<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 1999
REGISTRATION NO. 333-55935
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4 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.
KEVIN S. SPRENG, 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>
------------------------
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
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM AMOUNT OF
AGGREGATE REGISTRATION
TITLE OF SHARES TO BE REGISTERED OFFERING PRICE(1) FEE(2)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value.............................. $29,900,000 $8,313.00
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 JUNE 15, 1999
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
$8.00 and $10.00 per share. See "Underwriting" for information relating to the
factors considered in determining the initial public offering price. The Company
has applied for listing of its 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 6 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>
<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
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 $350,000.
(3) The Company and a stockholder have granted to the Underwriters a 30-day
option to purchase up to 375,000 and 15,000 additional shares of Common
Stock, respectively, on the same terms per share solely to cover
over-allotments, if any. 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 , 1999.
------------------
Needham & Company, Inc.
Cruttenden Roth
Incorporated
John G. Kinnard and Company,
Incorporated
The date of this Prospectus is , 1999.
<PAGE> 3
Inside Front Cover: Caption at top which reads as follows: "Datalink
Delivers the Power of Information Through Enterprise Storage Solutions." Caption
at bottom which reads as follows: "Access, Protection and Management of
Information are Increasingly Critical and Represent a Key Competitive
Advantage." Datalink logo at bottom center of page. Three diagrams in center of
page with center caption "Storage--Centric Computing." The top diagram,
captioned "Storage Area Network (SAN)," depicts a local area network (LAN) with
three UNIX and NT servers linked through storage management software to a
switch, which in turn is connected to a RAID storage system and, through a
bridge, to a tape library. The lower left diagram, captioned "Direct Attached
Storage," depicts a LAN with two UNIX and Novell servers, one linked through
storage management software to a tape library and the other linked through such
software to a RAID storage system. The lower right diagram, captioned "Network
Attached Storage (NAS)," depicts three workstations connected through a LAN to a
RAID storage system.
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," "Implementation,"
"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 Best of Breed Products With Technical
Expertise and Comprehensive Professional 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) 1,350,000 shares of Common Stock reserved for issuance
under the Company's Incentive Compensation Plan, including 751,425 shares of
Common Stock reserved for issuance upon the exercise of stock options to be
granted under the Incentive Compensation Plan; (ii) 250,000 shares of Common
Stock reserved for issuance under the Company's Employee Stock Purchase Plan and
(iii) 390,000 shares of Common Stock which may be purchased by the Underwriters
from the Company to cover over-allotments, if any. 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.
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 storage area network ("SAN"), network attached
storage ("NAS"), redundant array of independent disks ("RAID"), hard disk,
magnetic tape, CD-ROM and optical products. The Company also incorporates
storage management software technologies, including backup and recovery,
disaster recovery, hierarchical storage management ("HSM"), archive, management
and configuration, high availability and media management products, to meet the
specific needs of its customers. The Company's net sales have grown from $32.3
million in 1994 to $88.0 million in 1998, a 28% annual compound growth rate, and
the Company's S corporation net income has grown from $2.0 million to $6.5
million, a 34% 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 market for hubs, switches and routers, which are key SAN components,
was approximately $0.4 billion in 1998 and is expected to grow at an annual
compound rate of 48% to approximately $1.8 billion by 2002. According to
Dataquest, the worldwide RAID storage market for UNIX and Windows NT operating
platforms was approximately $15.0 billion in 1998 and is expected to grow at an
annual compound rate of 22% to approximately $39.8 billion by 2003. 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 Dataquest, the worldwide
storage management software market was approximately $2.6 billion in 1998 and is
expected to grow at an annual compound rate of 21% to approximately $6.6 billion
by 2003. 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 rely upon complex Open Systems computing platforms that link
multiple application, file, database and communications servers of differing
vendors to networked computers. The increasing demand for and complexity of
information
<PAGE> 5
storage systems has outpaced the ability of in-house MIS departments to
adequately serve their organizations. 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
computer networks and 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.
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. 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 BellSouth.net, The Boeing Company,
Eli Lilly and Company, Gateway 2000, Inc., GE Medical Systems and Lucent
Technologies, Inc. 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. Datalink further differentiates itself by maintaining ISO 9001
registration for its principal facility and utilizing such standards throughout
its organization 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 strengthen 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 and project management services; (iv) expand geographically through
internal growth and acquisitions; and (v) maintain and continually improve the
Company's high standards for superior technical and sales service and support.
As part of its business strategy, in July 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
solutions principally for end-users in the southeastern United States. DCSI's
net sales for 1997 were $11.8 million.
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. The Company's web site is located at www.datalink.com. The contents of
this web site are not incorporated herein by reference.
2
<PAGE> 6
THE OFFERING
Common Stock offered by the Company..... 2,600,000 shares
Common Stock to be outstanding after
this offering........................... 8,626,502 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 $10.7 million
had the termination occurred on
March 31, 1999; (ii) repay certain
outstanding indebtedness of
approximately $5.6 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) Excludes (i) 1,350,000 shares of Common Stock reserved for issuance under
the Company's Incentive Compensation Plan, including 751,425 shares of
Common Stock reserved for issuance upon the exercise of options to be
granted under the Incentive Compensation Plan, (ii) 250,000 shares of Common
Stock reserved for issuance under the Company's Employee Stock Purchase Plan
and (iii) 375,000 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."
(2) Includes an additional 22,222 shares of the Company's Common Stock issuable
in connection with the DCSI acquisition assuming an initial public offering
price of $9.00 per share. See Note 12 of the Notes to the Company's
Consolidated Financial Statements.
3
<PAGE> 7
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $32,333 $38,048 $54,652 $71,255 $87,952 $16,599 $25,682
Cost of sales......................... 25,907 30,356 42,872 55,719 65,740 12,723 19,071
------- ------- ------- ------- ------- ------- -------
Gross profit.......................... 6,426 7,692 11,780 15,536 22,212 3,876 6,611
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing................... 1,891 2,487 3,607 5,191 7,754 1,427 2,160
General and administrative............ 1,912 2,118 2,382 3,010 5,403 961 1,691
Engineering........................... 343 467 633 926 1,362 315 776
Offering costs(1)..................... 733 173
------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 4,146 5,072 6,622 9,127 15,252 2,703 4,800
------- ------- ------- ------- ------- ------- -------
Operating income...................... 2,280 2,620 5,158 6,409 6,960 1,173 1,811
Interest expense, net................. 243 306 286 333 281 55 74
------- ------- ------- ------- ------- ------- -------
Income before income taxes............ 2,037 2,314 4,872 6,076 6,679 1,118 1,737
Income tax expense (benefit).......... 148 (556)
------- ------- ------- ------- ------- ------- -------
Net income(2)......................... $ 2,037 $ 2,314 $ 4,872 $ 6,076 $ 6,531 $ 1,118 $ 2,293
======= ======= ======= ======= ======= ======= =======
Historical net income per share, basic
and diluted......................... $ 0.30 $ 0.34 $ 0.71 $ 0.88 $ 0.93 $ 0.16 $ 0.34
======= ======= ======= ======= ======= ======= =======
Weighted average shares outstanding,
basic and diluted................... 6,900 6,900 6,900 6,900 6,993 6,900 6,723
------- ------- ------- ------- ------- ------- -------
Pro forma income taxes(3)............. 2,672 436 730
------- ------- -------
Pro forma net income.................. $ 4,007 $ 682 $ 1,007
======= ======= =======
Pro forma net income per share, basic
and diluted(4)...................... $ 0.48 $ 0.08 $ 0.13
======= ======= =======
Shares used in computing pro forma net
income per share(4)................. 8,276 8,183 8,005
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
---------------------
PRO FORMA
-----------
AS OF DECEMBER 31, TERMINATION
----------------------------------------------- OF PUT
1994 1995 1996 1997 1998 ACTUAL OPTIONS(5)
---- ---- ---- ---- ---- ------ -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.......................... $ 294 $ 111 $ 222 $ 1,163 $ 2,798 $ 588 $ 588
Working capital............... 2,424 3,003 5,330 6,761 6,677 5,993 5,993
Total assets.................. 9,314 8,689 15,355 18,705 32,144 31,090 31,090
Note payable to former
stockholder(8).............. 3,020 3,020
Common stock, subject to put
option...................... 3,425 5,351 9,339 13,874 19,059 20,476 --
Stockholders' equity
(deficiency)................ (1,331) (2,286) (3,296) (5,744) (6,341) (9,483) 10,993
<CAPTION>
AS OF MARCH 31, 1999
-----------------------------
PRO FORMA
-----------------------------
TERMINATION OF
S CORPORATION AS
STATUS(6) ADJUSTED(7)
-------------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash.......................... $ 588 $ 5,615
Working capital............... (4,305) 17,107
Total assets.................. 31,526 36,553
Note payable to former
stockholder(8).............. 3,020 3,020
Common stock, subject to put
option...................... -- --
Stockholders' equity
(deficiency)................ (111) 21,301
</TABLE>
- ------------
(1) Represents legal, accounting and other costs associated with the Company's
initial public offering, which was postponed due to market conditions.
(2) For the periods presented, the Company was an S corporation and,
accordingly, was not subject to federal and state income taxes. Until its
merger into Datalink in January 1999, DCSI was a C corporation. Accordingly,
a provision for income taxes resulting from the operations of DCSI from the
date of the acquisition, July 15, 1998, through December 31, 1998 is
included in the financial data for the year ended December 31, 1998.
Beginning with the merger of DCSI into Datalink in January 1999, the taxable
income of DCSI is reported as part of the Company's S corporation taxable
income. Accordingly, the Company eliminated DCSI's net deferred income tax
liabilities of $580 which, net of a current income tax provision of $24,
resulted in a net income tax benefit of $556 for the three month period
ended March 31, 1999.
(3) 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 Consolidated Financial Statements.
4
<PAGE> 8
(4) 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 an assumed initial public offering price of $9.00 per share (before
deducting the underwriting discounts) to fund a distribution to the current
stockholders of all previously taxed, but undistributed, S Corporation
earnings, estimated at $10,735 had the termination occurred on March 31,
1999. 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 Consolidated Financial Statements.
(5) 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 Consolidated Financial Statements.
(6) Adjusted to give pro forma effect to (i) the pro forma adjustment described
in (5) above, (ii) a final S corporation distribution payable to the current
stockholders, representing all previously taxed, but undistributed, S
corporation earnings, estimated at $10,735 had the termination occurred on
March 31, 1999 and (iii) a net deferred tax liability which will be recorded
by the Company as a result of the termination of its S corporation status,
estimated at $370 had such termination occurred on March 31, 1999. See
"Termination of S Corporation Status and Put Option and Dividend Policy" and
Note 3 of the Notes to the Company's Consolidated Financial Statements.
(7) Adjusted to give effect to (i) the pro forma adjustments described in (6)
above and (ii) the sale by the Company of 2,600 shares of Common Stock
offered hereby at an assumed initial public offering price of $9.00 per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."
(8) Represents a $3.0 million note issued to a former stockholder of the Company
in connection with the redemption of 1,095,720 shares of the Company's
Common Stock, effective February 28, 1999. See Note 9 of Notes to the
Company's Consolidated Financial Statements.
5
<PAGE> 9
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 subassemblies. For example, the
Company purchases SAN switching products manufactured primarily by Brocade
Communications Systems, Inc. and Computer Network Technology Corp., digital
linear tape products manufactured primarily by ATL Products, Inc, a division of
Quantum Corporation, and Storage Technology Corporation, RAID products
manufactured primarily by CLARiiON, a division of Data General Corporation, and
Hitachi Data Systems Corporation and storage management software products
manufactured primarily by Legato Systems, Inc. and VERITAS Software Corporation.
