for that year, and LESSEE shall pay an estimated share each month. The first
of the month after LESSOR has received the actual real estate tax statement and
sent a copy to the LESSEE an adjustment shall be made for any difference
between that which the LESSEE paid and that which it should have paid. LESSEE
shall then start paying its prorata share monthly based upon the actual tax
statement
8. OPERATING EXPENSES
The LESSEE shall pay, as additional rent, when billed by LESSOR, its
proportionate share of the following operating expenses during the full term of
this Lease:
(a) City water and sewer charges, except where used by tenants in
substantial amounts for production and is therefore separately
metered, and the monitoring surveillance of the fire protection
system.
(b) Lawn care, snow and litter removal, and the repair and maintenance
as reasonably required for parking lots, drives, sidewalks and
landscaped areas.
(c) Electrical service for the trash and mechanical room and or
exterior lighting, replacement of bulbs used for exterior
lighting, and trash removal from the common area trash room
serving the LESSEE, if any.
(d) All insurance that is maintained by LESSOR with respect to the
building, for fire and extended coverage, loss of rents insurance
or business interruptions and general liability insurance.
(e) All other necessary maintenance, replacement, and repair, to the
exterior of the building except, structural maintenance which is
the responsibility of LESSOR, and that which is covered by
manufacturer or sub-contractor warranties.
(f) Property management expenses, except for re-leasing commissions
and special services not related to the ongoing operation of the
building, of four percent (4.00%) of the rents and additional
rents collected.
LESSOR agrees to exercise due care and diligence to obtain these
operating expense services and supplies at competitive and reasonable market
costs with acceptable quality and service standards. LESSOR shall have the
right to invoice these costs monthly to LESSEE on an estimated basis, making
adjustments to actual costs periodically (but at least annually) as operating
reports are available.
9. UTILITIES
LESSEE is responsible and shall pay for all utility services. The
LESSEE is separately metered for gas and electricity and will deal with the
utility companies for service requirements and billing.
In the event the LESSEE uses water and sewer in substantial amounts or
for production purposes, the LESSOR shall install at LESSEE'S expense a water
meter to sub-meter said water and sewer, and shall charge LESSEE for said
water and sewer at rates as charged by the City of Eden Prairie.
LESSOR shall not be liable to LESSEE for any loss or damage of any kind
of description whatsoever caused or sustained by reason of failure of the
heating or ventilating and air conditioning system servicing the leased
premises or because of inability to obtain energy or utilities for any reason
beyond LESSOR's control.
10. INSURANCE
The LESSEE shall maintain in full force and effect during the term
hereof, a policy of public liability insurance under which the LESSOR and
LESSEE are named insured. The minimum limits of liability for such insurance
shall be $500,000.00 combined single limit for bodily injury and property
damage. LESSEE agrees to deliver a duplicate copy of said policy, or a
certificate of insurance evidencing such coverage, to LESSOR.
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<PAGE> 3
Such policy shall contain a provision requiring ten (10) days written notice to
the LESSOR before cancellation of the policy can be effected.
The LESSOR shall carry and cause to be in full force and effect a fire
and extended coverage insurance policy on the building, but not contents owned,
leased to or otherwise in possession of the LESSEE. Such policy shall contain a
provision that the policy shall not be canceled except upon ten (10) days
written notice to the LESSEE.
Each insurance policy carried by either the LESSOR or LESSEE covering
the leased premises or its contents shall provide that the insured party has
relinquished all rights to recover against the other party for loss or damage
resulting from perils insured against by the policy. LESSOR and LESSEE each
hereby waive any claim based upon liability which may arise against the other
so far as the claim relates to loss or damage to the premises or contents
which is covered by insurance.
The LESSOR agrees to carry a fire and extended coverage insurance
policy on the building which covers, without any rating surcharge, a wide range
of uses. The uses set forth in Paragraph 3 of this Lease falls within such wide
range of uses. In the event, however, the LESSEE's change in use of the premises
or contents kept in the premises, or refusal to follow directions from the Fire
Inspection Bureau, or general housekeeping cause the fire and extended coverage
insurance premiums for the building to increase then the LESSEE agrees to pay
such additional premium in equal monthly installments.
11. MAINTENANCE
The LESSEE shall be wholly responsible for the maintenance and repair
of the interior of the leased premises, and will keep them in as good condition
as when turned over to it, reasonable wear and tear and damage by fire and the
elements excepted.
The LESSEE agrees to keep the leased premises in a clean, orderly and
sanitary condition and will neither do nor permit to be done therein anything
which is in violation of insurance policies on the building or that is contrary
to law.
The LESSEE will neither commit nor suffer waste to the building or to
the leased premises.
The maintenance and repair obligations of the LESSEE specifically
extend to all interior walls and to all doors, windows, plumbing, heating and
cooling systems, and electrical fixtures that serve the leased premises, except
as these obligations may be covered by manufacturer or contractor warranties.
The LESSOR agrees to cooperate with and reasonably assist LESSEE in pursuing
such warranties which are still in effect.
The LESSEE is responsible for snow removal two feet out from doors and
entries.
The LESSOR shall at its own expense keep in good order, safe condition
and repair the structural parts of the building in which the leased premises
are located, except where repairs to the structural parts are required due to
the fault or negligence of the LESSEE, its employees or invitees, in which case
the LESSEE shall be responsible.
12. APPEARANCE AND ACCESS
LESSOR and LESSEE mutually agree to keep the grounds, building, leased
premises and common areas in a condition of good repair and appearance as their
respective responsibilities and rights may allow. LESSOR shall provide general
access to LESSEE and its invitees to the common areas except as reasonable
security requirements and temporary conditions may prevent, and shall make a
reasonable effort to keep the common areas well maintained and free of nuisance.
LESSOR may establish and LESSEE will abide by reasonable rules for parking,
security, handing of trash and like procedures.
LESSEE agrees to keep all of its trash containers, pallets, dumpsters,
refuse and waste within its leased premises OR NEAR ITS TRUCK DOCKS.
13. LESSOR'S RESPONSIBILITY
LESSOR agrees that prior to the commencement of the term hereof, at its
sole cost and expense, it will make the following improvements, if any,
alterations, or maintenance efforts for the benefit of the LESSEE.
THE LESSOR SHALL BE RESPONSIBLE FOR THE COSTS OF IMPROVEMENTS AND
ALTERATIONS REQUESTED BY THE LESSEE UP TO $965.00. THE LESSEE SHALL PAY ANY
COSTS IN EXCESS OF $965.00.
LESSEE acknowledges that, upon occupancy hereof, it will cause the
leased premises to be inspected in order to ascertain the condition thereof;
that any objections (except for latent deficiencies not currently discoverable)
thereto not delivered in writing to LESSOR within 20 days after occupancy shall
be deemed waived.
14. CONDEMNATION LOSS
Should all the leased premises be taken in condemnation proceedings or
by exercise of any right of eminent domain, then this Lease shall automatically
terminate as of the date the condemning authority or the authority exercising
its right of eminent domain takes possession of the leased premises. If there
is a partial taking but LESSEE continues to occupy the premises in part, the
rent shall be reduced in the proportion that the unoccupied part of the
premises bears to the entire premises.
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<PAGE> 4
if, as a result of a partial taking, the leased premises are no longer usable
for the purposes specified in Paragraph 3 of this Lease, then, in any such
case, the LESSEE may terminate this Lease as of the date the condemning
authority or the authority exercising its right of eminent domain takes
possession of the property by giving written notice thereof to the LESSOR. The
LESSOR shall be specifically entitled to all awards for condemnation.
15. ASSIGNMENT
The LESSEE will not assign this Lease, and will not sublet any part of
said premises without the prior written consent of the LESSOR. Said consent
will not be unreasonably withheld. Any such assignment or subletting will not
release the LESSEE from its responsibilities under this Lease, unless expressly
agreed to in writing by the LESSOR. The LESSOR shall have the right to any
profit made in such assignment or subletting, but only in the event that the
LESSEE is using less than one-half of its leased premises for its business
operation. If the LESSEE shall be declared bankrupt, shall have a receiver
appointed of its property, shall make an assignment for the benefit of
creditors, or its rights hereunder shall be taken under execution; it shall be
construed as an assignment of this Lease within the meaning hereof, the LESSOR
shall have the right to terminate this Lease.
16. BREACH BY TENANT
In the event that the LESSEE shall vacate or abandon said premises or
shall default in any of its covenants herein, and said default shall not be
removed within 10 days after notice thereof in writing from the LESSOR, the
LESSOR is hereby authorized to re-enter said premises to eject the LESSEE, and
take full possession of said premises, to terminate this Lease at its option,
and to lease and let said premises as to it shall seem best, to remove from
said premises all personal property of the LESSEE, and to store the same to the
account and at the expense and risk of the LESSEE, and to sell said property or
any part thereof, and out of the proceeds to pay all expenses of so removing,
storing, and selling the same, and all sums which shall then be in arrears or
past due for rent. No such act or acts of the LESSOR shall be construed as
cancellation of the Lease or waiver of said term, except exercise of its option
to terminate the same.
In case the LESSOR shall determine that an action or proceeding at law
or otherwise is necessary to enforce the terms and conditions hereof, the
LESSEE agrees that necessary costs and; reasonable attorney's fees and
disbursements thereof; and brokerage fees to re-lease said premises may be
allowed and taxes against it along with annual interest in the amount of 12% or
the maximum amount allowed by law whichever is less.
17. ALTERATIONS
The LESSEE shall not make any alterations to the leased premises
without the written consent of the LESSOR, such consent not to be unreasonably
withheld. If the LESSEE shall desire to make any such alterations, an accurate
description shall first be submitted to and approved by the LESSOR and shall be
done by the LESSEE at its own expense. LESSEE agrees that all such work shall
be done in a good, workmanship like manner, and in conformance with applicable
building codes, that the structural integrity of the building shall not be
impaired, and that no liens shall attach to the premises by reason thereof. The
LESSOR DECLARES that all such alterations MADE IN THE PAST AND TO BE MADE IN
1997 HAVE THE LESSOR'S CONSENT. THE LESSEE SHALL HAVE NO OBLIGATION TO RESTORE
the premises to its original condition FOR SUCH IMPROVEMENTS. Any such
alterations shall become the property of the LESSOR WHEN THE LESSEE VACATES THE
PREMISES and all right, title and interest therein of the LESSEE shall
immediately cease unless otherwise stated in writing. The LESSEE however, shall
remain the owner of any installed trade fixtures and shall have the right to
remove such trade fixtures at the expiration of this Lease Agreement, so long
AS REPAIRS ARE MADE WHERE ITEMS WERE REMOVED.
18. SIGNS
The LESSEE shall have the right, at its own risk and expense, to place
signs identifying its business on the exterior walls of the building and next
to any doors opening directly into the premises, so long as all such signs
conform with the LESSOR's building standards and criteria and with all
applicable zoning laws. Said signs shall not be erected without the written
prior approval of the LESSOR. LESSEE agrees to maintain its signs in good
repair, to remove its signs at the end of the term or any extended term,
repairing any damage caused by such removal, and to hold LESSOR harmless from
any loss, cost, or damages resulting from the erection, existence, maintenance,
or removal or LESSEE's signs. The LESSEE agrees not to place signs on or near
its window(s) which are easily visible from the exterior. The LESSOR reserves
the right to remove all unapproved signs at the expense of the LESSEE.
19. ENTRY
The LESSOR shall have the right to keep pass keys to the leased
premises. The LESSEE agrees that no additional locks will be placed on any of
the LESSEE's doors without the written consent of the LESSOR. THE LESSOR HEREBY
CONSENTS TO ALL LOCKS INSTALLED AS OF THE SIGNING OF THIS LEASE AGREEMENT.
LESSOR, its agents, and its employees shall have the right to enter the
premises at all reasonable times with representative of LESSEE present to
inspect them, to make repairs, and to maintain the building of which the
premises are a part. During the ninety days prior to the expiration of the
term, the LESSOR or its agents may exhibit the premises to prospective Lessees.
LESSOR shall also have the right of entry as provided in Paragraph 16.
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<PAGE> 5
20. SUBORDINATION
It is mutually agreed that this Lease shall be subordinate to any and
all mortgages, ground leases, or other securities, including any renewals,
modifications, consolidations, replacements and extensions thereof now or
hereafter recorded against the leased premises by the LESSOR. LESSEE's right
to quiet possession of the premises shall not be disturbed if LESSEE is not in
default and so long as LESSEE shall pay the rents and observe and perform all
of the provisions of this Lease, unless this Lease is otherwise terminated
pursuant to its terms.
21. NOTICES
All notices, consents, demands and requests which may be or are
required to be given by either party of the other, shall be in writing, and
sent by United States registered or certified mail, with return receipt
requested, addressed to the LESSEE at the street address set forth in Paragraph
1 and to the LESSOR in care of SCHOENING PROPERTIES, INC. 5325 WEST 74TH
STREET, SUITE 8, EDINA, MINNESOTA 55439 or to such other address as LESSOR
may direct in writing in the future.
The date which said registered or certified mail is mailed by the
LESSOR shall be conclusively deemed to be the date on which a notice, consent,
demand, or request is given or made. The above address of a party may be
changed at any time of from time to time by notice given by said party to the
other party in the manner herein above provided.
22. SHORT FORM LEASE
The parties hereto shall, at the option of either party, execute a
short form of lease for recording purposes and, in such event, the terms
thereof shall constitute a part of this Lease as fully as though recited at
length herein.
23. ASSUMPTION
The LESSOR may assign its right, title, and interest in this Lease,
and such assignment shall thence terminate all the LESSOR's obligations so
long as the LESSOR is not in default when such assignment is made and the
assignee assumes the LESSOR's responsibilities thereafter. This Lease and all
the covenants, terms, provisions and conditions herein contained shall inure to
the benefit, and be binding upon the LESSOR and LESSEE, their respective
successors and assigns.
24. OCCUPANCY
THE LESSEE IS IN OCCUPANCY OF ALL OF THE LEASED PREMISES EXCEPT FOR
BAY 8 AND 9. IN THE EVENT BAY 8 HAS NOT BEEN VACATED BY AD&P AS OF THE
COMMENCEMENT DATE, THEN THE LESSOR AND LESSEE AGREE THAT THERE SHALL BE A
REDUCTION IN RENT AS SET FORTH IN PARAGRAPH 6 FOR SIXTY DOLLARS AND NO/100
($60.00) PER DAY, A REDUCTION IN THE ADDITIONAL RENT FOR TAXES AND OPERATING
EXPENSES OF TWENTY-TWO DOLLARS AND NO/100 ($22.00) PER DAY, AND THE LESSEE
SHALL NOT BE OBLIGATED TO PAY UTILITIES FOR ANY AREA THAT HAS NOT BEEN VACATED.
IN THE EVENT BAY 9 HAS NOT BEEN VACATED BY AD&P AS OF THE COMMENCEMENT
DATE, THEN THE LESSOR AND LESSEE AGREE THAT THERE SHALL BE A REDUCTION IN THE
RENT AS SET FORTH IN PARAGRAPH 6 OF FIFTY-THREE DOLLARS AND NO/100 ($53.00)
PER DAY, A REDUCTION IN THE ADDITIONAL RENT FOR TAXES AND OPERATING EXPENSES
OF TWENTY-TWO DOLLARS AND NO/100 ($22.00) PER DAY, AND THE LESSEE SHALL NOT BE
OBLIGATED TO PAY UTILITIES FOR ANY AREA THAT HAS NOT BEEN VACATED. FURTHER,
COMMENCING ON THE DAY THAT BAY 9 IS VACATED, THE LESSOR AGREES TO REDUCE THE
RENT DUE UNDER PARAGRAPH 6 BY ONE THOUSAND FIVE HUNDRED EIGHTY-SEVEN DOLLARS
AND NO/100 ($1587.00) PER MONTH FOR TWO (2) MONTHS. THEREAFTER THE LESSOR
AGREES TO REDUCE THE MONTHLY RENT DUE FOR BAY 9 BY FIVE HUNDRED EIGHTY-SEVEN
DOLLARS AND NO/100 ($587.00) PER MONTH FOR THREE ADDITIONAL MONTHS.
25. CLAIMS
The LESSEE will make no claims against the LESSOR for any loss of or
damage to property caused by theft, burglary, water, gas, electricity or other
means, unless the cause of such loss or damage is the direct result of the
gross negligence or the willful misconduct of the LESSOR, its employees, or
agents.
26. FIRE REPAIR
In the event of damage to the premises by fire, the elements or other
casualty, LESSOR shall repair the damage with reasonable dispatch, unless
mortgagee or financial participant, who from time to time might have an
interest in on the demised premises, shall require that the fire insurance
proceeds be used to reduce its interest or the indebtedness on the premises. If
the damage renders the premises untenantable in whole or in such part that it
is impractical to conduct business therein, the rent shall wholly abate until
the damage has been repaired. If the damage renders the premises untenantable
in part but LESSEE continues to occupy them in part, the rent shall be reduced
in the proportion that the unoccupied portion of the premises bears to the
entire premises, until the damage has been repaired.