The Company's reliance on its suppliers involves several risks, including an
inadequate supply of required products and subassemblies, price increases, late
deliveries and poor product and subassembly quality. In addition, there is
currently a significant market demand for disk drives, tape drives and RAID
controllers, and from time to time the Company's subassembly suppliers 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 subassemblies,
there can be no assurance that the Company will be able to obtain its full
requirements of such products and subassemblies in the future or that prices of
such products and subassemblies will not increase. In addition, there can be no
assurance that problems with respect to quantity and quality of such products
and subassemblies and timeliness of deliveries will not occur. Disruption or
termination of the supply of products and subassemblies 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. Datalink
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. The
Company also competes in the storage systems market with general purpose
computer suppliers such as Compaq Computer Corporation ("Compaq"), Dell Computer
Corporation ("Dell"), Hewlett-Packard Company ("Hewlett-Packard"), International
Business Machines Corp. ("IBM"), Silicon Graphics, Inc. ("Silicon Graphics") and
Sun Microsystems, Inc. ("Sun"). 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
6
<PAGE> 10
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, President and Chief Executive Officer; Daniel J.
Kinsella, Chief Financial Officer; Scott D. Robinson, Vice
President--Engineering, Stephen M. Howe, Vice President--Sales and Michael J.
Jaeb, Vice President--Operations and Administration. The Company does not have
employment, non-competition or nondisclosure agreements with any of its officers
or employees, other than certain non-competition agreements entered into in
connection with the DCSI acquisition. 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
7
<PAGE> 11
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 relies
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 July 1998 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 limited
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 "Use of Proceeds" and
"Business--Business Strategy."
8
<PAGE> 12
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 $5.1
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 $9.00
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 March 31, 1999, this amount was estimated to be approximately $10.7 million.
The Company will adjust the actual amount of the distribution to reflect the
taxable income and any stockholder distributions from April 1, 1999 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 3 of the Notes to the
Company's Consolidated Financial Statements.
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, there can be no such assurance. Further, the Company
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 subassemblies sold by the Company to its customers were to
fail, the Company could be liable to its customers
9
<PAGE> 13
for damages and costs to the extent that the Company's 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--Year 2000 Disclosure."
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 $7.00 per share, or 77.8%, in the net tangible book
value per share of Common Stock from the assumed initial public offering price
of $9.00 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, and assuming an initial public
offering price of $9.00 per share, the current stockholders of the Company will
beneficially own approximately 69.9% of the outstanding Common Stock
(approximately 66.8% if the Underwriters' over-allotment option is exercised in
full). As a result, the nine 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 "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's Common Stock has been approved upon notice of
issuance for quotation and trading 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
10
<PAGE> 14
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, the 6,026,502 shares of Common
Stock that will then be owned by the 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 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."
11
<PAGE> 15
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 $9.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses, are estimated to
be approximately $21.4 million ($24.7 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.............................................. $10.7 million
Repayment of certain indebtedness........................... 5.6 million
Growth and expansion, working capital and general corporate
purposes.................................................. 5.1 million
-------------
Total....................................................... $21.4 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 March 31, 1999, such earnings were estimated to be
approximately $10.7 million. See "Termination of S Corporation Status and Put
Option and Dividend Policy" and Note 3 of the Notes to the Company's
Consolidated 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 March 31,
1999, the balance under the Credit Agreement was approximately $5.6 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 Consolidated Financial Statements.
Approximately $5.1 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.
12
<PAGE> 16
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 March 31, 1999, such earnings were estimated at
approximately $10.7 million. The actual amount of the distribution will be
adjusted to reflect the taxable income and any stockholder distributions from
April 1, 1999 through the termination of the S corporation status. Following the
termination of its S corporation status, the Company will record a net deferred
tax liability on its balance sheet which will ultimately reduce stockholders'
equity. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations" and Note 3 of the Notes to the
Company's Consolidated Financial Statements.
The Company is obligated to redeem shares of the Company's Common Stock
held by its current stockholders upon the occurrence of certain events. Because
the Company's Common Stock is subject to these put options, the accreted value
of the Common Stock has been excluded from stockholders' equity. These put
options will be terminated contemporaneously with the closing of this offering.
See "Selected Historical Financial Data," "Capitalization" and Notes 3 and 9 of
the Notes to the Company's Consolidated 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.
13
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1999, 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 $9.00 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 consolidated financial statements and notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------------------------------------
PRO FORMA
--------------------------------------------
TERMINATION TERMINATION OF
OF PUT S CORPORATION AS
ACTUAL OPTIONS(2) STATUS(3) ADJUSTED(4)
------ ----------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Note payable to former stockholder(1)......... $ 3,020 $ 3,020 $3,020 $ 3,020
Common Stock, subject to put option, $0.001
par value; 50,000,000 shares authorized;
6,004,280 shares issued and outstanding..... 20,476 -- -- --
Stockholders' equity (deficiency):
Common Stock, $0.001 par value; 50,000,000
shares authorized; 6,004,280 shares
issued and outstanding actual and
8,626,502 shares issued and outstanding
as adjusted(5)........................... -- 6 6 9
Additional paid-in capital.................. -- -- -- 21,409
Retained earnings (accumulated deficit)..... (9,483) 10,987 (117) (117)
------- ------- ------ -------
Total stockholders' equity (deficiency)..... (9,483) 10,993 (111) 21,301
------- ------- ------ -------
Total capitalization.......................... $14,013 $14,013 $2,909 $24,321
======= ======= ====== =======
</TABLE>
- ------------
(1) Represents a $3.0 million note issued to a former stockholder of the Company
in connection with the redemption of 1,095,720 shares of the Company's
Common Stock, effective February 28, 1999. See Note 9 of Notes to the
Company's Consolidated Financial Statements.
(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 Consolidated 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 $10.7 million had the termination
occurred on March 31, 1999 and (iii) a net deferred tax liability which will
be recorded by the Company as a result of the termination of its S
corporation status, estimated at $370,000 had such termination occurred on
March 31, 1999. See "Termination of S Corporation Status and Put Option and
Dividend Policy" and Notes 2 and 3 of Notes to the Company's Consolidated
Financial Statements.
(4) Adjusted to give pro forma effect to the adjustments in (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 $9.00 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 Consolidated Financial Statements.
(5) Excludes (i) 1,350,000 shares of Common Stock reserved for issuance under
the Company's Incentive Compensation Plan, including 751,425 shares of
Common Stock reserved for issuance upon the exercise of options to be
granted under the Incentive Compensation Plan, (ii) 250,000 shares of Common
Stock
14
<PAGE> 18
reserved for issuance under the Company's Employee Stock Purchase Plan and
(iii) 375,000 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." As adjusted,
includes an additional 22,222 shares of the Company's Common Stock issuable
in connection with the DCSI acquisition assuming an initial public offering
price of $9.00 per share. See Note 12 of the Notes to the Company's
Consolidated Financial Statements.
15
<PAGE> 19
DILUTION
The net tangible book value (deficit) of the Company as of March 31, 1999
was $(13.5) million, or $(2.24) 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 $10.7 million had the
termination occurred on March 31, 1999, (iii) the net deferred tax liability
which will be recorded by the Company as a result of the termination of its S
corporation status, estimated at $370,000 had such termination occurred on March
31, 1999 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 $9.00 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 March 31, 1999 would have been $17.3 million, or
$2.00 per share. This represents an immediate increase in net tangible book
value of $4.24 per share to the existing stockholders and an immediate dilution
in net tangible book value of $7.00 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..................... $9.00
Net tangible book value (deficit) per share at March 31,
1999................................................... $(2.24)
Increase attributable to termination of put option on
Common Stock........................................... 3.40
Decrease attributable to the final S corporation
distribution and establishment of net deferred tax
liabilities............................................ (1.84)
Increase in net tangible book value per share attributable
to new investors....................................... 2.68
Net tangible book value per share after the offering........ 2.00
-----
Dilution per share to new investors......................... $7.00
=====
</TABLE>
The following table summarizes as of March 31, 1999, 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 $9.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... 6,026,502 69.9% $ 2,000,100 7.9% $ .33
New investors............................ 2,600,000 30.1 23,400,000 92.1 9.00
--------- ----- ----------- ----- ------
Total............................... 8,626,502 100.0% $25,400,100 100.0% $ 2.94
========= ===== =========== ===== ======
</TABLE>
The foregoing calculations assume the issuance of 22,222 additional shares
of the Company's Common Stock in connection with the DCSI acquisition based upon
an assumed initial public offering price of $9.00 per share, but do not give
effect to (i) 1,350,000 shares of Common Stock reserved for issuance under the
Company's Incentive Compensation Plan, including 751,425 shares of Common Stock
reserved for issuance upon the exercise of options to be granted under the
Incentive Compensation Plan, (ii) 250,000 shares of Common Stock reserved for
issuance under the Company's Employee Stock Purchase Plan and (iii) 375,000
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."
16
<PAGE> 20
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth certain selected historical financial data
of Datalink as of and for each of the five years in the period ended December
31, 1998 and as of March 31, 1999 and for each of the three month periods ended
March 31, 1998 and 1999. The selected historical financial data as of December
31, 1995, 1996, 1997 and 1998 and for each of the four years in the period ended
December 31, 1998 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 and for the year 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 March 31,
1999 and for the three month periods ended March 31, 1998 and 1999 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $32,333 $38,048 $54,652 $71,255 $87,952 $16,599 $25,682
Cost of sales................ 25,907 30,356 42,872 55,719 65,740 12,723 19,071
------- ------- ------- ------- ------- ------- -------
Gross profit............... 6,426 7,692 11,780 15,536 22,212 3,876 6,611
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing........ 1,891 2,487 3,607 5,191 7,754 1,427 2,160
General and
administrative.......... 1,912 2,118 2,382 3,010 5,403 961 1,691
Engineering................ 343 467 633 926 1,362 315 776
Offering costs(1).......... 733 173
------- ------- ------- ------- ------- ------- -------
Total operating expenses..... 4,146 5,072 6,622 9,127 15,252 2,703 4,800
------- ------- ------- ------- ------- ------- -------
Operating income............. 2,280 2,620 5,158 6,409 6,960 1,173 1,811
Interest expense, net........ 243 306 286 333 281 55 74
------- ------- ------- ------- ------- ------- -------
Income before income taxes... 2,037 2,314 4,872 6,076 6,679 1,118 1,737
Income tax expense........... 148 (556)
------- ------- ------- ------- ------- ------- -------
Net income(2)................ $ 2,037 $ 2,314 $ 4,872 $ 6,076 $ 6,531 $ 1,118 $ 2,293
======= ======= ======= ======= ======= ======= =======
Historical net income per
share, basic and diluted... $ 0.30 $ 0.34 $ 0.71 $ 0.88 $ 0.93 $ 0.16 $ 0.34
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding, basic and
diluted.................... 6,900 6,900 6,900 6,900 6,993 6,900 6,723
------- ------- ------- ------- ------- ------- -------
Pro forma income taxes(3).... 2,672 436 730
------- ------- -------
Pro forma net income......... $ 4,007 $ 682 $ 1,007
======= ======= =======
Pro forma net income per
share, basic and
diluted(4)................. $ 0.48 $ 0.08 $ 0.13
======= ======= =======
Shares used in computing pro
forma net income per
share(4)................... 8,276 8,183 8,005
======= ======= =======
</TABLE>
17
<PAGE> 21
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------------------------------------
PRO FORMA
------------------------------------------
AS OF DECEMBER 31, TERMINATION TERMINATION OF
----------------------------------------------- OF PUT S CORPORATION AS
1994 1995 1996 1997 1998 ACTUAL OPTIONS(5) STATUS(6) ADJUSTED(7)
---- ---- ---- ---- ---- ------ ----------- -------------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash..................... $ 294 $ 111 $ 222 $ 1,163 $ 2,798 $ 588 $ 588 $ 588 $ 5,615
Working capital.......... 2,424 3,003 5,330 6,761 6,677 5,993 5,993 (4,305) 17,107
Total assets............. 9,314 8,689 15,355 18,705 32,144 31,090 31,090 31,526 36,553
Note payable to former
stockholder(8)......... 3,020 3,020 3,020 3,020
Common stock, subject to
put option............. 3,425 5,351 9,339 13,874 19,059 20,476 -- -- --
Stockholders' equity
(deficiency)........... (1,331) (2,286) (3,296) (5,744) (6,341) (9,483) 10,993 (111) 21,301
</TABLE>
- ------------
(1) Represents legal, accounting and other costs associated with the Company's
initial public offering, which was postponed due to market conditions.
(2) For the periods presented, the Company was an S corporation and,
accordingly, was not subject to federal and state income taxes. Until its
merger into Datalink in January 1999, DCSI was a C corporation. Accordingly,
a provision for income taxes resulting from the operations of DCSI from the
date of the acquisition, July 15, 1998, through December 31, 1998 is
included in the financial data for the year ended December 31, 1998.
Beginning with the merger of DCSI into Datalink in January of 1999, the
taxable income of DCSI is reported as part of the Company's S corporation
taxable income. Accordingly, the Company eliminated DCSI's net deferred
income tax liabilities of $580 which, net of a current income tax provision
of $24, resulted in a net income tax benefit of $556 for the three month
period ended March 31, 1999.
(3) 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 Consolidated Financial Statements.
(4) 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 an assumed initial public offering price of $9.00 per share (before
deducting the underwriting discounts) to fund a distribution to the current
stockholders of all previously taxed, but undistributed, S Corporation
earnings, estimated at $10,735 had the termination occurred on March 31,
1999. 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 Consolidated Financial Statements.
(5) 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 Consolidated Financial Statements.
(6) Adjusted to give pro forma effect to (i) the pro forma adjustment described
in (5) above, (ii) a final S corporation distribution payable to the current
stockholders, representing all previously taxed, but undistributed, S
corporation earnings, estimated at $10,735 had the termination occurred on
March 31, 1999 and (iii) a net deferred tax liability which will be recorded
by the Company as a result of the termination of its S corporation status,
estimated at $370 had such termination occurred on March 31, 1999. See
"Termination of S Corporation Status and Put Option and Dividend Policy" and
Note 3 of the Notes to the Company's Consolidated Financial Statements.
(7) Adjusted to give effect to (i) the pro forma adjustments described in (6)
above and (ii) the sale by the Company of 2,600 shares of Common Stock
offered hereby at an assumed initial public offering price of $9.00 per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."
(8) Represents a $3.0 million note issued to a former stockholder of the Company
in connection with the redemption of 1,095,720 shares of the Company's
Common Stock, effective February 28, 1999. See Note 9 of Notes to the
Company's Consolidated Financial Statements.
18
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated 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
subassemblies 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 SAN, NAS, RAID, hard disk, magnetic tape, CD-ROM and optical products.
The Company also incorporates storage management software technologies,
including backup and recovery, disaster recovery, HSM, archive, management and
configuration, high availability and media management products, to meet the
specific needs of its customers. The Company's net sales and net income have
grown at a compound annual rate of 28% and 34%, respectively, over the five year
period ended December 31, 1998.
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.
Datalink sells its products through its direct sales force located in
Minneapolis and 19 field offices. The Company has continued to grow its sales
force through the DCSI acquisition and opening 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 part of its business strategy, in July 1998, the Company acquired DCSI,
a Marietta, Georgia-based firm engaged in the analysis, custom design,
integration and support of high-end Open Systems data solutions principally for
end users in the southeastern United States. DCSI's net sales for 1997 were
$11.8 million.
As an independent storage solutions provider, Datalink updates its product
offerings to incorporate 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.
19
<PAGE> 23
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>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................... 78.4 78.2 74.8 76.6 74.3
----- ----- ----- ----- -----
Gross profit.................................. 21.6 21.8 25.2 23.4 25.7
----- ----- ----- ----- -----
Operating expenses:
Sales and marketing........................... 6.6 7.3 8.8 8.6 8.4
General and administrative.................... 4.4 4.2 6.1 5.8 6.5
Engineering................................... 1.2 1.3 1.6 1.9 3.0
Offering costs................................ 0.8 0.7
----- ----- ----- ----- -----
Total operating expenses................... 12.2 12.8 17.3 16.3 18.6
----- ----- ----- ----- -----
Operating income................................ 9.4% 9.0% 7.9% 7.1% 7.1%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
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 $9.1
million, or 54.7%, to $25.7 million for the three months ended March 31, 1999,
from $16.6 million for the comparable period in 1998. The increased sales are
primarily attributable to the July 1998 acquisition of DCSI, the hiring of
DCSI's and other new sales and engineering personnel and the opening of new
sales offices. Additionally, the higher sales reflect the increasing demand for
more complex data storage products, which has resulted in higher equipment,
software and services revenues.
Gross Profit. Gross profit as a percentage of net sales increased to 25.7%
for the three months ended March 31, 1999, from 23.4% for the comparable period
in 1998. This increase was principally attributable to the Company's increased
percentage of sales of large, sophisticated storage systems to end-user
customers which typically have generated higher margins than sales to VAR and
OEM customers.
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 expenses totalled 8.4% of net sales for the three months ended
March 31, 1999, compared to 8.6% of net sales for the comparable period in 1998.
The Company has hired new sales and marketing personnel in addition to absorbing
the incremental costs related to the operations of DCSI. Approximately 70% of
sales and marketing costs are directly variable with sales. These variable costs
have remained relatively constant as a percentage of net sales between the two
periods. Additionally, the Company has increased net sales at a rate slightly
greater than the growth in fixed sales and marketing expense.
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 were 6.5% of net sales for the three months ended March
31,
20
<PAGE> 24
1999, compared to 5.8% of net sales for the comparable period in 1998. Of the
increased general and administrative expenses, approximately $193,000 or 0.8% of
net sales for the three months ended March 31, 1999 was amortization of
identifiable assets and goodwill related to the Company's acquisition of DCSI.
Depreciation expense related to the Company's new information systems
implemented in late 1998 increased significantly from the comparable period in
1998. In addition, rent expense increased relative to the comparable period in
1998 due primarily to the acquisition of DCSI and the opening of additional
sales offices. Profit sharing expense also increased relative to the comparable
period in 1998.
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 to 3.0% of net sales for the three months ended March 31,
1999, compared to 1.9% of net sales for the comparable period in 1998. The
Company has continued to add new engineering personnel and has increased the
compensation levels for its engineers in order to more effectively compete for
engineering human resources. Additionally, the Company's costs for engineering
travel have increased as sales have increased.
Offering Costs. The Company incurred approximately $173,000 of expenses in
the first quarter of 1999 in conjunction with the Company's contemplated initial
public offering. As required, these costs were expensed in the first quarter
when a determination was made that the offering would be delayed more than 90
days.
Operating Income. Operating income totaled 7.1% of net sales for the three
months ended March 31, 1999 and 1998. The Company's operating income as a
percentage of net sales in the 1999 period would have been 7.7% if the expenses
related to offering costs were excluded. The higher gross profit margin in 1999
was offset by increased engineering and general and administrative costs. The
Company expects gross profit margins may increase further as the Company
increasingly sells complex data storage solutions to end-user customers.
However, improved gross profit margins may be offset by higher costs to develop,
implement and support these high-end data storage solutions.
Income Taxes. In January 1999, DCSI was merged into Datalink, an S
corporation. Until its merger into Datalink, DCSI was a C corporation and
accordingly its income was subject to U.S. and state income taxes. Beginning
with the merger of DCSI into Datalink, the taxable income is reported as part of
the Company's S Corporation taxable income. Accordingly, the Company eliminated
DCSI's net deferred income tax liabilities of $580,000 which, net of a current
income tax provision of $24,000, resulted in a net income tax benefit of
$556,000 for the three month period ended March 31, 1999. Most of this income
tax benefit will be reversed upon the completion of the offering because the
Company will lose its S Corporation status and accordingly, will need to
establish its deferred tax assets and liabilities.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Net Sales. Net sales increased 23.4% to $88.0 million in 1998 and increased
30.4% to $71.3 million in 1997. Net sales were $54.7 million in 1996. These
increases were principally attributable to an increase in sales of large RAID
and tape backup storage systems to end-user customers. The increase in sales in
1998 was also attributable to the July 1998 acquisition of DCSI, the hiring of
DCSI's and other new sales and engineering personnel and the opening of new
sales offices.
Gross Profit. Gross profit as a percentage of net sales increased to 25.2%
in 1998 from 21.8% in 1997 and 21.6% in 1996. These increases were primarily due
to the Company's increasing sales of large storage systems to end-user customers
which typically have generated higher margins than sales to VAR and OEM
customers.
Sales and Marketing. Sales and marketing expenses increased 49.4% to $7.8
million in 1998 and increased 43.9% to $5.2 million in 1997. Sales and marketing
expenses were $3.6 million in 1996. As a percentage of net sales, sales and
marketing expenses were 8.8% in 1998, 7.3% in 1997 and 6.6% in 1996. 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
21
<PAGE> 25
and to the hiring of new sales representatives in anticipation of future growth.
In addition, during 1998, the Company absorbed the incremental costs related to
the operations of DCSI.
General and Administrative. General and administrative expenses increased
79.5% to $5.4 million in 1998 compared to 1997 and increased 26.4% to $3.0
million in 1997 compared to $2.4 million in 1996. As a percentage of net sales,
general and administrative expenses were 6.1% in 1998, 4.2% in 1997 and 4.4% in
1996. The dollar increase in general and administrative expenses was primarily
attributable to increases in administrative personnel and related expenses. In
1998, the Company also incurred $376,000 of amortization expense due to the
amortization of identifiable assets and goodwill resulting from the July 1998
acquisition of DCSI.
Engineering. Engineering expenses increased 47.1% to $1.4 million in 1998
as compared to 1997 and increased 46.3% to $926,000 in 1997 as compared to
$633,000 in 1996. Engineering expenses as a percentage of net sales were 1.6% in
1998, 1.3% in 1997 and 1.2% in 1996. The dollar increase over these years was
primarily attributable to the addition of new engineering personnel and
increased travel expenses.
Offering Costs. The Company incurred approximately $733,000 of expenses in
1998 in conjunction with the Company's contemplated initial public offering. As
required, these previously deferred costs were expensed in 1998 when a
determination was made that the offering would be delayed more than 90 days.
Operating Income. Operating income increased 8.6% to $7.0 million in 1998
as compared to 1997 and 24.3% to $6.4 million in 1997 as compared to $5.2
million in 1996. As a percentage of net sales, operating income was 7.9% in
1998, 9.0% in 1997 and 9.4% in 1996. The decrease in operating income as a
percentage of net sales in 1998 was principally attributable to the investment
in sales and marketing expenses in anticipation of future sales growth, offering
costs related to the Company's delayed initial public offering and amortization
expenses related to the DCSI acquisition. The increase in operating income as a
percentage of net sales in 1996 was principally attributable to the significant
increase in net sales.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain unaudited quarterly financial data
of the Company for each quarter of 1996, 1997 and 1998 and the first quarter of
1999. 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 1,586 2,085 1,173 2,351
Net income........... 771 1,271 1,075 1,755 1,004 1,567 1,489 2,016 1,118 2,301
<CAPTION>
QUARTER ENDED
------------------------------
1998 1999
------------------- --------
SEP. 30 DEC. 31 MAR. 31
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales............ $23,485 $27,840 $25,682
Gross profit......... 6,000 7,229 6,611
Operating income..... 1,622 1,814 1,811
Net income........... 1,265 1,847 2,293
</TABLE>
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.
22
<PAGE> 26
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 $6.0 million, $6.8 million and $6.7 million at
March 31, 1999 and December 31, 1998 and 1997, respectively. The Company's
current ratio was 1.3, 1.4 and 1.6 at March 31, 1999 and December 31, 1998 and
1997, respectively.
Cash used in operating activities was $5.1 million for the three months
ended March 31, 1999. The use of cash in operating activities was primarily due
to the timing of payments to vendors at calendar year end which resulted in an
unusually high level of accounts payable at December 31, 1998. Cash used in
investing activities was $160,000 for the three months ended March 31, 1999
resulting primarily from the Company's purchases of new computer equipment. Cash
provided by financing activities was $3.1 million for the three months ended
March 31, 1999 generated primarily from borrowings under the Credit Agreement,
offset by $1.0 million of dividends paid to the stockholders primarily to
provide liquidity to pay their income tax liabilities resulting from the
Company's S corporation taxable income.