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part, the rent shall be reduced in the proportion that the unoccupied portion
of the premises bears to the entire premises, until the damage has been
repaired.
27. QUIET ENJOYMENT
LESSEE, upon payment of the rent herein reserved and upon performance
of all of the terms, covenants and conditions of this Lease by it to be kept
and performed, shall at all times during the term hereof or during any
extension or renewal hereof, peaceably and quietly enjoy the leased premises
without any disturbance from LESSOR or from any other person claiming through
LESSOR. Upon expiration or sooner termination of the term hereof, LESSEE
shall surrender the leased premises in good condition and repair, except for
reasonable wear and tear, condemnation and casualty.
28. HOLDING OVER
If LESSEE shall hold over the leased premises or any part thereof
after the expiration of the term hereof such holding over shall be construed
only to be a tenancy from month to month subject to all of the covenants,
conditions an obligations hereof except that the rent shall be 150% of the
amount shown in paragraph 6. Nothing herein shall be construed to give LESSEE
any rights to hold over and to continue in possession of the leased premises
after the expiration of the term hereof.
29. DEPOSIT
NO SECURITY DEPOSIT REQUIRED.
30 OTHER PROVISIONS
The invalidity or unenforceability of any provision hereof shall not
effect or impair the validity of any provision.
The headings herein are inserted only for convenience and reference
and shall in no way define, limit, or describe the scope or intent of any
provisions of this Lease. As used herein and where necessary, the singular
imports the plural and vice versa, and masculine, feminine and neuter pronouns
and expressions are interchangeable.
The covenants and agreements herein contained shall bind and shall
inure to the benefit of the LESSOR and LESSEE, their respective heirs,
administrators, legal representatives, successors and assigns.
During the term of this Lease Agreement, in the event the LESSEE
should pay to the LESSOR an amount which is less than the amount due at that
time, and the LESSOR receives and deposits such payment, such receipt and
deposit shall not be assumed to be payment in full, but rather partial payment
toward the LESSEE's account.
This Lease shall be governed by, construed and enforced in accordance
with the laws of the State of Minnesota.
One or more waivers of any covenant, term or condition of this Lease
by either party shall not be construed by the other party as a waiver or
subsequent breach of same covenant, term or condition. The failure or delay
on the part of the other party to enforce or exercise at any time any of the
provisions, rights or remedies of this Lease shall in no way be construed to be
a waiver thereof nor in any way effect the validity of this Lease or any part
thereof or the right of the party to thereafter enforce each and every such
provision, right or remedy.
31. DISCLOSURE STATEMENT
The LESSEE is hereby informed that H. M. "Bud" Schoening, Jr. is a
partner in the partnership that owns the property, and is also acting as
leasing agent in this transaction.
32. EXHIBITS AND ADDENDUMS
This instrument contains all of the agreements made between the
parties and may not be modified orally or in any manner other than by agreement
in writing signed by all parties to this Lease. The following exhibits and
addendums are attached and hereby made a part of this Lease:
Exhibit A(1) Building Floor Plan
33. OPTIONS TO EXPAND
THE LESSEE SHALL HAVE THE RIGHT AND OPTION TO EXPAND ITS LEASED
PREMISES TO THE SOUTH, TAKING ALL OF PORTIONS OF BAYS 1, 2, AND 3 AT 7435
WASHINGTON AVENUE AND MARKED AS THE "SOUTH EXPANSION" ON EXHIBIT A, ON THE
FOLLOWING TERMS AND CONDITIONS:
1.) THE LESSOR SHALL OFFER SUCH AREA TO THE LESSEE AS AN
EXPANSION AREA ANY TIME FROM JUNE 1, 1997 TO JUNE 1, 1998.
2.) THE BASE RENT FOR SUCH SPACE IF ANY AND WHEN IT IS LEASED
TO THE LESSEE
OFFICE AREA ON 1ST FLOOR @ $7.75 PER SQ. FT.
OFFICE AREA ON 2ND FLOOR @ $6.50 PER SQ. FT.
WAREHOUSE AREA @ $3.75 PER SQ. FT.
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<PAGE> 7
3.) The LESSOR shall notify the LESSEE at least four (4) months
in advance of the impending lease expiration/space
availability, and the LESSEE agrees to notify the LESSOR of
its intent to add such space to its leased premises within
thirty (30) days of such LESSOR notification.
4.) The LESSEE agrees to accept the space "as is".
34. IMPROVEMENT AMORTIZATION
The LESSEE agrees to pay each and every month, in addition to and along
with the rent set forth in paragraph 6 herein, the amount of One Thousand Three
Hundred Dollars ($1,300.00) for the amortization of improvements.
The signatories below warrant that they are duly authorized to enter into this
Lease representing the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed
the day and year first above written.
EDINA SOUTHWEST PARTNERS DATALINK CORPORATION
By HM Schoening, Jr. By Greg Meland
---------------------------------- -------------------------------
Partner
By Its President & CEO
---------------------------------- ------------------------------
[SIG]
-------------------
Secretary/Treasurer
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AGREEMENT
January 27, 1997
RE: Improvement cost borne by the Edina Southwest Partners for Datalink
Corporation improvements that were Datalink's responsibility.
Parties: Edina Southwest Partners
- hereinafter referred to as the Lessor, and
Datalink Corporation
- hereinafter referred to as the Lessee
The Parties agree to the following:
1.) The Lessee agrees to pay Twelve Thousand Dollars ($12,000.00) as
its share in excess of $68,000.00 for improvements to the
expansion and remodeling done in 1994.
2.) All other costs for improvements (i.e. extra improvements after
the 1994 remodeling and the construction of a picnic area) have
been eliminated in exchange for a reduction of the Lessor's
improvement obligation under the new Lease Agreement dated
February 26, 1997. Therefore, with the payment of the above
mentioned $12,000, all of the Lessee's obligations to the Lessor
for improvement costs of both labor and materials shall be fully
satisfied.
With their signatures below, the Parties indicate their agreement with the
foregoing:
Lessor: Edina Southwest Partners Lessee: Datalink Corporation
by HM Schoening, Jr. by Greg Meland
------------------------------------ ------------------------------------
its Partner its President & CEO
------------------------------------ ------------------------------------
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<PAGE> 9
ASSIGNMENT AND ASSUMPTION AGREEMENT
(TENANT LEASES AND SECURITY DEPOSITS)
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is made as of this 30th day of
June, 1997, by and between Edina Southwest Partners, a Minnesota general
partnership (hereinafter "Seller") and 7423 Washington Avenue L.L.P., a
Minnesota limited liability partnership (hereinafter "Purchaser").
RECITALS
A. Seller and Purchaser have entered into a purchase agreement dated
June 30th, 1997 (the "Agreement") whereby Seller agreed to sell to Purchaser and
Purchaser agreed to purchase from Seller, certain real property and
improvements located at 7401-7435 Washington Avenue South, Edina, Minnesota
55439, and more fully described in Exhibit A attached hereto (the "Property").
B. The Agreement obligates Seller to assign to Purchaser at closing
certain tenant leases and security deposits in connection with the Property,
and obligates Purchaser to assume Seller's duties as landlord thereunder from
and after the date of closing.
C. By warranty deed dated as of the date hereof (the "Deed"), to be
recorded in the office of the Registrar of Titles for Hennepin County,
Minnesota concurrently with the delivery hereof, Seller has conveyed the
Property, with all improvements thereon, to the Purchaser.
AGREEMENT
NOW, THEREFORE, in consideration of the Agreement and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Seller and Purchaser hereby agree as follows:
1. Assignment and Assumption of Leases. Seller hereby sells, assigns,
transfers and conveys unto Purchaser, its successors and assigns, all of
Seller's right, title and interest in and to the tenant leases described on the
schedule attached hereto as Exhibit B (the "Leases"), which Seller certifies to
be complete and correct to the best of its knowledge, as of June 30th, 1997,
together with all rents payable thereunder on and after the date hereof. By
its execution hereof, Purchaser agrees to assume and be bound by and timely
perform, observe, discharge and otherwise comply with each and every one of
Seller's duties, obligations, covenants and undertakings accruing on or after
the date hereof under the Leases, including without limitation, those
obligations relating to the "Deposits" referred to in paragraph 2 hereof.
2. Deposits. Seller hereby sells, assigns, transfers and conveys unto
Purchaser, and its successors and assigns, all of Seller's right, title and
interest in and to the security and other deposits (the "Deposits") described
on the attached Exhibit B, which Seller certifies to be true, complete and
correct to the best of its knowledge as of June 30th, 1997, together with any
interest thereon which may be required by law or by the Leases to be accrued
for the benefit of the tenants.
<PAGE> 10
3. Representations and Warranties of Seller. Seller hereby
represents and warrants to the Purchaser that Seller has good title to, and
good right to assign and transfer, said Leases in manner and form aforesaid;
that Seller's interest in said Leases are free and clear of all liens, charges
and encumbrances; and that no rents have been prepaid under the Leases more
than thirty (30) days in advance of the date hereof, except as may be disclosed
on Exhibit B.
4. Indemnification. Purchaser covenants to hold Seller harmless
from and indemnify Seller against any claim, loss, damage, cost or expense
(including reasonable attorneys' fees and court costs) that Seller may incur
from and after the date hereof as a result of the failure of Purchaser to
perform any of its obligations with respect to the Deposits or under the Leases
from and after the date hereof. Seller covenants to hold Purchaser harmless
from and indemnify Purchaser against any claim, loss, damage, cost and expense
(including reasonable attorneys' fees and court costs) that Purchaser may incur
from and after the date hereof as a result of (a) the failure of Seller to
perform any of its obligations with respect to the Deposits and under the Leases
up to the date hereof and (b) the breach of the representations and warranties
made by Seller under paragraph 3 hereof.
5. Further Assurances. Seller and Purchaser hereby covenant and
agree to sign, execute and deliver, or cause to be signed, executed or
delivered and to do or make, or cause to be done or made, upon request of
either party, any and all agreements, instruments, papers, deeds, acts or
things, supplemental, confirmatory or otherwise, as may be reasonably required
for the purpose of or in connection with acquiring or more effectively vesting
in Purchaser or evidencing the vesting in Purchaser of the right, title and
interest of Seller granted, conveyed, bargained, sold, assigned, transferred,
set over or delivered or intended to be granted, conveyed, bargained, sold,
assigned, transferred, set over or delivered, hereby or hereunder and the
assumption of the obligations of Seller referred to herein.
6. Tenant Leases and Files. Purchaser acknowledges that, along with
all of the Leases, Seller has transferred all files of Tenants to Purchaser,
which include applications and correspondence. Purchaser covenants and agrees
to maintain the Leases and the files of Tenants in a manner customary to
similar office-warehouse complexes in Edina, Minnesota for a period not to
exceed two (2) years, and upon the request of Seller, to provide Seller access
to the Leases and to the files of Tenants during normal business hours for any
reasonable purpose.
7. Governing Law. This Assignment and Assumption Agreement and all
other instruments referred to herein shall be governed by, and shall be
construed in accordance with, the laws of the State of Minnesota.
8. Successors and Assigns. This Assignment and Assumption Agreement
and the terms and provision hereof shall inure to the benefit of, and shall be
binding upon, the respective successors and assigns of Seller and Purchaser.
2
<PAGE> 11
9. Incorporation by Reference. All of the Exhibits attached hereto or
referred to herein and all documents in the nature of such Exhibits are by
reference incorporated herein and made a part of this Assignment and Assumption
Agreement.
10. Survival. The terms and conditions of this Assignment and Assumption
Agreement shall survive the Closing.
IN WITNESS WHEREOF, the Seller and the Purchaser have caused this
Assignment and Assumption Agreement to be executed on their behalf by their
duly authorized representatives as of the date first above written.
SELLER:
EDINA SOUTHWEST PARTNERS,
a Minnesota general partnership
By: HM "Bud" Schoening
-------------------------------------
Its General Partner
PURCHASER:
7423 WASHINGTON AVENUE L.L.P.,
a Minnesota limited liability partnership
By: Greg Meland
-------------------------------------
Greg Meland
Its Managing Partner
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 30th day of June,
1997, by HM Bud Schoening, the General Partner of Edina Southwest Partners, a
Minnesota general partnership, on behalf of the partnership.
[SEAL]
JANE M. MILLER
NOTARY PUBLIC-MINNESOTA
WASHINGTON COUNTY Jane M. Miller
MY COMMISSION EXPIRES JAN. 31, 2000 -------------------------------------
Notary Public
3
<PAGE> 12
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 30th day of June,
1997, by Greg Meland, the Managing Partner of 7423 Washington Avenue L.L.P., a
Minnesota limited liability partnership, on behalf of the partnership.
[SEAL]
JANE M. MILLER
NOTARY PUBLIC-MINNESOTA
WASHINGTON COUNTY Jane M. Miller
MY COMMISSION EXPIRES JAN. 31, 2000 -------------------------------------
Notary Public
4
<PAGE> 13
EXHIBIT A
Legal Description
The South 148.24 feet of Tract D, Tract E, Registered Land Survey No. 1253,
according to the recorded plat thereof, Hennepin County, Minnesota,
Subject to a limitation of the right of access being the right of ingress to
and egress from that part of above land onto County State Aid Highway No. 18 as
shown in deed Document No. 876314.
5
<PAGE> 14
EXHIBIT B
Rent Roll and Security Deposit List
6
<PAGE> 15
EDINA SOUTHWEST PARTNERS - JUNE, 1997
EXHIBIT B
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ACCT/ BASE AMORT TOTAL SECURITY DEPOSITS
- ------------------------------------------------------------------------------------------------------------------------------------
ADDRESS TENANT RENT TAXES CAC IMPR. INVOICE HELD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
7401 Closets By Design 3,490.00 1,191.34 499.11 5,180.45 3,490.00
- ------------------------------------------------------------------------------------------------------------------------------------
7403 Statice Fonts/Joy Wise 425.00 425.00 425.00
- ------------------------------------------------------------------------------------------------------------------------------------
7404 Richard Hanson 700.00 700.00 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
7419 ADP 9,600.00 3,054.04 1,279.49 13,933.53 850.00
- ------------------------------------------------------------------------------------------------------------------------------------
7423 Datalink 10,735.00 2,989.90 1,252.62 1,300.00 16,277.52 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
7435 Donlin Company 3,995.51 1,181.08 494.81 5,671.40 3,765.00
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 28,945.51 8,416.36 3,526.03 1,300.00 42,187.90 8,530.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 1
<PAGE> 1
EXHIBIT 10.6
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT, made this 1st day of April, 1992, by and between Stanley I.
Clothier (the "Employee") and Datalink Corporation, a corporation organized and
existing pursuant to the laws of the State of Minnesota (the "Corporation").
RECITALS:
A. Employee is a key employee of the Corporation who has rendered
invaluable services to the Corporation; and
B. The Corporation wishes to offer an inducement to Employee to remain as
an employee in the form of additional compensation for services which he will
hereafter render; and
C. Employee is willing to continue in his position of employment with
the Corporation on the basis stated herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants as
hereinafter set forth, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. Employment. The Corporation will employ Employee at such rate of
compensation as may be so determined. The Employee will devote his energy,
skill and best efforts to the affairs of the Corporation as required.
Employment will continue from the date of execution of this Agreement until
December 31, 1994, but, nevertheless, either Corporation or Employee may
terminate said employment at any time for any reason upon thirty (30) days'
written notice to the other.
2. Deferred Compensation in the Event of Involuntary Termination,
Retirement, Death or Disability. In the event of Employee's involuntary
termination of employment with the Corporation, his retirement on December 31,
1994, his death or his disability, the Corporation shall pay to the Employee or
to his estate a monthly income of $7,000 for sixty (60) months. This benefit
shall commence January 1, 1995, and shall continue each month thereafter until
paid; provided, however, that any payment of monthly income shall be further
deferred if, after giving effect to such payment, the Corporation will not be
in full compliance with all of the covenants and conditions contained in the
General Credit and Security Agreement dated December 29, 1989, between the
Corporation and Fremont Financial Corporation, and any amendments thereto or
successor credit agreements (collectively referred to as the "Credit
Agreement"). Any such payment or payments further deferred shall be deferred
until such time as the Corporation shall be in full compliance with the Credit
Agreement, after giving effect to such payment or payments.
<PAGE> 2
3. Deferred Compensation in the Event of Voluntary Termination of
Employment. In the event of Employee's voluntary termination of employment
with the Corporation, the Corporation shall pay to the Employee or his estate a
defined percentage of the monthly income under paragraph 2 for sixty (60)
months. The defined percentage shall be a fraction, the numerator of which
shall be the number of months after December 31, 1991 Employee shall be
employed by the Corporation and the denominator of which shall be thirty-six
(36). This benefit shall commence January 1, 1995, and shall continue each
month thereafter until paid; provided, however, that any payment of monthly
income shall be further deferred if, after giving effect to such payment, the
Corporation will not be in full compliance with all of the covenants and
conditions contained in the General Credit and Security Agreement dated
December 29, 1989, between the Corporation and Fremont Financial Corporation,
and any amendments thereto or successor credit agreements (collectively
referred to as the "Credit Agreement"). Any such payment or payments further
deferred shall be deferred until such time as the Corporation shall be in full
compliance with the Credit Agreement, after giving effect to such payment or
payments.
4. Conditions Precedent to Entitlement to Deferred Compensation. The
Employee acknowledges that, if he were to compete with the Employer in the
computer business, it would cause serious harm to the Employer. Therefore, if
the Employee voluntarily terminates his employment with the Corporation,
Employee covenants that he will not engage in any business which competes with
the Corporation for a period of five (5) years after termination of employment.
In the event of a violation of this covenant, the deferred compensation payable
under this Agreement shall immediately cease, and no further deferred
compensation shall be due and payable to the Employee.
5. Source of Payments. The Employee and the estate of the Employee
and any other person or persons having or claiming a right to payments
hereunder or to any interest in this Agreement shall rely solely on the
unsecured promise of the Corporation set forth herein, and nothing in this
Agreement shall be construed to give the Employee, the estate of the Employee
or any other person or persons any right, title, interest or claim in or to any
specific asset, fund, reserve, account or property of any kind whatsoever owned
by the Corporation or in which it may have any right, title or interest now or
in the future, but Employee shall have the right to enforce his claims against
the Corporation in the same manner as any unsecured creditor.
6. Inclusion of Employment Taxes and Retirement Benefits. All
deferred compensation received pursuant to this Agreement shall be inclusive of
any employment taxes, including, but not limited to, FICA, FUTA, state and
federal income taxes, which may be due on those benefits and any corporate
retirement plan contributions, including, but not limited to, 401K plans, which
may be due on those benefits.
2
<PAGE> 3
7. Miscellaneous.
7.1 All representations, covenants and warranties made hereunder
shall survive the closing for the benefit of all parties.
7.2 This Agreement sets forth the entire understanding of the parties
with respect to its subject matter and it may not be altered except by written
agreement by all parties hereto.
7.3 The terms and provisions hereof shall be binding upon and inure
to the benefit of the parties hereto, their heirs, successors and assigns.
7.4 This Agreement shall be governed by and construed in accordance
with the laws of the State of Minnesota.
7.5 Each provision of this Agreement shall be considered separable
and, if for any reason any provision herein is determined to be invalid, such
invalidity shall not impair or otherwise affect the validity of the other
provisions of this Agreement. Moreover, the parties agree to replace such
invalid provision with a substitute provision that will satisfy the intent of
the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first hereinabove set forth.
EMPLOYEE: Stanley I. Clothier
-----------------------------------
STANLEY I. CLOTHIER
CORPORATION: DATALINK CORPORATION
By Stanley I. Clothier
--------------------------------
Its President
--------------------------
3
<PAGE> 1
EXHIBIT 10.7
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") dated July
14, 1998, is by and among Datalink Corporation, a Minnesota corporation
(hereinafter referred to as "Datalink"), DCS Acquisition Corporation, a
Minnesota corporation (hereinafter referred to as the "Subsidiary"), Direct
Connect Systems, Inc., a Georgia corporation (hereinafter referred to as "DCS")
and Donald R. Schrenk, Jr., Melissa A. Schrenk, Bernard D. Westwood, Jr. and A.
Deborah Westwood (hereinafter referred to as the "Stockholders").
RECITALS:
A. Datalink, Subsidiary and DCS desire to cause the merger of DCS with and
into Subsidiary (the "Merger"), pursuant to the Plan of Merger set
forth in Exhibit A hereto (the "Plan of Merger") and the transactions
contemplated hereby, in accordance with the applicable provisions of
the statutes of the States of Minnesota and Georgia, which permit such
Merger.
B. For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization with the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended and interpreted by treasury
regulations (the "Code").
C. Each of the parties to this Agreement desires to make certain
representations, warranties and agreements in connection with the
Merger and also to prescribe various conditions thereto.
AGREEMENT
THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement and any exhibits hereto, the following words and
phrases shall have the meanings set forth below:
"Act" shall mean the Securities Act of 1933, as amended.
"Authorization" and "Authorizations" shall have the meanings ascribed to them in
Section 5.23 below.
"Base Balance Sheet" shall have the meaning ascribed to it in Section 5.5 below.
"Buy-Sell Agreement" shall have the meaning ascribed to it in Section
3.10(a)(iii) below.
<PAGE> 2
"Closing" shall mean the consummation of the transactions contemplated herein as
described in Section 3.7 below.
"Closing Date" shall be the date of the Closing as described in Section 3.7
below.
"Closing Date Balance Sheet" shall mean the audited balance sheet for DCS as of
the close of business on the Closing Date (determined in accordance with
generally accepted accounting principles consistently applied on a pro forma
basis as though the parties had not consummated the Merger contemplated by this
Agreement), subject to adjustments as provided in Section 4.2(a) below.
"Code" shall mean the Internal Revenue Code of 1986, as amended and interpreted
by treasury regulations.
"Constituent Corporations" shall refer to Subsidiary and DCS.
"Conversion Ratio" shall have the meaning ascribed to it in Section 3.1(b)
below.
"Datalink" shall mean Datalink Corporation, a Minnesota corporation.
"Datalink Common Stock" shall mean the Common Stock of Datalink, par value $.001
per share.
"DCS" shall mean Direct Connect Systems, Inc., a Georgia corporation.
"DCS Common Stock" shall mean the Common Stock of DCS, par value $.01 per share.
"DCS Unpaid Sales and Use Tax Assessment" shall mean a post-Closing assessment
by any taxing authority against DCS for any state or local sales or use taxes
imposed on DCS's pre-Closing sales and/or installations of tangible personal
property for DCS's customers, which taxes DCS failed to collect from its
customers, and any interest, penalty or addition thereto, whether disputed or
not.
"Effective Time" shall have the meaning ascribed to it in Section 2.2 below.
"Employee Benefit Plans" shall have the meaning ascribed to it in Section
5.25(a) below.
"Environmental Law" shall mean any environmental or health and safety-related
law, regulation, rule, ordinance, or by-law at the federal, foreign, state, or
local level, whether existing as of the date hereof, previously enforced or
subsequently enacted.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agent" shall mean Resource Trust Bank, Minneapolis, Minnesota.
-2-
<PAGE> 3
"Escrow Agreement" shall mean the Escrow Agreement by and among Datalink, each
of the Stockholders and the Escrow Agent.
"Excess Payables" shall mean the amount of accounts payable due by DCS to its
vendors as of the Closing Date which have been outstanding for longer than
forty-five (45) days.
"Financial Statements" shall have the meaning ascribed to it in Section 5.5
below.
"Fraud" shall require a showing of an intent to deceive and, with respect to a
claim of misrepresentation, that the party to be charged had knowledge of the
falsity of the representation; and with respect to an omission, that the party
to be charged knowingly failed to disclose.
"Funded Debt" shall mean the sum of any short or long-term bank or other third
party debt (exclusive of the Permitted Transaction Expenses), capital lease
obligations and Excess Payables.
"GBCC" shall mean the Georgia Business Corporation Code.
"Hazardous Materials" shall mean and include any hazardous waste, hazardous
material, hazardous substance, petroleum product, oil toxic substance or
pollutant as defined in or pursuant to the Resource Conservation and Recovery
Act, as amended, the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, the Hazardous Materials Transportation Act or any
other foreign, federal, state or local law, regulation, ordinance, rule or
by-law, whether existing as of the date hereof, previously enforced or
subsequently enacted pertaining to environmental or health and safety matters.
"Intellectual Property" shall have the meaning ascribed to it in Section 5.13(a)
below.
"IPO" shall mean an initial public offering of Datalink Common Stock.
"Knowledge" shall mean actual knowledge after reasonable investigation.
"MBCA" shall mean the Minnesota Business Corporation Act.
"Merger" shall mean the merger of DCS with and into Subsidiary with Subsidiary
being the Surviving Corporation as described in this Agreement.
"Merger Consideration" shall have the meaning ascribed to it in Section 3.1(b)
below.
"Permitted Transaction Expenses" shall have the meaning ascribed to it in
Section 4.2(a)(iii) below.
"Person" shall mean an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization
or a governmental entity (or any department, agency or political subdivision
thereof).
-3-
<PAGE> 4
"Plan of Merger" shall refer to the Plan of Merger set forth in Exhibit A of
this Agreement.
"Post-Merger Notice" shall have the meaning ascribed to it in Section 3.3 below.
"Preliminary Purchase Price" shall have the meaning ascribed to it in Section
4.1 below.
"Purchase Price" shall have the meaning ascribed to it in Section 4.1 below.
"Qualified Plan" shall have the meaning ascribed to it in Section 5.25(b) below.
"Registration Statement" shall mean Datalink's Registration Statement with the
SEC on Form S-1, SEC File No. 333-55935, as filed with the SEC on June 3, 1998.
"SEC" shall mean the Securities and Exchange Commission.
"Stockholders" shall refer collectively to Donald R. Schrenk, Jr., Melissa A.
Schrenk, Bernard D. Westwood, Jr. and A. Deborah Westwood.
"Subsidiary" shall mean DCS Acquisition Corporation, a Minnesota corporation.
"Surviving Corporation" shall mean Subsidiary.
"Taxes" shall mean any federal, state, local or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental, customs duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration,
value-added, alternative or add-on minimum, estimated or other tax of any kind
whatsoever, including any interest, penalty or addition thereto, whether
disputed or not.
"Tax Return" shall mean any return, declaration, report, claim for refund or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Valuation Price" shall have the meaning ascribed to it in Section 3.2 below.
SECTION 2. THE MERGER
2.1 The Merger. At the Effective Time (as defined in Section 2.2) and
subject to the terms and conditions of this Agreement and the Plan of Merger,
DCS shall be merged with and into Subsidiary and the separate existence of DCS
shall thereupon cease, in accordance with the applicable provisions of the MBCA
and the GBCC.
-4-
<PAGE> 5
(a) Subsidiary will be the Surviving Corporation in the
Merger and will continue to be governed by the laws
of the State of Minnesota, and the separate corporate
existence of Subsidiary and all of its rights,
privileges, immunities and franchises, public or
private, and all its duties and liabilities as a
corporation organized under the MBCA, will continue
unaffected by the Merger.
(b) The Merger will have the effects specified by the
MBCA and the GBCC.
2.2 Effective Time. As soon as practicable following the Closing
hereunder, the Constituent Corporations will cause Articles of Merger (the
"Articles of Merger") together with the Plan of Merger and such other documents
as are required by the MBCA and the GBCC to be filed with the office of the
Secretary of State of the State of Minnesota and the Secretary of State of the
State of Georgia. Subject to and in accordance with the laws of the States of
Minnesota and Georgia, the Merger will become effective at the date and time the
Articles of Merger are filed with the office of the Secretary of State of the
State of Minnesota, or such later time or date as may be specified in the
Articles of Merger (the "Effective Time"). Each of the parties will use its best
efforts to cause the Merger to be consummated as soon as practicable following
the Closing.
SECTION 3. CONVERSION OF SHARES
3.1 Conversion of DCS Shares in the Merger. Pursuant to the Plan of
Merger, at the Effective Time, by virtue of the Merger and without any action on
the part of any holder of any capital stock of DCS:
(a) Each share of DCS Common Stock owned by Stockholders shall, be
converted into, and become exchangeable for, the number of
shares of validly issued, fully paid and nonassessable
Datalink Common Stock equal to the Conversion Ratio.
(b) In this Agreement, the term "Conversion Ratio" means a
fraction, the numerator of which is equal to $2,000,000
divided by the Valuation Price as defined in Section 3.2
herein, and the denominator of which is equal to the total
number of shares of DCS Common Stock issued and outstanding
immediately prior to the Effective Time. The consideration
referred to in this Section 3.1, together with the cash
payment pursuant to Section 4 as provided herein, is
hereinafter referred to as the "Merger Consideration."
3.2 Datalink Common Stock Valuation Price in Merger. The "Valuation
Price" of the Datalink Common Stock is $10.00 per share, subject to adjustment
as provided in Section 3.3.
3.3 Post-Merger Adjustments. If Datalink within two (2) years from the
Closing Date of the Merger withdraws its Registration Statement for the IPO, the
total number of shares issued to the Stockholders under Section 3.1 shall be
adjusted, effective as of the Effective Time, so that
-5-
<PAGE> 6
the Valuation Price will be $8.70 per share (such per share price to be
adjusted proportionally for any Datalink Common Stock split or dividend or
reverse split or combination occurring after the Closing Date and through the
date of any such adjustment). If an IPO initially closes within two (2) years
from the Closing Date of the Merger, the total number of shares issued to the
Stockholders under the Valuation Price as described in Section 3.2 or the
preceding sentence shall be adjusted, effective as of the Effective Time, so
that the Valuation Price will be the IPO price per share as stated on the cover
of the definitive Prospectus for the IPO as filed with the SEC pursuant to Rule
424(b) of the Act.
If an event occurs requiring an adjustment by the preceding paragraph,
Datalink shall give written notice within ten (10) business days to the
Stockholders describing the event and Datalink's computation of the number of
shares to be issued or canceled (a "Post-Merger Notice"). If Datalink fails
timely to give the Post-Merger Notice, the Stockholders may, upon learning of
the triggering event, give written notice thereof to Datalink, which notice
shall constitute the Post-Merger Notice as to such event. If the event requires
the issuance of additional shares, then within ten (10) business days after
giving the Post-Merger Notice, Datalink shall issue (or shall cause its transfer
agent to issue) to each Stockholder a certificate representing the additional
shares. If the event requires the cancellation of shares, then within ten (10)
business days after Datalink has given the Post-Merger Notice, each Stockholder
shall return for cancellation to Datalink a certificate or certificates
representing a number of shares of Datalink Common Stock equal to or greater
than the number of shares to be canceled, together with a stock power endorsed
in blank with signature guaranteed covering such certificate or certificates.
Within ten (10) business days after receipt of the certificate(s) and stock
power, Datalink shall cancel (or cause its transfer agent to cancel) the
certificate(s) so tendered and shall issue (or cause its transfer agent to
issue) to the Stockholder a certificate representing the balance, if any, of the
shares remaining after the adjustment. The Stockholders shall be jointly and
severally liable for the return of shares for cancellation to Datalink as
provided herein.
3.4 Status of Subsidiary Shares. At the Effective Time, by virtue of
the Merger and without any action on the part of any holder of any capital stock
of Subsidiary, each issued and outstanding share of common stock of Subsidiary
shall continue unchanged and remain outstanding as a share of Common Stock of
the Surviving Corporation.
3.5 Exchange of Stock Certificates.
(a) At the Closing, the Stockholders shall deliver the
certificates representing all issued and outstanding shares of
DCS Common Stock, duly endorsed in blank with signature
guaranteed, in exchange for the certificates representing
shares of Datalink Common Stock required to effect the
exchange referred to in Section 3.1 (based upon the Valuation
Price computed pursuant to Section 3.2) and the cash payments
referred to in Section 4. Shares of Datalink Common Stock into
which shares of DCS Common Stock shall be converted in the
Merger shall be deemed to have been issued at the Effective
Time.
-6-
<PAGE> 7
(b) From and after the Effective Time, each holder of a
certificate which immediately prior to the Effective Time
represented outstanding shares of DCS Common Stock, shall be
entitled to receive in exchange therefor, upon surrender
thereof to Datalink, a certificate or certificates
representing the number of shares of Datalink Common Stock as
computed by Sections 3.1 and 3.2 (to be later adjusted by
Section 3.3) and cash pursuant to Section 4. From and after
the Effective Time, Datalink shall be entitled to treat the
certificates which immediately prior to the Effective Time
represented shares of DCS Common Stock and which have not yet
been surrendered for exchange as evidencing the ownership of
the number of full shares of Datalink Common Stock into which
the shares of DCS Common Stock represented by such
certificates shall have been converted pursuant to Section
3.1, notwithstanding the failure to surrender such
certificates. However, notwithstanding any other provision of
this Agreement, until holders or transferees of certificates
which immediately prior to the Effective Time represented
shares of DCS Common Stock have surrendered them for exchange
as provided herein, no dividends shall be paid with respect to
any shares represented by such certificates and no cash
payments pursuant to Section 4 shall be made. Upon surrender
of a certificate which immediately prior to the Effective Time
represented outstanding shares of DCS Common Stock, there
shall be paid to the holder of such certificate the amount of
any dividends which theretofore became payable, but which were
not paid by reason of the foregoing, with respect to the
number of whole shares of Datalink Common Stock represented by
the certificate or certificates issued upon such surrender. If
any certificate for shares of Datalink Common Stock is to be
issued in a name other than that in which the certificate,
which immediately prior to the Effective Time represented
shares of DCS Common Stock, surrendered in exchange therefor
is registered, it shall be a condition of such exchange that
the person requesting such exchange shall pay any transfer or
other taxes required by reason of the issuance of certificates
for such shares of Datalink Common Stock in a name other than
that of the registered holder of any such certificate
surrendered.