Cash provided by operating activities for 1998, 1997 and 1996 was $11.5
million, $4.6 million and $2.5 million, respectively, reflecting the Company's
increasing sales and net income. Cash used in investing activities during 1998,
1997 and 1996 was $4.2 million, $766,000 and $337,000, respectively. These uses
reflected $3.1 million applied to acquire the net assets in the DCSI
transaction, 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 1998, 1997 and 1996 was $5.6
million, $2.8 million and $2.0 million, respectively. These uses of cash relate
primarily to net repayments of borrowings under the Credit Agreement and to
dividends paid to the stockholders. These dividends totaled $3.9 million, $4.0
million and $1.9 million in 1998, 1997 and 1996, 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 March 31, 1999, the Company's borrowings consisted of $5.6 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. The Company intends to use a portion of the
net proceeds of this offering to repay all borrowings under the Credit
Agreement.
Effective February 28, 1999, the Company redeemed 1,095,720 shares held by
a former stockholder and issued a $3.0 million note payable in four installments
through February 2002. See Note 9 of the Notes to the Company's Consolidated
Financial Statements.
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 March 31, 1999, such earnings were estimated at
approximately $10.7 million. The actual amount of the distribution will be
adjusted to reflect the taxable income and any stockholder distributions from
April 1, 1999 through the termination of the S corporation status upon the
closing of this offering.
The Company believes that funds generated from operations, together with
the net proceeds of this offering and available credit under its Credit
Agreement 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 Disclosure. Many currently installed computer systems and
software products are dependent upon internal calendars coded to accept only two
digit entries in the date code field. In order to distinguish 21st century dates
from 20th century dates, computer systems and software products must accept four
digit entries in the date code field. As a result, computer systems and software
used by many companies may need to be upgraded to comply with Year 2000
requirements.
23
<PAGE> 27
The Company believes that all of its financial reporting and resource
planning systems are Year 2000 compliant except for its property and equipment
accounting software which the Company plans to replace during 1999 at a cost of
less than $5,000. The Company has recently installed a new primary financial
reporting software which has been certified Year 2000 compliant by its vendor.
Effective January 1, 1999, the Company transitioned all DCSI accounting and
reporting to the Company's systems. The Company's other software is generally
certified by the vendors to be Year 2000 compliant or is not considered critical
to the Company's operations.
External professionals and internal information systems and engineering
personnel have assessed the Company's internal-use computer software and
equipment. Generally, the Company believes that its internal use computer
equipment is Year 2000 compliant and its internal-use software, principally its
operating system, networking software, office application suite and electronic
mail applications have been certified by the vendors to be Year 2000 compliant,
or updates for Year 2000 readiness have been made available by the vendors for
downloading over the Internet. In such instances, the Company plans to use its
internal information systems and engineering personnel to complete Year 2000
readiness downloads during 1999. The Company does not expect to incur any
material costs in completing these efforts.
The Company's operations are not dependent on any form of electronic data
interchange with its customers or vendors, other than the cash balance reporting
system made available to the Company by its bank. The Company's bank has
certified that its systems have the ability to process dates beyond the Year
2000.
The Company has completed an assessment of the Year 2000 compliance of its
vendors' products. The Company has surveyed each of its major vendors and, as
part of its ongoing quality efforts, has obtained a "statement of Year 2000
compliance" from virtually all of its current storage equipment and software
vendors. Accordingly, the Company believes that all of its current vendors
supply Year 2000 compliant products for installation at customer sites. The
Company requires such a statement of compliance before installing any vendor's
equipment or software at a customer site. Although the Company has no written
assurance from its vendors and provides no assurance to its customers about the
Year 2000 readiness of products installed prior to obtaining such statements of
compliance, all of the Company's standard sales agreements explicitly indicate
that the Company is not the original equipment manufacturer nor the software
developer/manufacturer of the equipment and software installed at customer
sites. Terms of the Company's current standard sales agreements explicitly state
that the Company is not responsible for the Year 2000 compliance of the
equipment and software installed at customer sites.
If any products or subassemblies 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 vendors do not cover such liabilities. In
addition, if the Company fails to complete its Year 2000 readiness efforts for
its internal use systems or if any of its customers or vendors fail to complete
any required Year 2000 remediation of their systems, the Company could suffer
delays in product delivery or experience delays in customer payments. Any such
product or system failures could have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
At this time, the Company believes it is unnecessary to adopt a contingency
plan covering the possibility that the Company's computer systems, or those of
its vendors or customers, will not be at an adequate stage of Year 2000
readiness by the end of 1999. However, as part of its Year 2000 readiness
efforts, the Company will continue to consider the need for a contingency plan
based on the Company's periodic evaluation of target dates for completion of its
readiness efforts.
Recently Issued Accounting Standards. Effective with its year end 1998
financial statements, the Company adopted 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 reports its operations as a single segment under
SFAS No. 131.
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<PAGE> 28
Effective with its year end 1998 financial statements, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income," which established standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company's comprehensive income is
equal to its net income for all periods presented.
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP No. 98-1"). SOP
No. 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria have been met. The Company adopted SOP 98-1
beginning on January 1, 1999. The adoption did not have a material impact on the
Company's financial position or results of operations.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" ("SOP
98-9"). SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral of the
application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal
years beginning on or before March 15, 1999. All other provisions of SOP 98-9
are effective for transactions entered into in fiscal years beginning after
March 15, 1999. The Company has not had significant software sales to date and
management does not expect the adoption of SOP 98-9 to have a significant effect
on its financial condition or results of operations.
25
<PAGE> 29
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 critical and represents a
key competitive advantage to business, government, educational and nonprofit
organizations. In recent years, virtually all organizations 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"). 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. Open Systems architecture permits
organizations to utilize hardware and software products from various suppliers
in order to share, manage and protect mission critical information throughout
the organization.
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 central processing units
("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.
The increasing demand for and complexity of information storage systems has
outpaced the ability of in-house MIS departments to adequately serve their
organizations. 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 computer networks and
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.
As Open Systems information storage needs continue to grow, industry
experts predict the increasing deployment of SANs which will link physically
separated storage and backup devices to servers and each other through a
dedicated, high-speed network. The Company believes that SANs will be enabled
principally by Fibre Channel technology. Fibre Channel allows high speed
connections of up to 100 MB per second each between and among a greater number
of hosts and storage technologies on the SAN. The Company expects that SANs will
enable organizations to implement scaleable storage and backup solutions that
are faster,
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<PAGE> 30
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.
According to Dataquest, Inc., an independent market research firm, the
worldwide market for hubs, switches and routers, which are key SAN components,
was approximately $0.4 billion in 1998 and is expected to grow at an annual
compound rate of 48% to approximately $1.8 billion by 2002. According to
Dataquest, the worldwide RAID storage market for UNIX and Windows NT operating
platforms was approximately $15.0 billion in 1998 and is expected to grow at an
annual compound rate of 22% to approximately $39.8 billion by 2003. 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 Dataquest, the worldwide storage management software
market was approximately $2.6 billion in 1998 and is expected to grow at an
annual compound rate of 21% to approximately $6.6 billion by 2003.
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. As a leading independent information
storage solutions provider, Datalink tailors state-of-the-art information
storage systems to meet the specific needs of each end-user, VAR and OEM. The
Company does not manufacture products, but rather works closely with end-users
and VARs to assess their information storage and retrieval requirements and then
designs, integrates, installs and supports information storage solutions.
Datalink's solutions incorporate the best available hardware and software
products on the market from technological leaders including ATL Products, Inc.,
a division of Quantum Corporation, Brocade Communication Systems, Inc.,
CLARiiON, a division of Data General Corporation, Computer Network Technology
Corp., Hitachi Data Systems Corporation, Legato Systems, Inc., Network
Appliance, Inc., Storage Technology Corporation and VERITAS Software
Corporation. 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 SAN, NAS, RAID, hard disk, magnetic tape, CD-ROM, optical
and storage networking products. The Company also matches storage management
software technologies, including backup and recovery, disaster recovery, HSM,
archive, management and configuration, high availability and media management
products, to the specific needs of its customers. Datalink's expertise extends
to all major Open Systems operating systems and hardware platforms.
Technological Leadership. Datalink provides a high level of technical
expertise to its customers through its 34 technical services professionals. The
Company's engineers each specialize in 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 20 locations throughout the United States, ten of which also
serve as regional technical centers with in-house engineering capabilities.
Datalink further differentiates itself by
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<PAGE> 31
maintaining ISO 9001 registration for its principal facility. The Company
utilizes ISO 9001 standards throughout its organization 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 strengthen 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:
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 design 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.
Provide Professional Consulting and Project Management Services. Datalink
intends to continue expanding its ability to provide its customers with
comprehensive professional consulting and project management services. Utilizing
the expertise of its professional engineers, Datalink assists 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 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, by adding personnel to existing
offices and by acquiring businesses perceived by management to complement the
Company's strategic business objectives. Since January 1998, Datalink has
increased the number of its regional offices from nine to 19, including its
expansion into the southeastern United States as a result of the July 1998
acquisition of DCSI.
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 AND PROJECT MANAGEMENT
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
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<PAGE> 32
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 and radio
frequency emissions and 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 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 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 subassemblies on the next
business day.
PRODUCTS
Datalink continually updates its product offerings to incorporate
advancements by its suppliers in storage technology. Datalink's engineering,
sales and marketing teams design creative solutions that include hardware,
software, storage networking 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 subassemblies sold by leading suppliers that offer differing
performance characteristics and costs. These storage products and subassemblies
include SAN and NAS devices, magnetic (hard) disk, magnetic tape and optical
disk storage technologies.
SAN TECHNOLOGIES. A SAN consists of a scalable pool of file or
block-oriented storage connected by Fibre Channel or other dedicated
communication links. This pool of storage resides on its own subnetwork and
can be shared by multiple servers. Ultimately, any server can access any
storage device and storage can be balanced among the storage devices.
Similarly, storage devices can be used to back up each other. SAN
technology offers greater distance, performance, reliability and management
capabilities than other existing technologies.
NAS TECHNOLOGIES. NAS devices use Thin Server technology to translate
block-oriented storage data contained on various data storage devices into
file-oriented storage data usable by end users on their local area network.
NAS technology enables "hot" attachment of storage devices to the network.
HARD DISK TECHNOLOGIES. Hard disk storage is typically used for
on-line, high performance storage of large amounts of information. Hard
disk storage products include disk drives, disk farms and RAID
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storage systems. 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. The most advanced
RAID systems now include capabilities to copy data remotely for data
protection. Such advanced systems also enable internal copying of data to
permit the testing of new applications without the risk of destroying the
original data.
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 HSM
activities. A variety of tape drive technologies are available, including
those utilizing digital linear tape, advanced intelligent tape ("AIT"), 8mm
tape, 4mm digital data storage ("DDS"), high performance helical scan and
9840 tape technologies. Magnetic tape autoloaders and libraries integrate
multiple tape drives and media cartridges with robotics to increase
capacity and automation.
OPTICAL DISK TECHNOLOGIES. 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 5.2 GB (MO optical disk) per cartridge. 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, disaster 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 have been enhanced through the deployment
of SANs.
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 also with tape drives and libraries through Fibre
Channel to SCSI bridge products.
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
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business. No single customer represented more than 5% of the Company's net sales
in 1998, 1997 or 1996. 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. Dayton Hudson Corporation University of Chicago
Imation, Inc. Michelin Tire Corp. University of Minnesota
Silicon Graphics Tyson Foods Corp. University of Washington
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL SERVICES GOVERNMENT HEALTH CARE
------------------ ---------- -----------
<S> <C> <C>
Chicago Board of Trade Fermi National Accelerator Laboratory Baptist Memorial Healthcare
Edward Jones National Aeronautics Space Eli Lilly and Company
Administration
Swiss Bank Corporation United States Coast Guard Mayo Clinic Foundation
</TABLE>
<TABLE>
<CAPTION>
INSURANCE INTERNET SERVICE PROVIDERS PROFESSIONAL SERVICES
--------- -------------------------- ---------------------
<S> <C> <C>
CNA Financial Corporation BellSouth.net Comdisco, Inc.
SAFECO Corporation GTE Internetworking/BBN IBM Global Services
The Kemper Insurance Companies HotOffice Technologies, Inc. KPMG Peat Marwick LLP
</TABLE>
<TABLE>
<CAPTION>
TELECOMMUNICATIONS TRANSPORTATION UTILITIES
------------------ -------------- ---------
<S> <C> <C>
Ameritech Corp. The Boeing Company Florida Power Corporation
Motorola, Inc. Northwest Airlines Corporation Dominion Resources, Inc.
Sprint Corporation UAL Corporation Northern States Power Company
</TABLE>
VAR CUSTOMERS
<TABLE>
<S> <C> <C>
Andersen Worldwide, S.C. Electronic Data Systems McKesson HBOC Inc.
Corporation
Computerized Medical Systems Forsythe McArthur Associates Inacom Corp.
</TABLE>
OEM CUSTOMERS
<TABLE>
<S> <C> <C>
GE Medical Systems Lucent Technologies, Inc. Rockwell International Corporation
Lockheed Martin Corporation National Computer Systems, Inc. Siemens Medical Systems, Inc.
</TABLE>
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<PAGE> 35
SALES AND MARKETING
The Company markets and sells its products and services throughout the
United States primarily through a direct sales force. The 35 field account
executives are teamed with 21 inside sales representatives. In addition to its
Minneapolis headquarters, the Company has 19 field sales offices in order to
serve its customers' needs more efficiently. Nine 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
Atlanta, Georgia............................................ 1993*
Charlotte, North Carolina................................... 1995*
Grand Rapids, Michigan...................................... 1995
Indianapolis, Indiana....................................... 1995
Washington, D.C. ........................................... 1996**
Denver, Colorado............................................ 1997
Melbourne, Florida.......................................... 1997*
New York, New York.......................................... 1997
Tampa, Florida.............................................. 1997*
San Jose, California........................................ 1998
Boston, Massachusetts....................................... 1998
Birmingham, Alabama......................................... 1998
Nashville, Tennessee........................................ 1998
Los Angeles, California..................................... 1998
Phoenix, Arizona............................................ 1999
</TABLE>
- ------------
* Represents a field office acquired by Datalink in July 1998 as a result of
the DCSI acquisition.
** The Company currently maintains two offices in Washington, D.C., one of which
it acquired in July 1998 as a result of the DCSI acquisition.
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
subassemblies 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
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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
subassemblies 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. 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.
Datalink's strategic suppliers include the following:
<TABLE>
<CAPTION>
TECHNOLOGY STRATEGIC SUPPLIER
- ---------- ------------------
<S> <C>
SAN Hardware Brocade Communication Systems, Inc.
Computer Network Technology Corp.
NAS Products Network Appliance, Inc.
RAID Technologies CLARiiON, a division of Data General Corporation
Hitachi Data Systems Corporation
Storage Management Software Legato Systems, Inc.
VERITAS Software Corporation
Tape Automation Products ATL Products, Inc., a division of Quantum
Corporation
Storage Technology Corporation
Optical Technologies NSM Jukebox GmbH
Plasmon IDE, Inc.
</TABLE>
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COMPETITION
The market for Open Systems storage is intensely competitive. Datalink
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. The Company also competes in the storage systems market with
general purpose computer suppliers such as Compaq, Dell, Hewlett-Packard, IBM,
Silicon Graphics and Sun. 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 14, 1999, Datalink had a total of 134 full-time employees, of
whom 34 were engaged in engineering and technical support, 63 were engaged in
sales and marketing and 37 were engaged in customer service, integration and
assembly operations and 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.
FACILITIES
Datalink's principal engineering operations and its integration, assembly
and customer service operations are located at the Company's 37,200 square foot,
leased executive and administrative facility in Minneapolis, Minnesota. The
leases, which expire in December 2002, provide the Company with certain rights
to take additional space in the building. The Company's landlord is a
partnership whose partners primarily 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.
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<PAGE> 38
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
Daniel J. Kinsella........................ 40 Chief Financial Officer
Stephen M. Howe........................... 41 Vice President--Sales
Scott D. Robinson......................... 39 Vice President--Engineering
Michael J. Jaeb........................... 49 Vice President--Operations and
Administration
Robert M. Price........................... 68 Chairman of the Board and Director
James E. Ousley*.......................... 53 Director
Margaret A. Loftus*....................... 54 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.
Daniel J. Kinsella joined Datalink in 1999 as its Chief Financial Officer.
Between 1998 and 1999, he was Chief Financial Officer of Lloyd's Barbeque
Company. Mr. Kinsella served in various finance roles for Grist Mill Company
between 1989 and 1998, most recently as its Chief Financial Officer, Treasurer
and Secretary. From 1984 to 1989, Mr. Kinsella was the Director of Financial
Reporting for Inter-Regional Financial Group, Inc. Between 1980 and 1984, he was
employed by Touche Ross & Company, most recently as an audit manager. Mr.
Kinsella 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.
Michael J. Jaeb joined Datalink in 1999 as its Vice President--Operations
and Administration. Between 1987 and 1999, Mr. Jaeb was employed with Aetrium
Incorporated, a manufacturer of semiconductor test handling and reliability test
equipment, most recently as Corporate Vice President of Human Resources and
Administration. From 1979 to 1987, he held various professional and management
positions with Control Data Corporation, Micro Component Technology, Inc. and
Varitronics, Inc.
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 President and 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,
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<PAGE> 39
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.
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 recommending to the Board of
Directors the engagement of the Company's independent accountants, assessing the
independence of such 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
In June 1999, the Company's Board of Directors authorized the grant
coincident with the closing of the Company's initial public offering to each of
Mr. Price, Mr. Ousley, Ms. Loftus and Mr. Lidsky of stock options to purchase
9,000 shares of the Company's Common Stock. Such options, if ultimately granted,
will have exercise prices equal to the initial public offering price per share
on the cover page of this Prospectus. These options, if ultimately granted, will
vest on the date of the closing of this offering and will expire in June 2009.
The Company intends to make an annual grant of 3,000 options commencing on the
date of the Company's 2001 annual stockholders' meeting to nonaffiliated,
nonemployee directors. The subsequent annual 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 subsequent annual 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> 40
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 1998.
<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,.......................... 1998 $250,000 $ 23,000 $8,000
President and Chief Executive Officer(3) 1997 83,000 141,000 7,750
1996 75,000 122,000 7,750
Robert D. DeVere(4)...................... 1998 $124,000 $ 6,000 $6,710
Former Chief Financial Officer 1997 93,000 6,000 5,786
1996 86,000 6,000 5,592
Stephen M. Howe,......................... 1998 $ 90,000 $110,000 $8,814
Vice President--Sales(3) 1997 77,000 108,000 7,750
1996 69,000 94,000 7,706
Scott D. Robinson,....................... 1998 $130,000 $ 6,000 $6,754
Vice President--Engineering 1997 102,000 6,000 5,872
1996 95,000 6,000 5,853
</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 officer's account under the Company's 401(k) Plan.
(3) Other annual compensation includes sales commissions for each of these
executive officers.
(4) Effective February 28, 1999, Mr. DeVere resigned from the Company and the
Company redeemed his 1,095,720 shares of Common Stock. See Note 9 of Notes
to the Company's Consolidated Financial Statements.
Employment Arrangements. The Company does not have employment,
non-competition or non-disclosure agreements with any of its executive officers
or employees, other than certain non-competition agreements entered into in
connection with the DCSI acquisition.
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 and June 1999,
respectively. 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
37
<PAGE> 41
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 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 1,350,000 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
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<PAGE> 42
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 2009.
In June 1999, the Company's Board of Directors authorized the grant to four
non-employee directors, coincident with the closing of the Company's initial
public offering, of options to purchase 36,000 shares of the Company's Common
Stock. Such options, authorized under the Incentive Compensation Plan, if
ultimately granted, will have exercise prices equal to the initial public
offering price per share, vest upon their grant and will expire 10 years after
the date of the Board's authorization of the option grant.
In June 1999, the Company's Board of Directors authorized the grant to
employees, coincident with the closing of the Company's initial public offering,
of options to purchase 715,425 shares of the Company's Common Stock. Such
options, authorized under the Incentive Compensation Plan, if ultimately
granted, will have exercise prices equal to the initial public offering price
per share, and will vest 25% annually and expire 10 years after the date of the
Board's authorization of the option grants.
THE 401(K) PLAN
The Company has a defined contribution 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 $10,000 in 1998). 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. 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.
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 five of the Company's current stockholders own, in the
aggregate, approximately 85% 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 March 31, 1999, the balances on
the Norwest Note and Clothier Note were approximately $802,000 and $1.4 million,
respectively. During July 1998, the Company entered into a second lease
agreement with Washington Avenue L.L.P. for additional office and warehouse
space. In March 1999, the leases were extended through December 2002.
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
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<PAGE> 43
Washington Avenue L.L.P. in 1996, 1997 and 1998 and the first three months of
1999 was approximately $129,000, $197,000, $233,000 and $75,000, respectively.
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 approximately $25,000, $20,000, $5,000 and
$5,000 for the years ended December 31, 1997 and 1998 and for the three months
ended March 31, 1998 and 1999, 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> 44
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 the 2,600,000 shares offered hereby, by: (i) each person who
beneficially owns 5% or more of the Common Stock, (ii) each of the Company's
executive officers and directors and (iii) 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>
PERCENTAGE OF SHARES
NUMBER OF SHARES BENEFICIALLY OWNED(1)
BENEFICIALLY OWNED ---------------------------
PRIOR TO AND AFTER PRIOR TO AFTER
NAME OF BENEFICIAL OWNER THE OFFERING(1) THE OFFERING THE OFFERING
------------------------ ------------------ ------------ ------------
<S> <C> <C> <C>
Greg R. Meland(2)...................................... 3,450,690 57.5% 40.0%
Daniel J. Kinsella..................................... -- * *
Stephen M. Howe(2)..................................... 712,080 11.9% 8.3%
Joseph J. Kaye(2)...................................... 712,080 11.9% 8.3%
Scott D. Robinson(2)................................... 584,430 9.7% 6.8%
Michael J. Jaeb........................................ -- * *
Stanley I. Clothier(2)(3).............................. 345,000 5.7% 4.0%
Robert M. Price(4)..................................... 9,000 * *
James E. Ousley(4)..................................... 9,000 * *
Margaret A. Loftus(4).................................. 9,000 * *
Paul F. Lidsky(4)...................................... 9,000 * *
All executive officers and directors as a group (9
persons)............................................. 4,783,200 79.7% 55.4%
</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) The address of each of these individuals is: c/o Datalink Corporation, 7423
Washington Avenue South, Minneapolis, Minnesota 55439.
(3) Mr. Clothier has granted the Underwriters a 30-day option to purchase up to
15,000 of his shares solely to cover over-allotments. The table assumes that
this option is not exercised.
(4) Includes 9,000 options to be granted which such director may exercise upon
the closing of this offering.
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<PAGE> 45
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, 6,004,280 shares of Common Stock are outstanding.
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 an
initial public offering price of $9.00 per share and no exercise of any stock
options or the Underwriters' over-allotment option, the current stockholders
will own approximately 69.9% 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> 46
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
8,626,502 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 6,026,502 shares of Common Stock held by the current stockholders after
completion of the offering 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
(86,265 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.
Except for the possible sale by Mr. Clothier to the Underwriters of 15,000
shares solely to cover over-allotments, 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 1,350,000 shares of Common Stock
for issuance pursuant to the Incentive Compensation Plan. In June 1999, options
to purchase a total of 751,425 shares of Common Stock were authorized for grant
coincident with the closing of this offering 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.