(c) Notwithstanding any other provision of this Agreement or the
Plan of Merger, and in order to avoid the issuance of any
certificates for fractional shares of Datalink Common Stock,
Datalink shall issue a full share of its Common Stock in lieu
of any such fractional share.
3.6 Closing of Transfer Books. From and after the Effective Time, the
stock transfer books of DCS shall be closed and no transfer of shares of DCS
Common Stock shall thereafter be made. If, after the Effective Time, DCS Common
Stock certificates are presented to Datalink, they shall be canceled and
exchanged for the Merger Consideration in accordance with the procedures set
forth in this Section 3.
3.7 Closing. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place (a) at the offices of Messerli &
Kramer P.A. at 10:00 a.m., local time,
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on July 14, 1998 or at such other time and place and on such other date as
Datalink and DCS shall agree (the "Closing Date").
3.8 Allocation of Purchase Price. The Merger Consideration shall be
allocated among the assets of DCS in accordance with the Schedule of Purchase
Price Allocation attached hereto as Exhibit 3.8.
3.9 Escrow of Certain Datalink Common Stock Received in the Merger.
Despite anything in this Agreement to the contrary, 50,000 shares of the
Datalink Common Stock issued to the Stockholders in the Merger shall be
delivered to the Escrow Agent as provided in the Escrow Agreement substantially
in the form of Exhibit 3.9 hereto, 10,000 of such shares which shall be held by
the Escrow Agent for a period of 120 days after the Closing Date for purposes of
Section 4.2(b) below. The remaining 40,000 of such shares shall be held by the
Escrow Agent for a period of two (2) years after the Closing Date for purposes
of Section 7.2 below.
3.10 Deliverables at Closing. The parties shall deliver the following
instruments, documents and property at the Closing:
(a) By Datalink and the Subsidiary. Datalink shall deliver the
following instruments, documents and property to the
Stockholders at the Closing:
(i) the Merger Consideration;
(ii) an opinion of Messerli & Kramer P.A., counsel to
Datalink and the Subsidiary, substantially in the
form of Exhibit 3.10(a)(ii) hereto;
(iii) a copy of the buy-sell agreement in the form attached
hereto as Exhibit 3.10(a)(iii) as executed by
Datalink and its stockholders (the "Buy-Sell
Agreement");
(iv) an executed copy of the Plan of Merger;
(v) resolutions of the Board of Directors of Datalink and
the Subsidiary authorizing the Merger and the
transactions contemplated hereby;
(vi) agreements by the Subsidiary (which may be oral) to
employ Donald R. Schrenk, Jr. as Eastern Regional
Sales Manager at an initial base salary of $67,500
plus a commission plan substantially similar to that
of Datalink's other senior sales management and to
employ Bernard D. Westwood, Jr. as Director of
Engineering Services at an initial base salary of
$100,000;
(vii) evidence that Datalink has retired DCS's outstanding
indebtedness under a Receivables and Inventory
Financing Agreement and related Promissory
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<PAGE> 9
Note each dated April 23, 1998, in favor of Premier
Lending Corporation; and
(viii) a copy of the Escrow Agreement as executed by
Datalink and the Escrow Agent.
(b) By DCS and the Stockholders. DCS and the Stockholders shall
deliver the following instruments, documents and property to
Datalink and the Subsidiary at the Closing:
(i) stock certificates representing all outstanding
shares of DCS Common Stock in accordance with this
Section 3, together with all necessary stock powers
endorsed in blank with signatures guaranteed;
(ii) an opinion of Morris, Manning & Martin, L.L.P.,
counsel for DCS and the Stockholders, substantially
in the form of Exhibit 3.10(b)(ii) hereto;
(iii) a copy of the Buy-Sell Agreement as executed by the
Stockholders;
(iv) non-competition agreements in substantially the form
of Exhibit 3.10(b)(iv) attached hereto as executed by
each of Donald R. Schrenk, Jr., Bernard D. Westwood,
Jr. and Juan Orlandini;
(v) a copy of the Escrow Agreement as executed by the
Stockholders, together with the Datalink Common Stock
certificates and stock powers endorsed in blank with
signature guaranteed as provided by Section 3.9 above
and the Escrow Agreement;
(vi) all consents, approvals, documents and certificates
contemplated by this Agreement or reasonably
requested by Datalink or its counsel and copies of
all contracts, commitments, leases and other
documents required to be identified on the Schedules
hereto;
(vii) the original stock record and minute books of DCS;
(viii) the resignations, dated as of the Closing Date, of
all of the officers and directors of DCS;
(ix) resolutions of the Board of Directors and the
Stockholders of DCS authorizing the Merger and the
transactions contemplated hereby;
(x) a letter from Greg Veach indicating his intention to
move into DCS's sales organization and out of DCS's
engineering organization; and
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(xi) an executed copy of the Plan of Merger.
(c) Additional Matters. Each party agrees to execute and deliver such
additional instruments, documents and property, and to take such
additional action, as may reasonably be requested by another party
hereto, or his, her or its counsel, in order to effectuate the
transactions contemplated by this Agreement.
SECTION 4. CASH PAYMENTS TO DCS STOCKHOLDERS
4.1 Cash Purchase Price and Payment. The Cash Purchase Price in the
Merger to be paid for the Stockholders' shares of DCS (the "Preliminary Purchase
Price") is $2,000,000, which amount shall be subject to adjustment as provided
in Section 4.2 hereof, with the adjusted amount being referred to as the
"Purchase Price." The Preliminary Purchase Price shall be paid at Closing in
cash to the Stockholders, to be allocated among the Stockholders prorata based
on each Stockholder's percentage of shares owed in DCS immediately prior to the
Merger. Such payments shall be made by wire transfer in accordance with wire
transfer instructions provided in writing to Datalink by each of the
Stockholders prior to the Closing Date.
4.2 Purchase Price Adjustment.
(a) Preparation of Closing Date Balance Sheet. Within ninety (90)
days after the Closing Date, Datalink will prepare at its
expense and deliver to each of the Stockholders the Closing
Date Balance Sheet for DCS. Datalink will direct its
independent auditors to prepare the Closing Date Balance Sheet
by excluding the following assets and liabilities to the
extent that they otherwise would be included on such balance
sheet:
(i) the respective automobiles being driven by each of
Donald R. Schrenk, Jr. and Bernard D. Westwood, Jr.
(as described in the Schedule of Excluded Assets and
Liabilities that is Exhibit 4.2(a) hereto), any debt
or capital lease obligations owed by DCS in
connection with the acquisition of such vehicles;
(ii) the life insurance contracts on certain DCS officers
and key employees (as described in the Schedule of
Excluded Assets and Liabilities), and any debt owed
by DCS for premiums thereon; and
(iii) up to $300,000 of expenses as described on the
attached Exhibit 4.2(a)(iii) associated with the
transactions contemplated by this Agreement or any
other previously proposed sale of substantially all
the assets or capital stock of DCS (the "Permitted
Transaction Expenses").
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(b) Adjustments. Datalink shall promptly deliver a copy of the
Closing Date Balance Sheet to the Stockholders after receiving
it from the auditors. If the Closing Date Balance Sheet of DCS
does not demonstrate stockholders' equity as of the Closing
Date of at least $1,000,000, the Preliminary Purchase Price
will be reduced dollar-for-dollar to the extent that the
Closing Date Balance Sheet stockholder's equity is less than
$1,000,000. If the Closing Date Balance Sheet of DCS
demonstrates Funded Debt in excess of $1,300,000, then the
Preliminary Purchase Price shall further be reduced
dollar-for-dollar for each dollar of Funded Debt greater than
$1,300,000. Nothing in this Agreement shall prohibit DCS from
using available cash to reduce Funded Debt to the required
level prior to the Closing so long as the effect thereof is
not to increase Excess Payables.
The Stockholders shall have 30 days after receipt of
the Closing Date Balance Sheet to give Datalink written notice
that the Stockholders intend to dispute the auditors'
determination of DCS's Closing Date stockholders' equity
and/or Funded Debt. Within 30 days after receipt of the
Stockholders' written notice, Datalink shall attempt to settle
the dispute with the Stockholders. If the Shareholders and
Datalink do not reach settlement of Datalink's claim within
such 30 days, the dispute may at any time thereafter be
submitted by the Stockholders or Datalink to arbitration in
Atlanta, Georgia, before a single arbitrator selected by the
American Arbitration Association and in accordance with the
rules and procedures of the American Arbitration Association
then in effect and which arbitrator is a certified public
accountant practicing with a "Big 5" accounting firm other
than PricewaterhouseCoopers LLP. The Stockholders and Datalink
agree that the arbitrator's award shall be final and binding
upon them with respect to the dispute and may be entered in
any court having jurisdiction thereof. All costs of the
arbitration (including the reasonable legal expenses of all
parties thereto) shall be borne by the Stockholders and/or
Datalink in the amounts determined by the arbitrator, which
shall base such determination upon the relative merits of the
respective positions of the Stockholders and Datalink in the
dispute. Following the resolution of such dispute by the
arbitrator, Datalink shall submit a copy of the arbitrator's
award or decision to the Escrow Agent, which shall be entitled
to rely upon such copy.
Any reductions in the Preliminary Purchase Price as
determined above shall be made first by cancellation of
Datalink Common Stock held in the 10,000 share escrow referred
to in Section 3.9 above, which shall continue to be held by
the Escrow Agent until resolution of the dispute described
above. Any further required reduction in the Preliminary
Purchase Price shall be effected by the DCS Stockholders
delivering to Datalink, within ten (10) business days after
written demand, shares of Datalink Common Stock for
cancellation. In determining the number of shares of Datalink
Common Stock to be canceled under this subsection (b), such
shares shall be valued at the Valuation Price per share on the
Closing Date
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of the Merger determined pursuant to Section 3.2 as adjusted
pursuant to Section 3.3 for any events requiring an adjustment
thereunder occurring on or prior to the date that Datalink
delivers the Closing Date Balance Sheet of DCS to the
Stockholders. If all shares of Datalink Common Stock owned by
the Stockholders have been returned for cancellation, any
additional reduction in the Preliminary Purchase Price shall
be effected by the Stockholders tendering cash to Datalink
within ten (10) business days after written demand. The
Stockholders are jointly and severally liable to Datalink for
any reduction in the Preliminary Purchase Price.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF DCS AND THE STOCKHOLDERS
As a material inducement to Datalink to enter into this Agreement and
to consummate the transactions contemplated hereby, DCS and each of the
Stockholders jointly and severally hereby make to Datalink each of the
representations and warranties set forth in this Section 5. Certain exceptions
to such representations and warranties are set forth on the Schedule of
Exceptions attached hereto as Exhibit 5(a) and incorporated herein. Any matter
which would constitute a breach of such representations and warranties shall not
constitute a breach if it is set forth under the appropriate heading on the
Schedule of Exceptions; provided, however, that disclosure of such a matter on
the Schedule of Exceptions shall not relieve the Stockholders of their
indemnification obligations regarding such matter under Section 7.2 hereof if so
indicated on Exhibit 5(b), the Schedule of Indemnifiable Exceptions.
5.1 Organization and Qualification. DCS is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Georgia and has full power and authority to own or lease its properties and to
conduct its business in the manner and in the places where such properties are
owned or leased or as such business is currently conducted. The copies of DCS's
Articles of Incorporation, as amended to date (hereinafter referred to as its
"Articles"), certified by the Secretary of State of the State of Georgia, and of
DCS's Bylaws, as amended to date (hereinafter referred to as its "Bylaws"),
certified by DCS's Secretary, both as attached under Exhibit 5.1(a) hereto, are
complete and correct and no amendments thereto have been filed or are pending.
DCS is and has been at all times in compliance with its Articles and Bylaws. DCS
is duly qualified or licensed to conduct business as a foreign corporation in
and is in good standing in each jurisdiction in which the nature of the business
conducted by DCS or the character and nature of the property or assets owned or
leased by DCS makes such qualification necessary, all of which jurisdictions are
listed on the Schedule of Foreign Qualifications attached hereto as Exhibit
5.1(b).
5.2 Authority. DCS has full right, power and authority to enter into
this Agreement and each agreement, document and instrument to be executed and
delivered by DCS pursuant to this Agreement and to carry out the transactions
contemplated hereby and thereby. The execution, delivery and performance of this
Agreement and each such other agreement, document and instrument by DCS has been
duly and validly authorized and approved by all necessary action on the part of
DCS and no other action on the part of DCS or the Stockholders is required in
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connection therewith. This Agreement and each agreement, document and instrument
to be executed and delivered by DCS pursuant to this Agreement constitutes, or
when executed and delivered will constitute, the legal, valid and binding
obligation of DCS, each enforceable in accordance with their respective terms,
except to the extent that enforcement is limited by bankruptcy, insolvency,
moratorium, conservatorship, receivership or similar laws of general application
affecting creditors' rights or by the application by a court of equity
principles. The execution, delivery and performance by DCS of this Agreement and
each such agreement, document and instrument:
(a) does not and will not violate any foreign, federal, state,
local or other laws, regulations or ordinances applicable to
DCS;
(b) does not or will not violate any term or provision of the
Articles or Bylaws of DCS; and
(c) except as set forth on Exhibit 5.2(c), does not and will not
result in a breach of, constitute or result in a default
under, accelerate any obligation under or give rise to a right
of termination of, any indenture or loan or credit agreement
or any other agreement, contract, instrument, mortgage, lien,
lease, permit, authorization, order, writ, judgment,
injunction, decree, determination or arbitration award to
which DCS is a party or by which the property of DCS is bound
or affected, or result in the creation or imposition of any
mortgage, pledge, lien, security interest or other charge or
encumbrance on any of DCS's assets.
Except as set forth on Exhibit 5.2(c), no consent or waiver by,
approval of, or designation, declaration or filing with, any Person is required
in connection with the execution, delivery and performance by DCS and the
Stockholders of this Agreement and each agreement, document and instrument to be
executed and delivered by DCS or the Stockholders pursuant to this Agreement.
5.3 Capitalization. DCS's authorized capital stock consists solely of
shares of DCS Common Stock, of which 1,000 shares are issued and outstanding and
of which 99,000 shares are authorized but unissued. All shares of DCS Common
Stock are owned of record and beneficially by the Stockholders in the amounts
set forth in Exhibit 5.3 hereto. There are no outstanding dividends, whether
current or accumulated, due or payable on any of the capital stock of DCS. None
of the DCS Common Stock has been issued or transferred in violation of any
federal or state law, including without limitation the Act. The DCS Common Stock
is, and when delivered to Datalink or its designee pursuant to this Agreement
will be, (i) duly authorized, validly issued and outstanding, (ii) fully paid,
non-assessable and free of preemptive rights and (iii) free and clear of any and
all pledges, claims, restrictions, charges, liens, security interests,
encumbrances or other interests of third parties of any nature whatsoever. There
are no outstanding options, warrants, rights, commitments or agreements of any
kind for the issuance or sale of, or outstanding securities convertible into,
any additional shares of capital stock of any class of DCS, and there are no
voting
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<PAGE> 14
trusts, voting agreements, proxies or other agreements, instruments or
undertakings with respect to the voting of any DCS Common Stock to which DCS or
any of the Stockholders is a party.
5.4 Subsidiaries. DCS has no subsidiaries, has not had any subsidiaries
during the preceding five years and does not own any securities issued by any
business organization or governmental authority except for United States
government securities, bank certificates of deposit or other cash equivalents.
DCS does not own or have any direct or indirect interest in or control over any
corporation, partnership, joint venture or other entity of any kind.
5.5 Financial Statements. For each of the past five fiscal years, DCS's
fiscal year end has been December 31. Exhibit 5.5 contains the unaudited balance
sheets of DCS as of December 31, 1995, 1996 and 1997, and the related unaudited
statements of income, changes in stockholders' equity and cash flows of DCS for
the fiscal years then ended, and the interim unaudited balance sheet of DCS as
of May 31, 1998 and the related unaudited income statement of DCS for the five
months then ended (all such financial statements being referred to collectively
herein as the "Financial Statements"). The unaudited balance sheet of DCS as of
December 31, 1997 is referred to herein as the "Base Balance Sheet." To the
Knowledge of DCS or any of the Stockholders, there are no material modifications
that are required to be made to any of the Financial Statements (including the
notes thereto) in order that they be in accordance with generally accepted
accounting principles applied consistently during the periods covered thereby.
Without limiting the foregoing, to the Knowledge of DCS or any of the
Stockholders, the Financial Statements are complete and correct, present fairly
the financial condition of DCS at the dates of said statements and the results
of its operations for the periods covered thereby and are consistent with the
books and records of DCS.