43
<PAGE> 47
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 Mr. Clothier have granted to the Underwriters an option,
exercisable within 30 days after the date of this Prospectus, to purchase up to
375,000 and 15,000 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 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.
Officers and directors may purchase shares in the offering (not to exceed
100,000 shares in the aggregate) at the same price and on the same terms as
provided in this Prospectus.
44
<PAGE> 48
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 consolidated balance sheets of Datalink Corporation as of December 31,
1997 and 1998 and the consolidated statements of operations, stockholders'
equity (deficiency) and cash flows for each of the three years in the period
ended December 31, 1998 and the balance sheet of Direct Connect Systems, Inc. as
of December 31, 1997 and the statement of income and retained earnings and cash
flows for the year ended December 31, 1997 included in this Prospectus, have
been included herein in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
CHANGE IN ACCOUNTANTS
In November 1997, the Company engaged PricewaterhouseCoopers LLP as its
independent public accountants to audit the financial statements as of December
31, 1995, 1996, and 1997 and for each of the
45
<PAGE> 49
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.
46
<PAGE> 50
GLOSSARY
AIT........................... Advanced Intelligent Tape. An 8 mm helical scan
tape technology designed, manufactured and
marketed 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.
FABRIC........................ A grouping of Fibre Channel devices
interconnected by Fibre Channel switches.
FIBRE CHANNEL................. A new high speed serial interface standard
developed and recently formalized by the
American National Standards Institute.
GB............................ Gigabyte. 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.
47
<PAGE> 51
MB............................ Megabyte. 1,048,576 bytes, a unit of
measurement for data storage.
NAS........................... Network Attached Storage. A device that uses
thin server technology to translate
block-oriented storage data into file-oriented
storage data usable by end users on their local
area network.
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.
THIN SERVER................... Computing platform including only the storage
and networking related functions of the
operating system.
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.
9840.......................... A high performance linear tape technology
designed, manufactured and marketed by Storage
Technology Corporation.
48
<PAGE> 52
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA INFORMATION
Unaudited Pro Forma Statements of Operations--Narrative
Overview.................................................. F-2
Unaudited Pro Forma Combined Statement of Operations........ F-3
Notes to Unaudited Pro Forma Combined Statement of
Operations................................................ F-4
DATALINK INFORMATION
Report of Independent Accountants........................... F-5
Consolidated Balance Sheets................................. F-6
Consolidated Statements of Operations....................... F-7
Consolidated Statements of Stockholders' Equity
(Deficiency).............................................. F-8
Consolidated Statements of Cash Flows....................... F-9
Notes to Consolidated Financial Statements.................. F-10
DIRECT CONNECT INFORMATION
Report of Independent Accountants........................... F-20
Balance Sheet............................................... F-21
Statement of Income and Retained Earnings................... F-22
Statement of Cash Flows..................................... F-23
Notes to Financial Statements............................... F-24
</TABLE>
F-1
<PAGE> 53
DATALINK CORPORATION
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS--NARRATIVE OVERVIEW
On July 15, 1998, the Company acquired 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 had 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, with a negotiated fair value of $2 million. In order to maintain the fair
value of the Common Stock at $2 million, the number of shares is subject to
adjustment: (i) in the event that the Company does not complete its initial
public offering or (ii) if the completed initial public offering price is less
than $10.00 per share. Such adjustment in the number of shares issued, if any,
would be reflected in stockholders' equity but would not affect the originally
recorded cost of the DCSI acquisition. Under terms of the acquisition, certain
DCSI employees were also paid an aggregate of $500,000 under noncompetition
agreements.
The following unaudited pro forma combined statement of operations for the
year ended December 31, 1998 gives effect to the acquisition of DCSI by the
Company using the purchase method of accounting, assuming the business
combination took place on January 1, 1998.
The following unaudited pro forma combined statements of operations are
presented for illustrative purposes only and are not necessarily indicative of
the combined results of operations for future periods or the results that
actually would have been realized had the Company and DCSI been a combined
company during the specified periods. The combined unaudited pro forma
statements of operations, including the notes thereto, are qualified in their
entirety and should be read in conjunction with the historical financial
statements of the Company and DCSI.
The unaudited pro forma combined statements of operations are based on the
respective historical statements of operations and the notes thereto of the
Company and DCSI. The purchase price was allocated to the estimated fair value
of assets acquired and liabilities assumed.
F-2
<PAGE> 54
DATALINK CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL DIRECT
DATALINK CONNECT PRO FORMA PRO FORMA
(1) (4) ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................................. $87,951,650 $ 9,179,347 $97,130,997
Cost of sales.............................. 65,739,837 6,232,809 71,972,646
----------- ----------- --------- -----------
Gross profit........................... 22,211,813 2,946,538 25,158,351
Operating expenses:
Sales and marketing...................... 7,753,711 1,086,998 8,840,709
General and administrative............... 5,403,562 836,424 $ 353,730(5) 6,683,994
90,278(6)
Engineering.............................. 1,362,047 1,362,047
Offering costs........................... 732,738 732,738
----------- ----------- --------- -----------
Operating income....................... 6,959,755 1,023,116 (444,008) 7,538,863
Interest expense........................... 280,555 69,688 97,500(7) 447,743
----------- ----------- --------- -----------
Income before income taxes................. 6,679,200 953,428 (541,508) 7,091,120
Income tax expense (benefit)............... 2,671,680(2) 387,296 (28,918)(8) 3,030,058
----------- ----------- --------- -----------
Net income................................. $ 4,007,520(2) $ 566,132 $(512,590) $ 4,061,062
=========== =========== ========= ===========
Net income per share, basic and diluted.... $ .51(3) $ .51
=========== ===========
Weighted average shares outstanding, basic
and diluted.............................. 7,922,947 106,301(9) 8,029,248
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
statement of operations.
F-3
<PAGE> 55
DATALINK CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
- ------------
(1) Reflects the historical results of operations of the Company as derived from
the Company's audited historical statement of operations for the year ended
December 31, 1998, adjusted to include the pro forma adjustments described
in items (2) and (3) below.
(2) Reflects 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 net income tax benefit related to the recognition of a net deferred
tax asset and liability which will be recorded by the Company upon
terminating its S corporation status (estimated at $390,000 as of December
31, 1998).
(3) Pro forma Datalink 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 (929,248
shares) that would be required to be sold at an assumed initial public
offering price of $9.00 per share, after deducting the underwriting
discount, to fund the distribution to the current stockholders of all
previously taxed, but undistributed, S corporation earnings, estimated at
$7.8 million had the termination occurred on December 31, 1998.
(4) Reflects the historical results of operations of DCSI as derived from the
DCSI unaudited statement of operations for the period from January 1 through
July 14, 1998. All operating results of DCSI for the period from July 15
through December 31, 1998 are included in the Company's statement of
operations for the year ended December 31, 1998.
(5) Reflects amortization, for the period from January 1 through July 14, 1998,
of acquired identifiable intangible assets and goodwill of $4,095,284, based
upon a purchase price allocation as follows:
<TABLE>
<CAPTION>
ALLOCATION ESTIMATED LIFE
---------- --------------
<S> <C> <C>
Customer base........................................ $ 700,000 5 years
Assembled workforce.................................. 490,000 5 years
Trademark and tradename.............................. 450,000 7 years
Goodwill............................................. 2,455,284 7 years
</TABLE>
(6) Reflects amortization, for the period January 1 through July 14, 1998, of
the $500,000 cost of noncompetition agreements on a straight-line basis over
their three-year terms.
(7) Reflects interest expense for the period January 1 through July 14, 1998,
resulting from the cash portion of the DCSI purchase price of $2,000,000
that the Company borrowed under its line of credit at an assumed interest
rate of 9%.
(8) Reflects the income tax impact of adjustments (6) and (7). Expenses related
to amortization of intangible assets and goodwill are not deductible for
income tax reporting purposes.
(9) Reflects incremental impact for the period from January 1 through July 14,
1998, of 200,000 shares issued in the DCSI acquisition on the weighted
average shares outstanding, assuming the business combination was completed
on January 1, 1998.
F-4
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Datalink Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows present fairly, in all material respects, the financial position
of Datalink Corporation as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 4, 1999, except
as to the information
contained in Note 11
for which the date
is June 14, 1999
F-5
<PAGE> 57
DATALINK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------------
TERMINATION TERMINATION OF
DECEMBER 31, OF S CORPORATION
------------------------- PUT OPTIONS STATUS PRO FORMA
1997 1998 ACTUAL (NOTE 3) (NOTE 3) (NOTE 3)
---- ---- ------ ----------- -------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................... $ 1,163,107 $ 2,797,724 $ 587,983 $ 587,983
Accounts receivable, net........... 11,280,738 15,629,960 16,818,413 16,818,413
Inventories........................ 4,661,378 6,694,870 6,821,578 6,821,578
Other current assets............... 78,705 263,103 369,066 369,066
Deferred income taxes.............. 22,087 $ 436,274 436,274
----------- ----------- ----------- ----------- -----------
Total current assets............. 17,183,928 25,407,744 24,597,040 436,274 25,033,314
Property and equipment, net.......... 1,478,122 2,466,946 2,417,736 2,417,736
Intangibles, net..................... 4,219,584 4,026,950 4,026,950
Other................................ 42,503 49,603 48,080 48,080
----------- ----------- ----------- ----------- -----------
Total assets..................... $18,704,553 $32,143,877 $31,089,806 $ 436,274 $31,526,080
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Book cash overdraft................ 1,641,548 1,641,548
Line of credit..................... 3,935,417 3,210,355 5,649,852 5,649,852
Accounts payable................... 4,928,617 13,253,656 8,024,952 8,024,952
Accrued expenses................... 1,493,317 2,186,972 1,605,037 1,605,037
Note payable to former stockholder,
current portion.................. 1,610,621 1,610,621
Capital lease obligation, current
portion.......................... 13,876 13,876 13,876
Deferred compensation, current
portion.......................... 65,242 66,339 57,863 57,863
Distribution payable to
stockholders..................... 10,734,907 10,734,907
----------- ----------- ----------- ------------ ----------- -----------
Total current liabilities........ 10,422,593 18,731,198 18,603,749 10,734,907 29,338,656
Note payable to former stockholder,
less current portion............... 1,409,293 1,409,293
Capital lease obligation, less
current portion.................... 12,502 12,502 12,502
Deferred compensation, less current
portion............................ 151,697 79,621 70,613 70,613
Deferred income taxes................ 601,739 806,221 806,221
Commitments and contingencies
Common stock, subject to put option;
$0.001 par value, 50,000,000 shares
authorized, 6,900,000, 7,100,000,
and 6,004,280 shares issued and
outstanding at December 31, 1997
and 1998 and March 31, 1999,
respectively....................... 13,873,980 19,059,410 20,476,156 $(20,476,156)
Stockholders' equity (deficiency):
Common stock, $0.001 par value,
50,000,000 shares authorized,
6,004,280 shares issued and
outstanding as of March 31,
1999............................. 6,004 6,004
Retained earnings (accumulated
deficit)......................... (5,743,717) (6,340,593) (9,482,507) 20,470,152 (11,104,854) (117,209)
----------- ----------- ----------- ------------ ----------- -----------
Total stockholders' equity
(deficiency)................... (5,743,717) (6,340,593) (9,482,507) $ 20,476,156 (11,104,854) (111,205)
----------- ----------- ----------- ------------ ----------- -----------
Total liabilities and
stockholders' equity
(deficiency)................... $18,704,553 $32,143,877 $31,089,806 $ 436,274 $31,526,080
=========== =========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 58