5.6 Title to Properties; Liens; Condition of Properties.
(a) DCS does not own any real property. The Schedule of Leases
(Exhibit 5.6(a)) contains a copy of and an accurate and
complete list of all of DCS's leasehold interests in real and
personal property including a brief description of each
leasehold interest (including the duration and financial terms
thereof) and, if applicable, all liens, mortgages or other
encumbrances upon each leasehold interest. All leases to which
DCS is a party are currently in full force and effect and each
party thereto has performed all of its obligations under each
of such leases and is not in default thereunder, and DCS is
not aware of any event or condition which could result in a
default under any such lease after notice or lapse of time or
both, nor has DCS received notice of any alleged default under
any such lease. Except as set forth on the Schedule of Leases,
the consummation of the transactions contemplated by this
Agreement will not result in any modification, termination,
breach or default or require any consent under any such lease.
(b) DCS does not own any machinery, equipment, furniture, fixtures
or improvements (collectively, the "Fixed Assets") with an
original cost per unit in excess of $500 or
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with a fair market value in excess of $5,000, except as set
forth on the Schedule of Fixed Assets (Exhibit 5.6(b))
attached hereto. DCS has good and marketable title to all of
its personal property; and none of the personal property or
assets of DCS is subject to any mortgage, pledge, lien,
conditional sales agreement, security interest, encumbrance or
other charge except as specifically reflected in the Base
Balance Sheet.
(c) Except as set forth on Exhibit 5.6(c), all machinery and
equipment owned or leased by DCS is in good repair and in
working order.
5.7 Taxes.
(a) Returns and Payments. DCS has filed all Tax Returns that it
was required to file. All such Tax Returns were correct and
complete in all respects. Except as set forth on Exhibit
5.7(c) hereto, all Taxes owed by DCS (whether or not shown on
any Tax Return) have been paid or provided for in DCS's
Financial Statements. DCS currently is not the beneficiary of
any extension of time within which to file any Tax Return.
Except as set forth on Exhibit 5.7(c) hereto, no claim has
ever been made by an authority in a jurisdiction where DCS
does not file Tax Returns that it is or may be subject to
taxation by that jurisdiction. There are no actual, pending or
threatened liens, encumbrances or charges against any of the
assets of DCS arising in connection with any failure (or
alleged failure) to pay any Tax.
(b) Withholding Taxes. Except as set forth on Exhibit 5.7(c)
hereto, DCS has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or
owing to any employee, independent contractor, creditor,
Stockholder or other third party.
(c) Tax Liabilities. None of DCS, the Stockholders or any of DCS's
officers, directors, or employees responsible for Tax matters
has Knowledge of any facts that would lead them to expect any
authority to assess any additional Taxes for any period for
which Tax Returns have been filed. Except as set forth on the
Schedule of Tax Matters (Exhibit 5.7(c) hereto), there is no
dispute or claim concerning any Tax liability of DCS either
claimed or raised by any authority in writing or as to which
any of DCS, the Stockholders or any of DCS's, officers,
directors, or employees responsible for Tax matters has
Knowledge based upon personal contact with any agent of such
authority. The Schedule of Tax Matters also includes all Tax
Returns filed for taxable periods ended on or after, and all
examination reports, closing agreements and statements of
deficiencies assessed against or agreed to by DCS since
December 31, 1992, indicates those Tax Returns that have been
audited and indicates those Tax Returns that currently are the
subject of audit. DCS has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the
meaning
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of Code Section 6662.
(d) Statute of Limitations. DCS has not waived any statute of
limitations in respect of Taxes or agreed to any extension of
time with respect to a Tax assessment or deficiency.
(e) Affiliated Group. DCS has not been a member of an affiliated
group filing a consolidated federal income Tax Return or has
any liability for the Taxes of any other person or entity
under Treasury Regulations Section 1.1502-6 (or similar
provision of state, local, or foreign law), as a transferee or
successor, by contract or otherwise. DCS is not a party to any
Tax allocation or sharing agreement.
(f) Tax Attributes. The Schedule of Tax Matters sets forth, as of
December 31, 1997, (i) the basis of DCS in its assets and (ii)
the amount of any net operating loss, net capital loss and
unused investment or other credit. DCS is not, and on the
Closing Date shall not be, an S Corporation within the meaning
of Code Section 1361(a).
5.8 Absence of Undisclosed Liabilities. To the Knowledge of DCS or any
of the Stockholders, as of the date of the Base Balance Sheet and the date
hereof, DCS had and has no indebtedness, liabilities or obligations of any
nature or kind, whether accrued, absolute, contingent or otherwise asserted or
unasserted, and whether due or to become due (including, without limitation,
potential liabilities relating to products or services provided by DCS or the
conduct of DCS's business prior to the date of the Base Balance Sheet regardless
of whether claims in respect thereof had been asserted as of such date), except
liabilities which are reflected on the Base Balance Sheet, are otherwise
expressly disclosed in the Schedules to this Agreement or that have been
incurred since the date of the Base Balance Sheet in the ordinary course of
business.
5.9 Accounts Receivable. A complete and accurate listing of all
accounts receivable of DCS as of July 13, 1998 accurately reflecting the aging
thereof is attached hereto as the Schedule of Accounts Receivable (Exhibit 5.9).
DCS has no accounts receivable or loans receivable from any person, firm or
corporation which is affiliated with it or from any of its directors, officers,
employees or stockholders and all accounts and loans receivable from any such
person, firm or corporation shall be paid in cash prior to the Closing Date.
5.10 Inventories. Except as set forth in the Schedule of Slow Moving
Raw Materials Inventory (Exhibit 5.10(a)) or the Schedule of Slow Moving
Finished Goods Inventory, (Exhibit 5.10(b)) the inventories (including
finished goods, work-in-progress and raw materials) of DCS reflected on the
Base Balance Sheet or existing on the date hereof are of a quality and quantity
saleable in the ordinary course of the business of DCS. Complete and accurate
listings of all such inventories of DCS and the pricing thereof are attached
hereto as the Schedule of Raw Materials Inventories (Exhibit 5.10(c)) and the
Schedule of Finished Goods Inventories (Exhibit 5.10(d)). The values of the
inventories stated in the Base Balance Sheet reflect DCS's normal inventory
valuation policies and were determined in accordance with generally accepted
accounting
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principles, practices and methods consistently applied. Purchase commitments for
raw materials and parts are not, individually or in the aggregate, in excess of
normal requirements. The Schedule of Slow Moving Raw Materials Inventory lists,
as of the date hereof, all raw materials inventory items that have not been used
in production within 90 days of their receipt and for which DCS has neither a
purchase order from a customer, ongoing active usage in a direct customer
account, nor is retaining the item in inventory to satisfy an ongoing
maintenance contract with a customer, and is complete and accurate. The Schedule
of Slow Moving Finished Goods Inventory lists, as of the date hereof, all
finished goods inventory items which (i) have not been included in a bona fide
sale to a customer within the last six months or (ii) have been produced for a
customer which has terminated its relationship with DCS or otherwise indicated
to DCS its intention not to accept and pay for such items, and is complete and
accurate.
5.11 Absence of Certain Changes. Except as provided in the Schedule of
Changes (Exhibit 5.11 hereto), since the date of the Base Balance Sheet, there
has not been:
(a) any operation of DCS out of the ordinary course of business or
any change in the financial condition, properties, assets,
liabilities, business, prospects or operations of DCS which
change, by itself or in conjunction with all other such
changes, has been or is likely to be materially adverse with
respect to DCS;
(b) any purchase, sale, license or other disposition, or any
agreement or other arrangement for the purchase, sale, license
or other disposition, of any part of DCS's properties or
assets (including any patents, trademarks and copyrights)
other than purchases for and sales from inventory in the
ordinary course of business;
(c) any damage, destruction or loss, whether or not covered by
insurance, adversely affecting DCS's properties, assets or
business in excess of $5,000 per single occurrence;
(d) any change with respect to DCS's officers, management or
supervisory personnel;
(e) any payment or discharge of a lien or liability of DCS which
has been paid or incurred other than in the ordinary course of
business;
(f) any obligation or liability incurred by DCS to any bank, to
any officer, director, employee or stockholder of DCS, or,
other than in the ordinary course of business, to any other
individual; or any loans or advances made by DCS to any
officer, director, employee or stockholder of DCS, except for
normal compensation and expense allowances payable to such
persons;
(g) any capital expenditure by DCS in excess of $10,000 for any
one item;
(h) any contracts entered into by DCS which obligate DCS for more
than $10,000 with
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respect to any one contract or more than $25,000 with respect
to the aggregate of all such contracts;
(i) any change in the accounting methods or practices followed by
DCS or any change in depreciation or amortization policies or
rates theretofore adopted;
(j) any material change in the manner in which inventory of DCS is
marketed or any increase in inventory levels in excess of
historical levels for comparable periods;
(k) any acceleration, termination, modification or cancellation of
any agreement, contract, lease or license (or series of
related agreements, contracts, leases or licenses) involving
more than $10,000 to which DCS is a party or by which it is
bound;
(l) any issuance of any evidence of indebtedness or creation,
incurring, assumption or guaranteeing of any indebtedness for
borrowed money or capital lease obligations involving in
excess of $10,000 singly or $25,000 in the aggregate;
(m) subject to the last sentence of the first paragraph of Section
4.2(b) above, any delay or postponement of payment of any
accounts payable or other liabilities outside the ordinary
course of business;
(n) any declaration, setting aside or payment of any dividend or
distribution with respect to its capital stock, or redemption,
purchase or other acquisition of its capital stock;
(o) any change in the employment terms or employment-related
benefits for any independent sales representative or employee
outside the ordinary course of business; or
(p) any agreement or understanding, whether in writing or
otherwise, for DCS to take any of the actions specified in
paragraphs (a) through (o) above.
5.12 Banking Relations. All of the arrangements which DCS has with any
banking institutions are described in the Schedule of Arrangements with Banking
Institutions (Exhibit 5.12) attached hereto, indicating with respect to each of
such arrangements the type of arrangement maintained and the person or persons
authorized to act on behalf of DCS in respect thereof.
5.13 Intellectual Property.
(a) All domestic and foreign patents, patent applications,
copyrighted works, copyright applications and registrations,
trade names, trademarks and service marks, registered
trademarks and trademark applications, registered service
marks and
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service mark applications which are used by, owned
by or licensed to DCS (collectively, the "Intellectual
Property") are listed in the Schedule of Intellectual Property
(Exhibit 5.13) attached hereto, which Schedule indicates, with
respect to each, the nature of DCS's interest therein and the
expiration date thereof or the date on which DCS's interest
therein terminates. Except as set forth on the Schedule of
Intellectual Property, all registered copyrights, patents,
trademarks and service marks which are owned by or licensed to
DCS have been duly registered in, filed in or issued by, as
the case may be, the United States Patent and Trademark
Office, the United States Register of Copyrights or the
corresponding offices of other countries identified on said
Schedule, and have been properly maintained and renewed in
accordance with all applicable provisions of law and
administrative regulations in the United States and each such
country.
(b) The Intellectual Property is the only intellectual property
used in or otherwise necessary to operate the business and
operations of DCS as currently conducted or proposed to be
conducted.
(c) Except as set forth on the Schedule of Intellectual Property,
to the Knowledge of DCS or any of the Stockholders, (i) use of
the Intellectual Property and any other intellectual property
used by DCS does not require the consent of any other person
and the same is freely transferable (except as otherwise
provided by law or pursuant to the applicable license or use
agreement); (ii) the Intellectual Property is owned
exclusively by DCS, free and clear of any attachments, liens,
encumbrances or adverse claims; and (iii) neither DCS's
present or contemplated activities, products or services
infringe, misappropriate, dilute, impair or constitute unfair
competition with respect to any patent, tradename, trademark,
copyright or other proprietary rights of others.
(d) Except as set forth on the Schedule of Intellectual Property,
no other person has an interest in or right or license to use,
or the right to license others under, the Intellectual
Property. There are no claims or demands of any other person
pertaining thereto and no proceedings have been instituted,
are pending or, to the Knowledge of DCS or any of the
Stockholders, are threatened which challenge the rights of DCS
in respect thereof and DCS, and the Stockholders have no
Knowledge of any facts which could be the basis of any such
claims. To the Knowledge of DCS or any of the Stockholders,
there is no infringement of any of the Intellectual Property
by others nor is any of the Intellectual Property subject to
any outstanding order, decree, judgment, stipulation,
settlement, lien, charge, encumbrance or attachment. No claim
or demand has been made and no proceeding has been filed or,
to the Knowledge of DCS or any of the Stockholders, is
threatened to be filed charging DCS with infringement of any
patent, trade name, trademark, service mark or copyright and
DCS and the Stockholders do not know of any facts which could
be the basis of any such claims. To the Knowledge of
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DCS or any of the Stockholders, there are no royalties,
honoraria, fees or other payments payable by or on behalf of
DCS to any person with respect to any of the Intellectual
Property.
5.14 Trade Secrets and Customer Lists. DCS owns or has the right to
use, free and clear of any claims or rights of others, all trade secrets,
inventions, developments, customer lists, manufacturing and secret processes,
hardware designs, programming processes, software and other information and
know-how (if any) required for or used in the manufacture or marketing of all
products formerly or presently sold, manufactured, licensed, under development
or produced by DCS, including products licensed from others. There are no
payments which are required to be made by or on behalf of DCS for the use of
such trade secrets, inventions, developments, customer lists, copyrighted
materials, manufacturing and secret processes and know-how. To the Knowledge of
DCS or any of the Stockholders, DCS is not using or in any way making any
unlawful or wrongful use of any confidential information, copyrighted materials,
know-how or trade secrets of any third party, including, without limitation, any
former employer of any present or past employee of DCS or of any of DCS's
predecessors. Except as set forth on Exhibit 5.14, none of the Stockholders is a
party to any non-competition or confidentiality agreement with any party other
than DCS or Datalink.
5.15 Contracts. Except for contracts, commitments, plans, agreements
and licenses attached to and described in the Schedule of Contracts and
Commitments (Exhibit 5.15) attached hereto, DCS is not a party to or subject to:
(a) any plan or contract providing for compensation or benefits of
any type in connection with services rendered to DCS by its
employees or independent contractors having an aggregate value
with respect to any one individual in excess of $25,000 (other
than those providing for employment at will), or involving any
interest in the capital stock of DCS;
(b) any contract or agreement for the purchase of any commodity,
material or Fixed Asset, other than purchase orders entered
into in the ordinary course of business;
(c) any contract or agreement for the sale of any product,
material, Fixed Assets or service, other than contracts with
customers entered into in the ordinary course of business;
(d) any contract or agreement providing for the purchase of all or
substantially all of its requirements of a particular product
from a supplier, or for periodic minimum purchases of a
particular product from a supplier;
(e) any contract or agreement which by its terms does not
terminate or is not terminable without penalty by DCS and any
successor or assignee of DCS on 30 days' notice, other than
purchase orders and sales orders entered into in the
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ordinary course of business for goods to be delivered within
90 days;
(f) any contract containing covenants limiting in any material
respect DCS's freedom to compete in any line of business or
with any Person;
(g) any license agreement (as licensor or licensee);
(h) any contract or agreement with any present or former officer,
director or stockholder of DCS or with any persons or
organizations controlled by or affiliated with any of them;
(i) any contract, agreement or arrangement providing for a
guarantee or indemnification by DCS;
(j) any agreement concerning a partnership or joint venture; or
(k) any agreement under which the consequences of a default or
termination could have a material adverse effect on the
business, financial conditions or prospects of DCS.
Copies of all contracts, commitments, plans, agreements or licenses
attached to and described in the Schedule of Contracts and Commitments are true,
correct and complete, and have been subject to no amendment, extension or other
modification as of the date hereof. Each contract, commitment, plan agreement
and license described in the Schedule of Contracts and Commitments or the
Schedule of Customers, Distributors and Independent Sales Representatives
(Exhibit 5.28) is binding and enforceable in accordance with its terms and is in
full force or effect without any default thereunder by DCS or, to the Knowledge
of DCS or any Stockholder, by any other party thereto (a "default" being defined
for purposes hereof as an actual default or any set of facts which would, upon
receipt of notice or passage of time, or both, constitute a default). Except as
set forth in the Schedules to this Agreement, the execution, delivery and
performance of this Agreement, and the agreements, documents and instruments
contemplated hereby, by DCS and the Stockholders and the change in control of
DCS effected hereby does not and will not affect the validity or enforceability
of, or in any way modify DCS's rights or obligations under any contract, lease,
commitment, plan, agreement or license to which DCS is a party or under which it
is entitled to benefits.
5.16 Litigation. Except as set forth on the Schedule of Litigation
(Exhibit 5.16 hereto), there are no suits, actions or administrative,
arbitration or other proceedings or governmental investigations pending or
threatened against or relating to DCS or DCS's properties or business. Except as
set forth on the Schedule of Litigation, DCS is not otherwise engaged as a party
in any suit, action or administrative, arbitration or other proceeding. DCS has
not entered into or been subject to any consent decree, compliance order or
administrative order with respect to any property owned, operated, leased or
used by DCS. DCS has not received any request for information, notice, demand
letter, administrative inquiry or formal or informal complaint or claim
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with respect to any property owned, operated, leased or used by DCS or any
facilities or operations thereon. DCS has not been named by the U.S.