DATALINK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- --------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................... $54,651,868 $71,255,299 $87,951,650 $16,598,745 $25,682,293
Cost of sales................. 42,872,380 55,719,303 65,739,837 12,722,934 19,071,452
----------- ----------- ----------- ----------- -----------
Gross profit............. 11,779,488 15,535,996 22,211,813 3,875,811 6,610,841
Operating expenses:
Sales and marketing......... 3,606,567 5,191,040 7,753,711 1,426,889 2,160,258
General and
administrative........... 2,382,166 3,010,450 5,403,562 961,465 1,691,106
Engineering................. 632,660 926,008 1,362,047 314,844 776,056
Offering costs.............. 732,738 172,628
----------- ----------- ----------- ----------- -----------
Operating income......... 5,158,095 6,408,498 6,959,755 1,172,613 1,810,793
Interest expense.............. 285,905 332,562 280,555 54,861 73,880
----------- ----------- ----------- ----------- -----------
Income before income taxes.... 4,872,190 6,075,936 6,679,200 1,117,752 1,736,913
Income tax expense
(benefit)................... 147,746 (556,093)
----------- ----------- ----------- ----------- -----------
Net income.................... $ 4,872,190 $ 6,075,936 $ 6,531,454 $ 1,117,752 $ 2,293,006
=========== =========== =========== =========== ===========
Historical net income per
share, basic and diluted.... $ 0.71 $ 0.88 $ 0.93 $ 0.16 $ 0.34
=========== =========== =========== =========== ===========
Weighted average shares
outstanding, basic and
diluted.................. 6,900,000 6,900,000 6,993,151 6,900,000 6,722,585
Pro forma data (unaudited see
Note 3):
Income before income taxes
on S corporation
income................... $ 6,531,454 $ 1,117,752 $ 2,293,006
Pro forma income taxes...... 2,671,680 435,923 729,503
----------- ----------- -----------
Pro forma net income........ $ 4,007,520 $ 681,829 $ 1,007,410
=========== =========== ===========
Pro forma net income per
share basic and
diluted.................. $ 0.48 $ 0.08 $ 0.13
=========== =========== ===========
Shares used in computing pro
forma net income per share
(see Note 3)................ 8,275,696 8,182,545 8,005,130
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 59
DATALINK CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
------------------- PAID IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
---------- ------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995.......... 6,900,000 $(2,285,575) $(2,285,575)
Net income........................... 4,872,190 4,872,190
Cash dividends of $0.27 per share.... (1,874,600) (1,874,600)
Accretion of common stock value...... (3,987,994) (3,987,994)
---------- ----- ----------- ----------- -----------
Balances, December 31, 1996.......... 6,900,000 (3,295,979) (3,295,979)
Net income........................... 6,075,936 6,075,936
Cash dividends of $0.58 per share.... (3,988,299) (3,988,299)
Accretion of common stock value...... (4,535,375) (4,535,375)
---------- ----- ----------- ----------- -----------
Balances, December 31, 1997.......... 6,900,000 (5,743,717) (5,743,717)
Net income........................... 6,531,454 6,531,454
Cash dividends of $0.39 per share.... (2,679,100) (2,679,100)
Issuance of shares in acquisition
(Note 12).......................... 200,000 $ 200 $ 1,999,800 2,000,000
Cash dividends of $0.18 per share.... (1,263,800) (1,263,800)
Accretion of common stock value...... (200) (1,999,800) (3,185,430) (5,185,430)
---------- ----- ----------- ----------- -----------
Balances, December 31, 1998.......... 7,100,000 (6,340,593) (6,340,593)
Net income (unaudited)............... 2,293,006 2,293,006
Cash dividends of $0.17 per share
(unaudited)........................ (998,260) (998,260)
Repurchase of common stock
(unaudited)........................ (1,095,720) (3,019,914) (3,019,914)
Accretion of common stock value
(unaudited)........................ (1,416,746) (1,416,746)
---------- ----- ----------- ----------- -----------
Balances, March 31, 1999
(unaudited)........................ 6,004,280 $ $(9,482,507) $(9,482,507)
========== ===== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE> 60
DATALINK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.................... $ 4,872,190 $ 6,075,936 $ 6,531,454 $ 1,117,752 $ 2,293,006
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Provision for bad debts.... 69,109 27,235 24,214 150,000
Depreciation and
amortization............. 146,648 177,302 393,193 55,020 209,251
Amortization of
intangibles.............. 375,700 192,634
Loss on disposal of
property and equipment... 4,599 598
Deferred income taxes...... (52,460) (579,652)
Changes in operating assets
and liabilities:
Accounts receivable........ (3,321,609) (3,191,818) (1,153,740) 3,024,478 (1,338,453)
Inventories................ (2,921,963) 1,350,013 (413,277) (232,697) (126,708)
Other current assets....... (36,031) (3,554) (143,087) (348,542) (105,963)
Other assets............... 4,556 (10,916) 2,549 (2,047) 1,523
Accounts payable........... 3,106,571 (150,824) 6,022,951 (689,681) (5,228,704)
Accrued expenses........... 599,324 333,239 301,430 (335,100) (581,935)
Income taxes payable....... (353,237)
Deferred compensation...... (56,206) (59,058) (70,979) (21,030) (17,484)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used
in) operating
activities............... 2,462,589 4,557,082 11,469,310 2,568,750 (5,132,485)
------------ ------------ ------------ ------------ ------------
Cash flows from investing
activities:
Purchase of property and
equipment.................. (337,363) (766,436) (1,140,539) (247,307) (160,041)
Net assets acquired, net of
cash acquired.............. (3,095,619)
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities................. (337,363) (766,436) (4,236,158) (247,307) (160,041)
------------ ------------ ------------ ------------ ------------
Cash flows from financing
activities:
Proceeds from borrowings on
line of credit............. 52,657,600 70,372,500 79,119,139 17,376,000 29,034,000
Principal payments on line of
credit..................... (52,777,009) (69,233,611) (80,762,323) (20,256,314) (26,594,583)
Dividends paid................ (1,894,600) (3,988,299) (3,942,900) (1,008,100) (998,260)
Principal payments on capital
lease obligations.......... (12,451)
Book cash overdraft........... 546,432 1,641,548
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided
by financing
activities............... (2,014,009) (2,849,410) (5,598,535) (3,341,982) 3,082,785
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash... 111,217 941,236 1,634,617 (1,020,539) (2,209,741)
Cash, beginning of period....... 110,654 221,871 1,163,107 1,163,107 2,797,724
------------ ------------ ------------ ------------ ------------
Cash, end of period............. $ 221,871 $ 1,163,107 $ 2,797,724 $ 142,569 $ 587,983
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE> 61
DATALINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS:
Datalink Corporation (the "Company") analyzes, custom designs, integrates
or assembles, 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 received an ISO 9001 registration.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the Company
and, from July 15, 1998 through January 3, 1999, its wholly-owned subsidiary,
Direct Connect Systems, Inc. ("DCSI") (see Note 12). All significant
intercompany accounts and transactions have been eliminated in consolidation.
INTERIM FINANCIAL STATEMENTS:
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 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 three months ended March 31, 1999, 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 and amortization are provided by charges to operations using the
straight-line method over the estimated useful lives of the assets (ranging from
3 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.
INTANGIBLES:
Identifiable intangible assets and goodwill are amortized on a
straight-line basis over their estimated useful lives of 3 to 7 years.
VALUATION OF LONG-LIVED ASSETS:
The Company periodically, at least quarterly, analyzes its long-lived
assets for potential impairment, assessing the appropriateness of lives and
recoverability of unamortized balances through measurement of undiscounted
operating cash flows on a basis consistent with generally accepted accounting
principles.
F-10
<PAGE> 62
DATALINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
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, except as described
below, no provision or liability for income taxes is reflected in the financial
statements for the Company.
As of December 31, 1998, DCSI was a C corporation and accordingly, was
subject to corporate income taxes. A provision for taxes resulting from the
taxable income of DCSI for the period from July 15, 1998 through December 31,
1998 is included in the Company's consolidated financial statements. Effective
January 4, 1999, DCSI merged into the Company and, therefore, became part of the
S corporation. Accordingly, effective January 4, 1999, none of the consolidated
income of the Company is subject to corporate income taxes and all of the
deferred tax assets and liabilities described below were eliminated which
resulted in a one-time tax benefit of $579,652 which, along with a current
income tax provision of $23,559, is included in the Company's results of
operations for the three months ended March 31, 1999.
Prior to January 4, 1999, deferred income tax liabilities and assets were
recognized for the tax consequences in future years of differences between the
tax bases of DCSI's assets and liabilities and their financial reporting amounts
at each year end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Prior to January 4, 1999, income tax expense consists of the tax payable for
DCSI for the period and the change during the period in its deferred tax assets
and liabilities.
As of December 31, 1998, the Company has a deferred tax asset of $22,087
related primarily to DCSI's allowance for doubtful accounts and inventory
capitalization and a deferred tax liability of $601,739 related primarily to
acquired identifiable intangible assets and property and equipment, resulting in
a net deferred tax liability of $579,652.
Concurrent with the closing of the Company's proposed initial public
offering (the "Offering") (see Note 11), the Company's S corporation status will
terminate and its taxable income will be subject to federal and state C
corporation income tax regulation.
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 recognized.
Software solution and consulting service revenue is recognized as such services
are rendered. Revenues and expenses related to sales of maintenance contracts
fulfilled by third parties are recognized upon execution of the contracts.
OFFERING COSTS:
Costs related to the Company's initial public offering incurred during 1998
and the first quarter of 1999 totaling $732,738 and $172,628, respectively, were
initially deferred, but were expensed during the third quarter of 1998 and the
first quarter of 1999, respectively, when the offering was delayed due to market
conditions.
F-11
<PAGE> 63
DATALINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
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.
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 with its year end 1998 financial statements, the Company adopted
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 reported its operations as a single segment under SFAS No.
131.
COMPREHENSIVE INCOME:
Effective with its year end 1998 financial statements, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income," which established standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company's comprehensive income is
equal to its net income for all periods presented.
OTHER RECENTLY ISSUED ACCOUNTING STANDARDS:
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," ("SOP No. 98-1"). SOP
No. 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria have been met. The Company adopted SOP 98-1
beginning on January 1, 1999. The adoption did not have a material impact on the
Company's financial position or results of operations.
In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions," ("SOP
98-9"). SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral of the
application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal
years beginning on or before March 15, 1999. All other provisions of SOP 98-9
are effective for transactions entered into in fiscal years beginning after
March 15, 1999. The Company has not had significant software sales to date and
management does not expect the adoption of SOP 98-9 to have a significant effect
on its financial condition or results of operations.
F-12
<PAGE> 64
DATALINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
3. PRO FORMA DATA (UNAUDITED):
PRO FORMA BALANCE SHEET DATA:
The pro forma balance sheet of the Company as of March 31, 1999 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
$10,734,907 had the termination occurred on March 31, 1999), and (iii) a net
deferred tax liability which will be recorded by the Company upon termination of
its S corporation status as a result of the Offering (estimated at $370,000 as
of March 31, 1999).
The net deferred income tax liability 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 expense 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.
The actual deferred tax assets and liabilities recorded will be adjusted to
reflect the effect of operations from April 1, 1999 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 1999 taxable income and any stockholder distributions from April
1, 1999 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
years ended December 31, 1998 and the three months ended March 31, 1998 and
1999, 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 expense related to the recognition of a net
deferred tax liability which will be recorded by the Company upon terminating
its S corporation status (estimated at $370,000 as of March 31, 1999).
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 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 $10,734,907 (or
1,282,546 shares) had the termination occurred on March 31, 1999. The Company
does not have any common stock equivalents.