Environmental Protection Agency or a state environmental agency as a potentially
responsible party (or similar designation under applicable state law) in
connection with any site at which hazardous substances, hazardous materials,
toxic substances, oil or petroleum products have been released or are threatened
to be released. Except as set forth on the Schedule of Litigation, there are no
existing or, to the Knowledge of DCS or any of the Stockholders, threatened
product liability, warranty or other similar claims, or any facts upon which a
claim of such nature could be based, against DCS for services or products which
are defective or fail to meet any service or product warranties. Neither DCS nor
any Stockholder is aware of any facts providing a basis for any matter addressed
in this Section 5.16 or has any Knowledge that any such matters will be
forthcoming.
5.17 Compliance with Laws. DCS is not in material violation of any
laws, rules or regulations which apply to the conduct of its business or any
facilities or property owned, leased, operated or used by DCS, which violation
has had or may be expected to have a material adverse effect on DCS's business,
financial condition or results of operations. There has never been any citation,
fine or penalty imposed, asserted or threatened against DCS under any foreign,
federal, state, local or other law or regulation relating to employment,
immigration, occupational safety, zoning or environmental matters and neither
DCS nor the Stockholders is aware of any circumstances, occurrences or
conditions likely to result in the imposition or assertion of such a citation,
fine or penalty, nor has DCS or any Stockholder received any notice to the
effect that DCS is in violation of any such laws or regulations.
5.18 Insurance. The physical properties and assets of DCS are insured
to the extent disclosed in the Schedule of Insurance (Exhibit 5.18) attached
hereto and all other insurance policies and arrangements of DCS are disclosed in
said Schedule, including present product liability insurance policies and
product liability insurance policies held by DCS over the past five years. All
such present policies of insurance are in full force and effect, all premiums
with respect thereto are currently paid and DCS is in compliance with the terms
thereof. To the Knowledge of DCS or any of the Stockholders, such insurance
policies are sufficient for compliance by DCS with all requirements of law and
all agreements and leases to which DCS is a party and provide insurance coverage
for the properties, assets, operations and employees of DCS generally comparable
in type and amount to that which is customarily carried by other corporations
engaged in similar businesses and of approximately the same size and similarly
situated as DCS. The workers' compensation insurance of DCS complies with
applicable statutory requirements as to the amount of such coverage. Neither
this Agreement nor the consummation of the transactions contemplated hereby will
cause any such insurance policy not to be in full force and effect.
5.19 Product Warranty. To the Knowledge of DCS or any of the
Stockholders, each product manufactured, sold, leased or delivered by DCS has
been in conformity with all applicable contractual commitments and all express
and implied warranties. To the Knowledge of DCS or any of the Stockholders, DCS
has no liability (and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand which may
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give rise to any liability) for replacement or repair thereof or other damages
in connection therewith, subject only to the reserve for product warranty claims
set forth in the Base Balance Sheet as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of DCS, and
provided that liabilities arising from a recall required by a vendor and not
arising from any action or inaction on the part of DCS are not included within
this Section 5.19. To the Knowledge of DCS or any of the Stockholders, no
product manufactured, sold, leased or delivered by DCS is subject to any
guaranty, warranty or other indemnity beyond the applicable standard terms and
conditions of sale or lease, all of which are included in the Schedule of
Warranties (Exhibit 5.19) in addition to copies of the standard terms and
conditions of sale or lease for DCS containing applicable guaranty, warranty,
and indemnity provisions.
5.20 Product Liability. To the Knowledge of DCS or any of the
Stockholders, DCS has no liability (and there is no basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim or demand against it giving rise to any liability) arising out of any
injury to individuals or property as a result of the ownership, possession or
use of any product manufactured, sold, leased or delivered by DCS.
5.21 Powers of Attorney. Except as set forth on the Schedule of Powers
of Attorney (Exhibit 5.21 hereto), neither DCS nor any Stockholder has entered
into any outstanding power of attorney relating to DCS or its business or
assets.
5.22 Finders' Fees. Neither DCS nor any of the Stockholders has
incurred or will incur or become liable for any broker's commission or finder's
fee relating to or in connection with the transactions contemplated by this
Agreement, except as described on the Schedule of Finders' Fees (Exhibit 5.22
hereto).
5.23 Authorizations. DCS has obtained and is in material compliance
with all federal, foreign, state, provincial, municipal, local or other
governmental consents, certifications, licenses, permits, registrations, grants
and other authorizations (collectively the "Authorizations" and individually an
"Authorization") which are necessary to permit it to conduct its business as
presently conducted and for which the failure to comply with has had or may be
expected to have a material adverse effect on DCS's business, financial
condition or results of operations. No proceeding is pending or, to the
Knowledge of DCS or any of the Stockholders, is threatened in which any Person
or governmental authority is seeking to revoke or deny the renewal of any
Authorization. All Authorizations are listed in the Schedule of Authorizations
(Exhibit 5.23). Each Authorization is in full force and effect without any
default thereunder by DCS (a "default" being defined for purposes hereof as an
actual default or any set of facts which would, upon receipt of notice or
passage of time, or both, constitute a default), will remain in full force and
effect after giving effect to the transactions contemplated by this Agreement
and DCS has not received notice of any claim or charge that DCS has breached any
Authorization.
5.24 Transactions with Interested Persons. Neither the Stockholders nor
any officer, supervisory employee or director of DCS nor any of their respective
spouses or children, owns,
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directly or indirectly, on an individual or joint basis, any material interest
in, or serves as an officer or director or in another similar capacity of,
any customer, competitor or supplier of DCS, or any organization which has a
material contract or arrangement with DCS.
5.25 Employee Benefit Plans.
(a) All employee benefit plans, as that term is defined in Section
3(3) of ERISA, and fringe benefit plans, as that term is
defined in Section 6039D(d) of the Code, which now are or ever
have been maintained by DCS (or any subsidiary of DCS) or to
which DCS (or any subsidiary of DCS) now has or has ever had
an obligation to contribute (the "Employee Benefit Plans") are
described in the Schedule of Employee Benefit Plans (Exhibit
5.25) attached hereto. No event has occurred nor has there
been any omission which would result in violation of any laws,
rulings or regulations applicable to any Employee Benefit
Plan. There are no claims pending or, to the Knowledge of DCS
or any of the Stockholders, threatened with respect to any
Employee Benefit Plan, other than claims for benefits by
employees, beneficiaries or dependents arising in the normal
course of the operation of any such plan.
(b) Each Employee Benefit Plan that is intended to be qualified
under Section 401(a) or 401(k) of the Code is identified as a
"Qualified Plan" on the Schedule of Employee Benefit Plans and
has in fact been so qualified from the effective date of its
establishment and continues to be so qualified (unless such
plan has been terminated, in which case such plan continued to
be so qualified until its date of termination). Except as set
forth on the Schedule of Employee Benefit Plans, no event or
omission has occurred which would cause any such plan to lose
its qualification under Section 401(a) or 401(k) of the Code,
or which would cause DCS to incur liability for any excise tax
under the Code with respect to the maintenance, operation or
any other aspect of any such Qualified Plan.
(c) Neither DCS nor any member of any group of trades or
businesses under common control with DCS, within the meaning
of Section 4001(b)(1) of ERISA, (i) has ever had an obligation
to contribute to a multiemployer plan, within the meaning of
Section 3(37) of ERISA, (ii) has incurred any liability under
Title IV of ERISA, which will not be paid in full prior to the
Closing Date or (iii) has ever made contributions to or has
had an obligation to contribute to an association established
under Section 501(c)(9) of the Code. With respect to each
Employee Benefit Plan (as that term is defined in Section 3(3)
of ERISA) maintained by DCS or maintained by any member of any
"controlled group" (as defined in Section 412(n) of the Code)
of which DCS is or has been a member (a "Controlled Group")
and to which DCS or any member of any Controlled Group has had
an obligation to contribute, there are no "accumulated funding
deficiencies" within the meaning of Section 302 of ERISA or
Section 412 of the Code, or contributions or premiums required
to be
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made which have not been either paid or accrued as a
liability by DCS. All payments and contributions required to
be made under any and all collective bargaining agreements, or
any other agreements, to which DCS or any member of any
Controlled Group is a party or is otherwise subject, have been
made on a timely basis.
(d) With respect to each "group health plan" (as defined in
Section 607(1) of ERISA) that has been maintained by DCS or
any member of any Controlled Group, all notices required
pursuant to Section 606 of ERISA have been provided on a
timely basis and each such plan has otherwise complied in all
material respects with the requirements of Sections 606
through 608 of ERISA. Except as required by Section 601 of
ERISA, neither DCS nor any member of any Controlled Group has
made any commitment or is otherwise obligated to provide any
non-pension benefits to any employee, former employee or
spouse or dependent of any such employee or former employee.
(e) With respect to each Employee Benefit Plan (as that term is
defined in Section 3(3) of ERISA) maintained by DCS (or any
subsidiary of DCS) within the three years preceding the
Closing, complete and correct copies of the following
documents (if applicable to such Employee Benefit Plan) are
attached as part of the Schedule of Employee Benefit Plans:
(i) all documents embodying or governing such Employee Benefit
Plan, as they may have been amended to the date hereof; (ii)
the most recent IRS determination letter with respect to such
Employee Benefit Plan and any applications for determination
subsequently filed with the IRS; (iii) the three most recently
filed IRS Forms 5500, with all applicable schedules attached
thereto; (iv) the three most recent actuarial valuation
reports completed with respect to such Employee Benefit Plan;
(v) the summary plan description for such Employee Benefit
Plan and all modifications thereto; and (vi) any insurance
policy (including any fiduciary liability insurance policy)
related to such Employee Benefit Plan.
5.26 Hazardous Materials; Environmental Compliance; Disclosure of
Environmental Information. DCS has never generated, used, stored or handled any
Hazardous Materials nor has it treated, stored, disposed of, spilled or released
any Hazardous Materials at any site presently or formerly owned, leased,
operated or used by DCS or shipped any Hazardous Materials for treatment,
storage or disposal at any other site or facilities. To the Knowledge of DCS or
any of the Stockholders, no other person has ever generated, used, handled,
stored or disposed of any Hazardous Materials at any site presently or formerly
owned, leased, operated or used by DCS, nor has there been or is there
threatened any release of any Hazardous Materials on or at any such site. To the
Knowledge of DCS or any of the Stockholders, DCS does not presently own or
lease, nor has it previously owned or leased, any site on which underground
storage tanks are or were located. No lien has been imposed by any governmental
agency on any property, facility, machinery, or equipment owned, operated,
leased or used by DCS in connection with the presence of any Hazardous
Materials.
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To the Knowledge of DCS or any of the Stockholders, DCS has no
liability under nor has it ever violated any Environmental Law with respect to
any property owned, operated, leased, or used by DCS and any facilities and
operations thereon. In addition, DCS, any property owned, operated, leased, or
used by DCS, and any facilities and operations thereon are presently in material
compliance with all applicable Environmental Laws. DCS has not entered into or
been subject to any consent decree, compliance order or administrative order
with respect to any environmental or health and safety matter or received any
request for information, notice, demand letter, administrative inquiry, or
formal or informal complaint or claim with respect to any environmental or
health and safety matter or any enforcement of any Environmental Law; and DCS
and the Stockholders have no Knowledge that any of the above will be
forthcoming.
The Schedule of Environmental Matters (Exhibit 5.26 hereto) contains
copies of all documents, records, and information available to DCS concerning
any environmental or health and safety matter relevant to DCS, whether generated
by DCS or others, including, without limitation, environmental audits,
environmental risk assessments, site assessments, documentation regarding
off-site disposal of Hazardous Materials, spill control plans, and reports,
correspondence, permits, licenses, approvals, consents or other authorizations
issued by any environmental agency.
5.27 Backlog. As of July 10, 1998, DCS has a backlog of firm orders for
the sale of products or services, for which revenues have not been recognized by
DCS, as set forth in the Schedule of Backlog of Firm Orders (Exhibit 5.27)
attached hereto.
5.28 Customers, Distributors and Independent Sales Representatives. The
Schedule of Customers, Distributors and Independent Sales Representatives
(Exhibit 5.28) sets forth the names of all customers to which, and independent
sales representatives and distributors through which, DCS has sold or
distributed in excess of $50,000 of its products or services during any of the
last three fiscal years of DCS. Such schedule also indicates all customers,
distributors and independent sales representatives with which DCS has entered
into a contract or agreement. Except as set forth on the Schedule of Customers,
Distributors and Independent Sales Representatives, during the last three fiscal
years and through the date hereof, no such customer or distributor has canceled
or otherwise terminated its relationship with DCS or decreased materially its
usage or purchase of the products or services of DCS. To the Knowledge of DCS or
any of the Stockholders, no such customer or distributor has any plan or
intention to terminate, cancel or otherwise modify its relationship with DCS in
a manner which would be materially adverse to DCS.
5.29 Labor Relations; Employees. DCS employs 34 employees as of the
date hereof and generally enjoys a good employer-employee relationship. Each
employee of DCS who is compensated in the aggregate in excess of $25,000
annually and his or her current rate of compensation is listed, together with a
copy of any employment agreement, in the Schedule of Employee Compensation
(Exhibit 5.29) attached hereto. DCS is not delinquent in payments to any of its
employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed for it to the date hereof or amounts
required to be reimbursed to such
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employees. Upon termination of the employment of any of DCS's employees, neither
DCS nor Datalink will by reason of anything done prior to the Closing be liable
to any of such employees for "severance pay" or any other payments. To the
Knowledge of DCS or any of the Stockholders, DCS is in compliance with all
applicable laws and regulations respecting labor, employment, fair employment
practices, terms and conditions of employment and wages and hours. Except as set
forth on Exhibit 5.29, to the Knowledge of DCS or any of the Stockholders, there
are no charges of employment or age discrimination, sexual harassment or unfair
labor practices, claims by employees against DCS the asserted value of which
exceeds $5,000 individually or $15,000 in the aggregate or strikes, slowdowns,
stoppages of work or any other concerted interference with normal operations
existing, pending or threatened against or involving DCS. No question concerning
representation exists respecting the employees of DCS. No grievance which might
have a material adverse effect on DCS or the conduct of its business or any
arbitration proceeding arising out of or under collective bargaining agreements
is pending and no claim therefor has been asserted. No collective bargaining
agreement is in effect or is currently being or is about to be negotiated by
DCS.
5.30 Other Agreements. Except as set forth in the Schedule of Other
Agreements (Exhibit 5.30) attached hereto, there are no material agreements or
arrangements not contained herein, or disclosed in any Schedule hereto, to which
any Stockholder, or any individual serving as director or officer of DCS, is a
party relating to the business of DCS or to such Stockholder's, director's or
officer's rights and obligations as a stockholder, director or officer of DCS.
5.31 Copies of Documents. Except as described in the Schedules and
Exhibits to this Agreement, DCS has included in the Schedules and Exhibits
attached hereto true and correct copies of (a) all documents referred to in this
Section 5 including, without limitation, those referred to in the Schedules
delivered to Datalink pursuant to this Agreement, and (b) all other corporate
books and records including, without limitation, all stock record books, all
minutes of stockholders' and directors' meeting and all consents in lieu of such
meetings, which accurately record all action taken by its stockholders and Board
of Directors and committees thereof from the date of organization of DCS through
the date hereof. However, if DCS has previously provided a copy of any documents
to Datalink, DCS's obligations hereunder will be satisfied by describing the
document on any Schedule or Exhibit hereto and indicating its prior delivery to
Datalink.
The representations, warranties and statements contained in this
Agreement and in the certificates, exhibits and schedules delivered by DCS to
Datalink pursuant to this Agreement, when taken together, do not and shall not
contain any untrue statement of a material fact, and do not and shall not omit
to state a material fact required to be stated therein or necessary in order to
make such representations, warranties or statements not misleading in light of
the circumstances in which they were made.
5.32 Disclosure of Material Information and Potentially Adverse
Developments. DCS and the Stockholders have reported to Datalink any and all
material information of which DCS or
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any of the Stockholders has Knowledge as to potentially materially adverse
factors in the business of DCS, other than factors affecting the industry
generally.
5.33 DCS Common Stock. Each Stockholder owns of record and beneficially
the number of shares of DCS Common Stock set forth opposite his or her name in
Exhibit 5.3 hereto, free and clear of any and all restrictions on transfer
(other than any restrictions under the Act and state securities laws which do
not prohibit the transfer of DCS Common Stock to Datalink as contemplated
herein), pledges, claims, restrictions, charges, liens, security interests,
encumbrances or other interests of third parties of any nature whatsoever. No
Stockholder is a party to any contract or commitment that could require such
Stockholder to sell, transfer, or otherwise dispose of any capital stock of DCS
(other than this Agreement). No Stockholder is a party to any voting trust,
proxy or other agreement or understanding with respect to the voting of any
capital stock of DCS.
5.34 Authority. Each Stockholder has full right, authority, power and
capacity: (i) to enter into this Agreement and each agreement, document and
instrument to be executed and delivered by or on behalf of him or her pursuant
to this Agreement; (ii) to carry out the transactions contemplated hereby and
thereby; and (iii) to transfer, sell and deliver the DCS Common Stock to
Datalink (or its designee) in the Merger pursuant to this Agreement. This
Agreement and each agreement, document and instrument executed and delivered by
each Stockholder pursuant to this Agreement constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligation of such
Stockholder, each enforceable in accordance with their respective terms, except
to the extent that enforcement is limited by bankruptcy, insolvency, moratorium,
conservatorship, receivership or similar laws of general application affecting
creditors' rights or by the application by a court of equity principles. Except
as expressly disclosed in the Schedules to this Agreement, the execution,
delivery and performance of this Agreement and each such agreement, document and
instrument by each Stockholder: (i) does not and will not violate any foreign,
federal, state, local or other laws, regulations or ordinances applicable to
such Stockholder or require such Stockholder to obtain any approval, consent or
waiver of, or make any filing with, any Person or authority (governmental or
otherwise) that has not been obtained or made and (ii) does not and will not
result in a breach of, constitute a default under, accelerate any obligation
under or give rise to a right of termination of, any indenture or loan or credit
agreement or any other agreement, contract, instrument, mortgage, lien, lease,
permit, authorization, order, writ, judgment, injunction, decree, determination
or arbitration award to which such Stockholder is a party or by which the
property of such Stockholder is bound or affected, or result in the creation or
imposition of any mortgage, pledge, lien, security interest or other charge or
encumbrance on any of the property or assets of DCS.
5.35 Certain Securities Law Matters. Each Stockholder is an "accredited
investor" within the meaning of Rule 501(a) under the Act and has such knowledge
and experience in financial business matters that he or she is capable of
evaluating the merits and risks of an investment in Datalink Common Stock to be
received pursuant to this Agreement and the Merger. Each Stockholder
acknowledges being furnished by Datalink with a copy of Datalink's Registration
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Statement and being offered the opportunity to ask questions of, and receive
answers from, Datalink's officers with respect to Datalink's business and
financial affairs. Each Stockholder hereby acknowledges and agrees that the
Datalink Common Stock to be acquired pursuant to this Agreement is being
acquired for his or her own account and not for any other person, or with a view
to distribution or sale thereof, and that such securities have not been
registered under the Act or applicable state securities or "Blue Sky" laws, and
therefore cannot be resold unless so registered or exempted therefrom. The
Stockholders understand that certificates representing the Datalink Common Stock
will bear the following legend reflecting the foregoing restrictions on
transfer:
"The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act") or
under any applicable state securities laws (the "Laws"). The shares may
not be sold, transferred, assigned, pledged or otherwise disposed of at
any time unless they are registered under such Act and laws or unless
in the opinion of legal counsel for the Company such disposition will
not result in a violation of such Act or any such Laws."
Each Stockholder agrees to deliver to Datalink at the Closing an
undertaking in the form of Exhibit 5.35 hereto (the "Lock-Up Agreement")
addressed to the managing underwriters of Datalink's proposed IPO. In the event
that Datalink withdraws the Registration Statement for the IPO after the
Closing, but thereafter determines at any time in the future to proceed with an
IPO, the Stockholders further agree to furnish to the managing underwriter or
underwriters of the revived IPO, upon their request, a similar undertaking to
the Lock-Up Agreement containing the same restrictions on the resale of Datalink
Common Stock by the Stockholders as are requested by such underwriters of
Datalink's officers, directors and principal stockholders.
No Stockholder (i) is or controls a member of the National Association
of Securities Dealers, Inc. (the "NASD"), (ii) is a registered representative
with a NASD member firm or (iii) is the parent, brother or sister,
brother-in-law or sister-in-law, son or daughter or son-in-law or
daughter-in-law of an NASD member or of a registered representative of a NASD
member firm.
5.36 Director, Stockholder and Officer Claims. Except as described on
DCS's balance sheet as of May 31, 1998, no Stockholder, director or officer of
DCS has any claim of any kind arising out of or with respect to his or her
relationship to DCS, except claims for compensation and benefits accrued at
DCS's normal and customary rates in the ordinary course of business since the
date of such balance sheet, but unpaid as of the date hereof.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF DATALINK AND SUBSIDIARY
Datalink and the Subsidiary jointly and severally hereby make to each
of the Stockholders each of the representations and warranties set forth in this
Section 6 as follows:
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6.1 Organization and Good Standing. Datalink and the Subsidiary are
corporations duly organized, validly existing and in good standing under the
laws of the State of Minnesota with full corporate power to conduct their
business as now being conducted.
6.2 Authority. Datalink and the Subsidiary have full right, power and
authority to enter into this Agreement and each agreement, document and
instrument to be executed and delivered by them pursuant to this Agreement and
to carry out the transactions contemplated hereby and thereby. The execution,
delivery and performance of this Agreement and each such other agreement,
document and instrument by them has been duly and validly authorized and
approved by all necessary action on the part of each of them and no other action
on the part of each of them is required in connection therewith. This Agreement
and each agreement, document and instrument to be executed and delivered by each
of them pursuant to this Agreement constitutes, or when executed and delivered
will constitute, the legal, valid and binding obligation of each of them, each
enforceable in accordance with their respective terms, except to the extent that
enforcement is limited by bankruptcy, insolvency, moratorium, conservatorship,
receivership or similar laws of general application affecting creditors' rights
or by the application by a court of equity principles. The execution, delivery
and performance by Datalink and Subsidiary of this Agreement and each such
agreement, document and instrument:
(a) does not and will not violate any foreign, federal, state,
local or other laws, regulations or ordinances applicable to
Datalink;
(b) does not or will not violate any term or provision of the
Articles of Incorporation or Bylaws of Datalink and
Subsidiary; or
(c) except as set forth on the Schedule of Datalink Exceptions
(Exhibit 6.2(c) hereto), does not and will not result in a
breach of, constitute or result in a default under, accelerate
any obligation under or give rise to a right of termination
of, any indenture or loan or credit agreement or any other
agreement, contract, instrument, mortgage, lien, lease,
permit, authorization, order, writ, judgment, injunction,
decree, determination or arbitration award to which Datalink
or the Subsidiary is a party or by which the property of
Datalink or the Subsidiary is bound or affected, or result in
the creation or imposition of any mortgage, pledge, lien,
security interest or other charge or encumbrance on any of
Datalink's or the Subsidiary's assets.
No consent or waiver by, approval of, or designation, declaration or
filing with, any Person or authority (governmental or otherwise) is required in
connection with the execution, delivery and performance by Datalink or the
Subsidiary of this Agreement and each agreement, document and instrument to be
executed and delivered by Datalink or the Subsidiary pursuant to this Agreement.
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6.3 Datalink Registration Statement. The Registration Statement,
including a preliminary prospectus, in the form filed with the SEC was prepared
by Datalink in material conformity with the requirements of the Act and the
applicable rules and regulations of the SEC under the Act. Except as disclosed
on Exhibit 6.3, the Registration Statement as of its date and as of the date
hereof did not include any untrue statement of a material fact or omit to state
a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that Datalink makes no representation as to information contained in or omitted
from the Registration Statement in reliance upon, and in conformity with,
written information relating to any underwriter furnished to Datalink by or on
behalf of such underwriter specifically for use in the preparation of the
Registration Statement.
6.4 Absence of Undisclosed Liabilities. To the Knowledge of Datalink,
as of the date of the most recent balance sheet contained in the Registration
Statement and as of the date hereof, Datalink had and has no indebtedness,
liabilities or obligations of any nature or kind, whether accrued, absolute,
contingent or otherwise asserted or unasserted, and whether due or to become due
(including, without limitation, potential liabilities relating to products or
services provided by Datalink or the conduct of Datalink's business prior to the
date of the most recent balance sheet contained in the Registration Statement
regardless of whether claims in respect thereof had been asserted as of such
date), except liabilities which are reflected on the most recent balance sheet
contained in the Registration Statement or that have been incurred since the
date thereof in the ordinary course of business.
6.5 Reservation of Datalink Common Stock. Datalink has reserved and
will continue to reserve a sufficient number of shares of Datalink Common Stock
from Datalink's authorized, but unissued shares for the purposes of this
Agreement, including but not limited to additional shares which may be required
to be issued pursuant to Section 3.3 above.
6.6 Availability of Rule 144 Under the Act. Commencing upon the
effective date of any registration statement filed with the SEC for an IPO of
Datalink Common Stock, and continuing for the longer of (i) 90 days after such
effective date or (ii) the longer of (a) two years following the Closing Date of
the Merger or (b) 90 days following the date that the last of the Stockholders
ceases to be an "affiliate" of Datalink within the meaning of the Act, Datalink
will use its best efforts to make available the current public information
required by Rule 144(c) under the Act.
6.7 Release of Stockholder Guarantees. Promptly after the Closing,
Datalink will use its best efforts to cause the obligees under the the DCS
obligations described on the attached Exhibit 7.2(f)(ii) to release the
Stockholders from their personal guarantees thereof.
6.8 Datalink Common Stock. The Datalink Common Stock being issued to
the Stockholders hereunder will be (i) duly authorized, validly issued and
outstanding, (ii) fully paid, non-assessable and free of preemptive rights and
(iii) except as otherwise provided by this
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Agreement, free and clear of any and all pledges, claims, restrictions, charges,
liens, security interests, encumbrances or other interests of third parties of
any nature whatsoever.
6.9 Completeness. The representations, warranties and statements
contained in this Agreement and in the certificates, exhibits and schedules
delivered by Datalink to DCS and its Stockholders pursuant to this Agreement,
when taken together, do not and shall not contain any untrue statement of a
material fact, and do not and shall not omit to state a material fact required
to be stated therein or necessary in order to make such representations,
warranties or statements not misleading in light of the circumstances in which
they were made.
SECTION 7. INDEMNIFICATION
7.1 Materiality; Survival. All representations, warranties, agreements,
covenants and obligations herein or in any schedule, certificate or financial
statement delivered by any party incident to the transactions contemplated
hereby are material, shall be deemed to have been relied upon by the parties and
shall survive the Closing hereof.
7.2 Indemnification.
(a) The Stockholders jointly and severally agree to defend,
indemnify and hold Datalink and the Subsidiary and their
respective subsidiaries and affiliates and the persons serving
as officers, directors, partners, employees or agents thereof
harmless from and against any damages, liabilities, losses,
fines, penalties, clean-up costs, study costs and expenses
(including, without limitation, reasonable counsel fees and
expenses as the same are incurred; together referred to as
"Losses") of any kind or nature whatsoever which may be
sustained or suffered by any of them arising out of, based
upon or in connection with any of the following matters:
(i) a breach of any representation, warranty, agreement,
covenant or obligation made by DCS or any of the
Stockholders in this Agreement or in any Exhibit,
Schedule, certificate or financial statement
delivered hereunder or in connection herewith or by
reason of any claim, action or proceeding asserted or
instituted growing out of any matter or thing
constituting a breach of such representations,
warranties or covenants;
(ii) Fraud in connection with the making by DCS or any
Stockholder of any representation, warranty, covenant
or obligation or an intentional misrepresentation by
DCS or any Stockholder of any representation,
warranty, covenant or obligation; or
(iii) any matters described on Exhibit 5(b), the Schedule
of Indemnifiable Exceptions.
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(b) Datalink shall give prompt written notice to the Stockholders
and, if the Escrow Agreement is still in effect, the Escrow
Agent, of any claim, liability or expense to which the
indemnification obligations hereunder would apply. Such notice
shall state the information then available regarding the
amount of such claim, liability or expense and shall specify
the provision or provisions of this Agreement under which the
claim, liability or expense is asserted. The failure to
promptly notify the Stockholders and the Escrow Agent (if
applicable) as provided above shall not relieve the
Stockholders of any liability hereunder except to the extent
that the rights of the Stockholders have been materially and
adversely prejudiced as a result of the failure to give, or
the delay in giving, such notice.
(c) If such indemnification claim, liability or expense is the
subject of litigation, the Stockholders shall have the right
to participate at their own expense in the defense of any such
litigation, or if in the opinion of Datalink, the financial
condition or business of DCS would not be impaired thereby,
Datalink may authorize the Stockholders, if they so desire, to
take over the defense of such litigation so long as such
defense is expeditious and is undertaken by counsel reasonably
acceptable to Datalink.
(d) Upon resolution of the indemnification claim, whether by final
judicial decision after all periods for appeal have lapsed,
settlement, arbitration decision or otherwise, Datalink shall
give the Stockholders written notice of the Losses incurred by
Datalink with respect to the claim (the "Datalink Final
Notice"). Thereafter, the Stockholders shall have 30 days to
give Datalink written notice that the Stockholders intend to
dispute the amount of Datalink's claimed Losses. Within 30
days after receipt of the Stockholders' written notice,
Datalink shall attempt to settle the dispute with the
Stockholders. If the Shareholders and Datalink do not reach
settlement of Datalink's claim within such 30 days, the
dispute may at any time thereafter be submitted by the
Stockholders or Datalink to arbitration in Atlanta, Georgia,
before three arbitrators, one of which is selected by the
Stockholders as a group, one of which is selected by Datalink
and the third of which is selected by the first two
arbitrators. The arbitration shall be conducted by the
American Arbitration Association in accordance with the rules
and procedures of the American Arbitration Association then in
effect. The Stockholders and Datalink agree that the
arbitrators' award (which shall be agreed to unanimously by
the arbitrators) shall be final and binding upon them with
respect to the dispute and may be entered in any court having
jurisdiction thereof. All costs of the arbitration (including
the reasonable legal expenses of all parties thereto) shall be
borne by the Stockholders and/or Datalink in the amounts
determined by the arbitrators, which shall base such
determination upon the relative merits of the respective
positions of the Stockholders and Datalink in the dispute. The
judgment upon the award may be entered in any court having
jurisdiction thereof. There shall be added to the amount of
any arbitration award interest at the rate of 10% per annum on
the amount
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required to be paid pursuant to such award. This
interest will be computed from the date payment would have
been paid if not disputed by the Stockholders to the date paid
and the arbitrators shall include provisions therefor in any
award rendered. Following the resolution of such dispute by
the arbitrators, Datalink shall submit a copy of the
arbitrators' award or decision to the Escrow Agent, which
shall be entitled to rely upon such copy.
Any claims as determined above in favor of Datalink
first shall be resolved by cancellation of Datalink Common
Stock held in the 40,000 share escrow referred to in Section
3.9, which shares shall continue to be held by the Escrow
Agent despite the scheduled two year term thereof until
resolution of the dispute. If Datalink's claim cannot be
resolved with the number of shares of Datalink Common Stock
remaining in escrow, then the Stockholders shall deliver to
Datalink, within ten (10) business days after written demand,
additional shares of Datalink Common Stock for cancellation.
In determining the number of shares of Datalink Common Stock
to be canceled from escrow or otherwise under this subsection
(d), such shares shall be valued as follows. If the Datalink
Final Notice is given prior to the date that Datalink
initially closes on an IPO and is not disputed by the
Stockholders, or if an arbitrators' award on Datalink's claim
is granted prior to the date that Datalink initially closes on
an IPO, then the shares to be canceled shall be valued at the
Valuation Price per share on the Closing Date of the Merger
determined pursuant to Section 3.2 as adjusted pursuant to
Section 3.3 for any events requiring an adjustment thereunder
occurring on or prior to the date of the Datalink Final Notice
(if not disputed by the Stockholders) or arbitrators' award
(if disputed by the Stockholders), as the case may be. If the
Datalink Final Notice is given on or after the date that
Datalink initially closes on an IPO and is not disputed by the
Stockholders, or if an arbitrators' award on Datalink's claim
is granted on or after the date that Datalink initially closes
on an IPO, then the shares to be canceled shall be valued at
the average of the high closing bid prices per share for the
Datalink Common Stock as reported by the Nasdaq National
Market system (or such other exchange on which the Datalink
Common Stock may be listed) for the ten (10) trading days (or
if the Datalink Common Stock has not yet traded for 10 days,
the full number of trading days) ending on the trading day
immediately prior to the date of the Datalink Final Notice (if
not disputed by the Stockholders) or arbitrators' award (if
disputed by the Stockholders), as the case may be.
If all shares of Datalink Common Stock owned by the
Stockholders have been returned for cancellation, any
additional resolution of Datalink's claim shall be effected by
the Stockholders tendering cash to Datalink within ten (10)
business days after written demand.
Despite the above provisions of this subsection (d),
the Stockholders may resolve any claim by paying cash to
Datalink. In such case, the shares of Datalink
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Common Stock that otherwise would have been released from
escrow to Datalink for cancellation shall instead be released
to the Stockholders, and Datalink shall join with the
Stockholders in so instructing the Escrow Agent.
(e) Notwithstanding anything else in this Section 7 to the
contrary, no claim by Datalink under Sections 7.2(a)(i) or
7.2(a)(iii) may be enforced against the Stockholders (i)
unless Datalink gives the Stockholders written notice of such
claim under Section 7.2(b) above within two (2) years from the
Closing Date, (ii) if it is part of the first $10,000 (in the
aggregate) of claims asserted from time to time against the
Stockholders under Section 7.2(a)(i), (iii) to the extent that
the claim relates to the first $100,000 (in the aggregate) or
50% of the third $100,000 (in the aggregate) of DCS Unpaid
Sales and Use Tax Assessments or (iv) to the extent that the
claim, when aggregated with all other claims previously
enforced against the Stockholders, exceeds $2,000,000.
Further notwithstanding anything else in this Section 7 to the
contrary, no claim by Datalink under Section 7.2(a)(ii) may be
enforced against the Stockholders unless (i) Datalink gives
the Stockholders written notice of such claim under Section
7.2(b) above within four (4) years from the Closing Date and
(ii) to the extent that the dollar amount of such claim, when
aggregated with all claims previously enforced against the
Stockholders under Sections 7.2(a)(i), 7.2(a)(ii) and
7.2(a)(iii), exceeds $4,000,000. If Datalink makes a claim
under Section 7.2(a)(ii) and the arbitrators determine that
there has been no showing of Fraud, then Datalink shall pay
the expenses of any such arbitration and shall further pay the
Stockholders $100,000 in the aggregate as liquidated damages
for the wrongful bringing of such claim.
(f) Datalink and the Subsidiary jointly and severally agree to
defend, indemnify and hold the Stockholders harmless (in the
same manner as described with respect to the Stockholders in
subsections (b) through (e) above) from and against any Losses
of any kind or nature whatsoever which may be sustained or
suffered by any of them arising out of, based upon or in
connection with any of the following matters:
(i) a breach of any representation, warranty, agreement,
covenant or obligation made by Datalink in this
Agreement or in any Exhibit, Schedule, certificate or
financial statement delivered hereunder or in
connection herewith (notwithstanding any
investigation by or Knowledge of any of the
indemnified parties) or by reason of any claim,
action or proceeding asserted or instituted growing
out of any matter or thing constituting a breach of
such representations, warranties or covenants;
(ii) the DCS obligations for which the Stockholders have
previously provided a personal guarantee to the
obligee as described on the attached Exhibit
7.2(f)(ii); or
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(iii) the first $100,000 (in the aggregate) and 50% of the
third $100,000 (in the aggregate) of DCS Unpaid Sales
and Use Tax Assessments, and all of such Assessments
in excess of the first $300,000 (in the aggregate)
thereof.
SECTION 8. MISCELLANEOUS
8.1 S Corporation Matters. If at the time of the Closing, Datalink has
not yet initially closed on an IPO, the Stockholders agree to execute any
consents reasonably requested by Datalink to the continued tax election of
Datalink as an S Corporation pursuant to Code Section 1361. From and after the
Closing, and for so long as Datalink continues to be an S Corporation, the
Stockholders shall share prorata based on their percentage ownership with the
other Datalink stockholders in any S Corporation distributions made by Datalink.
Despite the foregoing, if Datalink declares one or more S Corporation
distributions payable to its stockholders of any of Datalink's pre-Closing
undistributed earnings and profits, whether in contemplation of an IPO, a
recapitalization or any other event, the Stockholders hereby waive any right to
the receipt of any such distributions and agree to execute a written
confirmation of such waiver if requested by Datalink.
8.2 Fees and Expenses. Except as otherwise provided herein, each of the
parties to this Agreement will bear its own expenses in connection with the
negotiation and consummation of the transactions contemplated by this Agreement.
All sales and transfer taxes, fees and duties under applicable law (including
all stock transfer taxes, fees and duties, if any) incurred in connection with
this Agreement or the transactions contemplated thereby will be borne and paid
by the Stockholders.
8.3 Confidentiality. DCS and the Stockholders agree that they will
treat the existence and terms of this Agreement and the transactions
contemplated hereby as strictly confidential and will not disclose them to any
Person without the prior written consent of Datalink or unless Datalink publicly
discloses such information.
8.4 Law Governing. This Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia without reference to the choice
of law provisions thereof. The parties hereby irrevocably and unconditionally
consent to the exclusive jurisdiction of the courts of the State of Georgia and
of the United States of America located in the State of Georgia in connection
with any suit, action or proceeding relating to this Agreement and the
transactions contemplated hereby (without, however, derogating from the
exclusivity of the arbitration procedures set forth in subparagraph 7.2(d)
hereof) and agree not to commence any action, suit or proceeding relating
thereto except in such courts.
8.5 Notices. All notices, requests, demands and other communications
hereunder shall be deemed to have been duly given if delivered by hand, sent by
certified or registered mail
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(postage prepaid and with return receipt requested), by overnight courier
service, or by telecopy or other written form of electronic confirmation:
To: DATALINK CORPORATION: Greg R. Meland, Chief Executive Officer
7423 Washington Avenue South
Minneapolis, Minnesota 55439
(612) 946-7894 (telefax)
With a copy to: Jerome J. Simons, Esq.
Messerli & Kramer P.A.
150 South Fifth Street, Suite 1800
Minneapolis, Minnesota 55402
(612) 672-3777 (telefax)
To: DCS ACQUISITION CORPORATION: Greg R. Meland, Chief Executive Officer
7423 Washington Avenue South
Minneapolis, Minnesota 55439
(612) 946-7894 (telefax)
With a copy to: Jerome J. Simons, Esq.
Messerli & Kramer P.A.
150 South Fifth Street, Suite 1800
Minneapolis, Minnesota 55402
(612) 672-3777 (telefax)
To: DIRECT CONNECT SYSTEMS, INC.: Attn: Donald R. Schrenk, Jr.
2264 N.W. Parkway, Suite I
Marietta, Georgia 30067
(770) 933-9272 (telefax)
With a copy to: Rosemarie Thurston, Esq.
Morris, Manning & Martin, L.L.P.
1600 Atlanta Financial Center
3343 Peachtree Road, N.E.
Atlanta, Georgia 30326
(404) 365-9532 (telefax)
To the STOCKHOLDERS: c/o Donald R. Schrenk, Jr.
Direct Connect Systems, Inc.
2264 N.W. Parkway, Suite I
Marietta, Georgia 30067
(770) 933-9272 (telefax)
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With a copy to: Rosemarie Thurston, Esq.
Morris, Manning & Martin, L.L.P.
1600 Atlanta Financial Center
3343 Peachtree Road, N.E.
Atlanta, Georgia 30326
(404) 365-9532 (telefax)
or to such other address of which any party may notify the other parties as
provided above. Notices are effective upon receipt or, if mailed, five (5)
business days after the placing thereof in the United States mail in the manner
provided above.
8.6 Entire Agreement. This Agreement, including the Schedules and
Exhibits referred to herein, constitutes the entire agreement between the
parties with respect to its subject matters and supersedes all previous written
or oral negotiations, commitments and writings; no promises, representations,
understandings, warranties and agreements have been made by any of the parties
hereto except as referred to herein or in such Schedules and Exhibits or in such
other writings; and all inducements to the making of this Agreement relied upon
by all the parties hereto have been expressed herein or in said Schedules or
Exhibits or in such other writings.
8.7 Assignability. This Agreement shall be binding upon, and shall be
enforceable by and inure to the benefit of, the parties named herein and their
respective successors and permitted assigns; provided, however, that (a) an
assignment of this Agreement may be made by Datalink to an affiliate of Datalink
upon written notice to the Stockholders, although no such assignment shall
relieve Datalink of any liabilities or obligations under this Agreement and (b)
this Agreement may not be assigned by DCS or any Stockholder without the prior
written consent of Datalink.
8.8 Waivers; Severability. The failure of any of the parties to this
Agreement to require the performance of a term or obligation under this
Agreement or the waiver by any of the parties to this Agreement of any breach
hereunder shall not prevent subsequent enforcement of such term or obligation or
be deemed a waiver of any subsequent breach hereunder. If any one or more of the
provisions of this Agreement are held to be invalid, illegal or unenforceable,
the validity, legality or enforceability of the remaining provisions of this
Agreement will not be affected thereby, and the parties will use all reasonable
efforts to substitute for such invalid, illegal or unenforceable provisions one
or more valid, legal and enforceable provisions which, insofar as practicable,
implement the purposes and intents hereof. To the extent permitted by applicable
law, each party waives any provision of law which renders any provision of this
Agreement invalid, illegal or unenforceable in any respect.
8.9 Specific Performance. Each of the parties acknowledges and agrees
that the other parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each of the parties agrees that
the other parties shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically this
Agreement and the
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terms and provisions hereof in any action instituted in any court of the United
States or any state thereof having jurisdiction over the Parties and the matters
covered by this Agreement (subject to the provisions set forth in Section 7.2),
in addition to any other remedy to which they may be entitled, at law or in
equity.
8.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same agreement.
8.11 Amendments. This Agreement may not be amended or modified, nor may
compliance with any condition or covenant set forth herein be waived, except by
a writing duly and validly executed by each party hereto, or in the case of a
waiver, the party waiving compliance.
8.12 Reporting of Reorganization. The parties agree that they will
report the transactions contemplated hereby as a reorganization within the
meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code for purposes of
federal, state and local income tax reporting.
SECTION 9. POST-CLOSING COVENANTS OF THE PARTIES
9.1 Post-Closing Covenants of DCS and the Stockholders. DCS and the
Stockholders will use their best efforts following the Closing promptly to
obtain (a) estoppel certificates acceptable in form and substance to Datalink
from each DCS landlord (a "Landlord") providing that (i) each lease is in full
force and effect and has not been modified, altered or supplemented in any way;
(ii) on the date of such estoppel certificate, there are no existing defenses,
off-sets or credits which the Landlord has against DCS under the lease, and the
Landlord is not aware of any action or inaction that has occurred or failed to
occur that by the passage of time or upon notice duly given, or both, would
constitute a defense to the lease or create a right of off-set or to a credit,
or if such an action or inaction has occurred, the nature of the action or
inaction; and (iii) stating the amount of rent and the date through which such
rent has been paid; and (b) a written undertaking by the trustees of DCS's
retirement and profit sharing plans to resign as trustees thereof upon the
request of Datalink. In addition, DCS and the Stockholders will promptly after
the Closing deliver to Datalink evidence satisfactory to Datalink's counsel that
all qualifications listed as incomplete on the Schedule of Foreign
Qualifications (Exhibit 5.1(b)) have been obtained.
[continued on next page]
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9.2 Post-Closing Covenant of Datalink. During the balance of 1998,
Datalink shall as much as practicable maintain the compensation and benefit
plans of DCS for such of DCS's employees as Datalink hires after the Closing and
will make any changes only upon the agreement with Messrs. Schrenk and Westwood.
IN WITNESS WHEREOF, the undersigned have hereto affixed their
signatures.
DATALINK CORPORATION
a Minnesota corporation
By: /s/ Greg R. Meland
--------------------------------------------
Greg R. Meland, Chief Executive Officer
DCS ACQUISITION CORPORATION
a Minnesota corporation
By: /s/ Greg R. Meland
--------------------------------------------
Greg R. Meland, Chief Executive Officer
DIRECT CONNECT SYSTEMS, INC.
a Georgia corporation
By: /s/ Donald R. Schrenk
--------------------------------------------
Donald R. Schrenk, Jr., President
STOCKHOLDERS:
/s/ Donald R. Schrenk, Jr.
-----------------------------------------------
Donald R. Schrenk, Jr.
/s/ Melissa A. Schrenk
-----------------------------------------------
Melissa A. Schrenk
[signatures continued on next page]
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<PAGE> 41
/s/ Bernard D. Westwood, Jr.
-----------------------------------------------
Bernard D. Westwood, Jr.
/s/ A. Deborah Westwood
-----------------------------------------------
A. Deborah Westwood
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<PAGE> 42
SCHEDULE OF EXHIBITS
Exhibit A Plan of Merger
Exhibit 3.8 Schedule of Purchase Price Allocation
Exhibit 3.9 Form of Escrow Agreement
Exhibit 3.10(a)(ii) Form of Opinion of Messerli & Kramer P.A.
Exhibit 3.10(a)(iii) Form of Buy-Sell Agreement
Exhibit 3.10(b)(ii) Form of Opinion of Morris, Manning & Martin, L.L.P.
Exhibit 3.10(b)(iv) Form of Non-Competition Agreement
Exhibit 4.2(a) Schedule of Excluded Assets and Liabilities
Exhibit 4.2(a)(iii) Schedule of Permitted Transaction Expenses
Exhibit 5(a) Schedule of Exceptions
Exhibit 5(b) Schedule of Indemnifiable Exceptions
Exhibit 5.1(a) Articles of Incorporation and Bylaws of DCS
Exhibit 5.1(b) Schedule of Foreign Qualifications
Exhibit 5.2(c) Schedule of Breaches and Defaults
Exhibit 5.3 Schedule of Stockholders
Exhibit 5.5 Financial Statements
Exhibit 5.6(a) Schedule of Leases
Exhibit 5.6(b) Schedule of Fixed Assets
Exhibit 5.6(c) Schedule of Defective Machinery and Equipment
Exhibit 5.7(c) Schedule of Tax Matters
Exhibit 5.9 Schedule of Accounts Receivable
Exhibit 5.10(a) Schedule of Slow Moving Raw Materials
Exhibit 5.10(b) Schedule of Slow Moving Finished Goods Inventory
Exhibit 5.10(c) Schedule of Raw Materials Inventories
Exhibit 5.10(d) Schedule of Finished Goods Inventories
Exhibit 5.11 Schedule of Changes
Exhibit 5.12 Schedule of Arrangements with Banking Institutions
Exhibit 5.13 Schedule of Intellectual Property
Exhibit 5.14 Schedule of Certain Non-Competition and
Confidentiality Agreements
Exhibit 5.15 Schedule of Contracts and Commitments
Exhibit 5.16 Schedule of Litigation
Exhibit 5.18 Schedule of Insurance
Exhibit 5.19 Schedule of Warranties
Exhibit 5.21 Schedule of Powers of Attorney
Exhibit 5.22 Schedule of Finders' Fees
Exhibit 5.23 Schedule of Authorizations
Exhibit 5.25 Schedule of Employee Benefit Plans
Exhibit 5.26 Schedule of Environmental Matters
Exhibit 5.27 Schedule of Backlog of Firm Orders
Exhibit 5.28 Schedule of Customers, Distributors and Independent
Sales Representatives
Exhibit 5.29 Schedule of Employee Compensation
Exhibit 5.30 Schedule of Other Agreements
-42-
<PAGE> 43
Exhibit 5.35 Form of Lock-Up Agreement
Exhibit 6.2(c) Schedule of Datalink Exceptions
Exhibit 6.3 Schedule of Matters on Datalink Registration
Statement
Exhibit 7.2(f)(ii) Schedule of Outstanding Stockholder Personal
Guarantees
-43-
<PAGE> 1
EXHIBIT 16.1
[HANSEN, JERGENSON, NERGAARD & CO., LLP LETTERHEAD]
July 14, 1998
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C., 20549
Re: Datalink Corporation
Ladies and Gentlemen:
We are writing to confirm that we have been provided a copy of the disclosures
being made by Datalink Corporation ("Datalink") in its Registration Statement
on Form S-1, SEC File No. 333-55935, in response to Item 304(a) of Regulation
S-K relating to our former role as the independent accountants for Datalink,
and that we agree with the statements made by Datalink therein.
Very truly yours,
Hansen, Jergenson, Nergaard & Co., LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
reports dated February 25, 1998, except as to the first paragraph of Note 5 and
Note 11 as to which the date is June 2, 1998, and Note 12, as to which the date
is July 15, 1998, on our audits of the financial statements and financial
statement schedule of Datalink Corporation. We also consent to the references
to our firm under the captions "Experts" and "Selected Historical and Pro
Forma Financial Data."
/s/ PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
July 15, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the references to our firm under the captions "Change in
Accountants" and "Selected Historical and Pro Forma Financial Data" in this
registration statement on Form S-1.
/s/ Hansen, Jergenson, Nergaard & Co. L.L.P.
Minneapolis, Minnesota
July 14, 1998
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<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 1,163,107 348,697
<SECURITIES> 0 0
<RECEIVABLES> 11,340,738 12,329,733
<ALLOWANCES> 60,000 75,000
<INVENTORY> 4,661,378 4,613,053
<CURRENT-ASSETS> 17,183,928 17,893,213
<PP&E> 2,246,664 2,634,798
<DEPRECIATION> 768,542 877,127
<TOTAL-ASSETS> 18,704,553 19,695,434
<CURRENT-LIABILITIES> 10,422,593 10,708,721
<BONDS> 0 0
13,873,980 16,173,980
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 18,704,553 19,695,434
<SALES> 71,255,299 36,627,004
<TOTAL-REVENUES> 71,255,299 36,627,004
<CGS> 55,719,303 27,644,047
<TOTAL-COSTS> 9,127,498 5,458,467
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 332,562 105,496
<INCOME-PRETAX> 6,075,936 3,418,994
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 6,075,936 3,418,994
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,075,936 3,418,994
<EPS-PRIMARY> 0.88 0.50
<EPS-DILUTED> 0.88 0.50
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