F-13
<PAGE> 65
DATALINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
4. SELECTED BALANCE SHEET INFORMATION:
The following provides additional balance sheet information as of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
---- ---- ---------
<S> <C> <C> <C>
Accounts receivable:
Accounts receivable................................. $11,340,738 $15,714,174 $17,052,627
Less allowance for doubtful accounts................ 60,000 84,214 234,214
----------- ----------- -----------
$11,280,738 $15,629,960 $16,818,413
=========== =========== ===========
Property and equipment:
Leasehold improvements.............................. $ 223,356 $ 317,361 $ 317,361
Equipment........................................... 761,059 1,120,976 1,220,580
Computers and purchased software.................... 1,262,249 2,289,879 2,350,316
----------- ----------- -----------
2,246,664 3,728,216 3,888,257
Less accumulated depreciation and amortization...... 768,542 1,261,270 1,470,521
----------- ----------- -----------
$ 1,478,122 $ 2,466,946 $ 2,417,736
=========== =========== ===========
Intangibles:
Customer base....................................... $ 700,000 $ 700,000
Noncompetition agreements........................... 500,000 500,000
Assembled workforce................................. 490,000 490,000
Trademark and tradename............................. 450,000 450,000
Goodwill............................................ 2,455,284 2,455,284
----------- -----------
4,595,284 4,595,284
Less accumulated amortization....................... 375,700 568,334
----------- -----------
$ 4,219,584 $ 4,026,950
=========== ===========
Accrued expenses:
Commissions......................................... $ 942,051 $ 1,333,704 $ 982,089
Other............................................... 551,266 853,268 622,948
----------- ----------- -----------
$ 1,493,317 $ 2,186,972 $ 1,605,037
=========== =========== ===========
</TABLE>
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. As of March 31, 1999, the amount available
under the borrowing base formula funds was the total $10,000,000 available under
the Credit Agreement. Borrowings under the Credit Agreement were $3,210,355 and
$5,649,852 as of December 31, 1998 and March 31, 1999, respectively, with
interest at the bank's reference rate. Borrowings under the Credit Agreement
were $3,935,417 as of December 31, 1997, with interest at the bank's reference
rate plus 0.25%. The bank's reference rate was 7.75% as of March 31, 1999 and
December 31, 1998 and 8.5% as of December 31, 1997.
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
F-14
<PAGE> 66
DATALINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
limitations on the payment of dividends and property and equipment acquisitions.
Included in cash on the balance sheet is $260,000, $1,499,000 and $558,000 as of
December 31, 1997 and 1998 and March 31, 1999, 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.
The Company's long-term capital lease obligations consist of capital leases
for office equipment with outstanding balances totaling $26,378, of which
$13,876 is current, as of March 31, 1999.
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 $216,939, $145,960 and $128,464 as of December 31, 1997 and 1998 and March
31, 1999, respectively, with interest computed at 10%.
Interest expense related to the agreement was $24,942, $20,021, $5,111 and
$4,605 for the years ended December 31, 1997 and 1998 and for the three months
ended March 31, 1998 and 1999, respectively.
7. LEASE COMMITMENTS AND CONTINGENCIES:
As of December 31, 1998, the Company leased an office and warehouse
facility under terms of operating leases 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 a
majority of the limited partners are stockholders of the Company. 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 March 31, 1999, the
balances of the notes payable to the bank and the stockholder were $802,000 and
$1.4 million, respectively.
In the first quarter of 1999, the Company extended these lease agreements
through December 2002. The extended agreements provide for options to extend the
leases for two additional three-year terms at the option of the Company. The
Company also leases office space from nonaffiliated entities under operating
lease agreements that expire at various dates through 2000. The Company also
leases office and manufacturing facilities, along with office equipment, for
DCSI under operating leases which expire at various dates through 2001. In
addition to minimum rents, the leases require the Company to pay certain
operating costs of the lessor.
As of December 31, 1998, future minimum lease payments due under
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
RELATED
YEAR ENDED PARTY OTHER TOTAL
---------- ------- ----- -----
<S> <C> <C> <C>
1999..................................................... $151,464 $123,601 $275,065
2000..................................................... 156,008 100,868 256,876
2001..................................................... 156,008 1,020 157,028
2002..................................................... 156,008 156,008
-------- -------- --------
$619,488 $225,489 $844,977
======== ======== ========
</TABLE>
F-15
<PAGE> 67
DATALINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
Total rent expense, including certain lessor operating costs charged to the
Company, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31,
-------------------------------- --------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Related party............................. $128,573 $197,363 $233,254 $ 58,750 $ 75,000
Other..................................... 90,361 119,620 219,494 42,376 83,342
-------- -------- -------- -------- --------
$218,934 $316,983 $452,748 $101,126 $158,342
======== ======== ======== ======== ========
</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, 1996, 1997 and 1998 and for the three
months ended March 31, 1998 and 1999, was $97,350, $126,404, $157,866, $49,872
and $72,991, 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, 1996, 1997 and 1998, and for the three
months ended March 31, 1999 was $156,500, $164,350, $311,000 and $89,807,
respectively.
As of December 31, 1998, the Company also maintained the defined
contribution retirement plan of DCSI. In the first quarter of 1999, the DCSI
plan was merged into the Company's plan. The cost of the Company's contributions
to the DCSI plan for the period from July 15 through December 31, 1998 was
$1,007.
9. COMMON STOCK BUY-SELL AGREEMENT:
The Company and all of its stockholders have entered into Stock Purchase
Agreements (the "Agreements") that restrict 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 or her 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 Agreements. 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 Agreements.
Effective November 1, 1996, one of the Agreements 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.
Effective February 28, 1999, the Company redeemed 1,095,720 shares held by
a former stockholder under terms of the Agreements. Pursuant to the terms of the
Agreements, the Company has issued a $3,019,914 note payable to this former
stockholder. The note provides for interest on the outstanding balance at the
prime rate beginning August 28, 1999. A principal payment of $905,974 is due on
August 28, 1999 with the remaining principal balance due in three installments
of $704,647 plus any accrued interest on February 28, 2000, 2001 and 2002.
F-16
<PAGE> 68
DATALINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
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 Agreements out of stockholders' equity. The effect of this adjustment was
to increase the carrying value of common stock subject to the put options, and
decrease stockholders' equity by $9,338,605, $13,873,980, $19,059,410 and
$20,476,156 as of December 31, 1996, 1997, 1998 and March 31, 1999,
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.
As of March 31, 1999, the Company is the owner and beneficiary of term life
insurance policies with face values ranging from approximately $3.0 million to
$17.9 million insuring four of its stockholders. The Company is also the owner
and beneficiary of disability insurance policies with coverage ranging from
$105,000 to $4.0 million insuring four of its stockholders. Any proceeds from
these life and disability insurance policies, prior to completion of the
Offering, would be used to fund at least a portion of the Company's obligations
under the Agreements 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 $1.0 million insuring the life of the
retired stockholder. The cash surrender value of these policies was $25,547,
$19,796 and $19,796 as of December 31, 1997, and 1998 and March 31, 1999,
respectively, and is included in other assets on the consolidated balance sheet.
10. SUPPLEMENTAL CASH FLOW INFORMATION:
The following provides supplemental information concerning the statements
of cash flows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash paid for interest............... $286,745 $327,496 $ 295,044 $ 49,372 $ 69,207
Cash paid for taxes.................. 549,400 23,559
Significant noncash financing and
investing transactions:
Stock issued to purchase DCSI........ 2,000,000
Repurchase of stock in exchange for
note............................... 3,019,914
</TABLE>
11. RECAPITALIZATION:
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 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. The stock split has been retroactively reflected in the accompanying
financial statements.
In connection with the Offering, the Company has reserved an aggregate of
1,350,000 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,
F-17
<PAGE> 69
DATALINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
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 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.
The Company's Board of Directors has authorized the grant to each of four
directors of options to purchase 9,000 shares of the Company's common stock,
coincident with the closing of the Company's initial public offering. Such
options, authorized under the Incentive Plan, if ultimately granted, will have
exercise prices equal to the initial public offering price per share, vest upon
their grant and will expire 10 years after the date of the Board's authorization
of the option grants.
The Company's Board of Directors has also authorized the grant to employees
of options to purchase 715,425 shares of the Company's common stock, coincident
with the closing of the Company's initial public offering. Such options,
authorized under the Incentive Plan, if ultimately granted, will have exercise
prices equal to the initial public price per share, and will vest 25% annually
and expire 10 years after the date of the Board's authorization of the option
grants.
12. BUSINESS ACQUISITION:
On July 15, 1998, the Company acquired 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 had 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, with a negotiated fair value of $2 million. In order to maintain the fair
value of the common stock at $2 million, the number of shares is subject to
adjustment: (i) in the event that the Company does not complete its initial
public offering or (ii) if the completed initial public offering price is less
than $10.00 per share. Such adjustment in the number of shares issued, if any,
would be reflected in stockholders' equity but would not affect the originally
recorded cost of the DCSI acquisition. Under terms of the acquisition, certain
DCSI employees were also paid an aggregate of $500,000 under noncompetition
agreements.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the estimated fair value of the
assets acquired and liabilities assumed. The results of operations of DCSI have
been included with the operating results of the Company beginning on July 15,
1998.
F-18
<PAGE> 70
DATALINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
The following table presents the purchase price allocation of the acquired,
identifiable intangible assets of DCSI:
<TABLE>
<S> <C>
Cash and fair value of Company's common stock issued........ $4,000,000
Direct acquisition costs.................................... 677,324
DCSI liabilities assumed.................................... 3,960,128
----------
Total purchase price...................................... $8,637,452
==========
Estimated fair value of tangible assets acquired............ $5,153,888
Estimated fair value of identifiable intangible assets...... 1,640,000
Goodwill.................................................... 2,455,284
Deferred tax liabilities related to identifiable
intangibles............................................... (611,720)
----------
$8,637,452
==========
</TABLE>
The purchase price allocated to intangible assets and goodwill and their
respective amortization periods are as follows:
<TABLE>
<CAPTION>
ALLOCATION ESTIMATED LIFE
---------- --------------
<S> <C> <C>
Customer base............................................... $ 700,000 5 years
Assembled workforce......................................... 490,000 5 years
Trademark and tradename..................................... 450,000 7 years
Goodwill.................................................... 2,455,284 7 years
</TABLE>
The $500,000 cost of noncompetition agreements has been capitalized and
will be amortized on a straight-line basis over their underlying three-year
terms.
The following unaudited pro forma condensed results of operations have been
prepared to give effect to the acquisition of DCSI as if the acquisition
occurred as of the beginning of the years presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998
---- ----
<S> <C> <C>
Net sales................................................... $83,078,070 $97,130,997
Net income.................................................. $ 5,563,562 $ 6,934,262
Net income per share, basic and diluted..................... $ 0.78 $ 0.98
</TABLE>
The unaudited pro forma condensed results of operations are not necessarily
indicative of results that would have occurred had the acquisitions been in
effect for the periods presented, nor are they necessarily indicative of the
results that will be obtained in the future.
13. SUBSEQUENT EVENT (UNAUDITED):
In April 1999, the Company paid $1,207,101 of dividends to its
stockholders.
F-19
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Direct Connect Systems, Inc.:
In our opinion, the accompanying balance sheet and the related statements
of income and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Direct Connect Systems, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
period then ended, in conformity with generally accepted accounting principles.
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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
July 20, 1998
F-20
<PAGE> 72
DIRECT CONNECT SYSTEMS, INC.
BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 38,270
Accounts receivable, net.................................. 3,422,382
Inventories............................................... 1,149,724
Prepaid expenses.......................................... 43,434
Deferred income taxes..................................... 50,917
----------
Total current assets................................... 4,704,727
Property and equipment, net................................. 252,262
Other assets................................................ 48,377
----------
Total assets................................................ $5,005,366
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Excess of outstanding checks over bank balance............ $ 685,415
Line of credit............................................ 484,643
Current portion of long-term debt......................... 30,471
Account payable........................................... 2,539,169
Accrued expenses.......................................... 179,995
Income taxes payable...................................... 133,695
Deferred revenue.......................................... 88,274
----------
Total current liabilities.............................. 4,141,662
Long-term debt.............................................. 211,385
Deferred income taxes....................................... 24,691
----------
Total liabilities...................................... 4,377,738
----------
Commitments and contingencies
Stockholders' equity:
Common stock ($.01 par value, 100,000 shares authorized,
1,000 shares issued and outstanding)................... 10
Additional paid-in capital................................ 33,345
Retained earnings......................................... 594,273
----------
Total stockholders' equity............................. 627,628
----------
Total liabilities and stockholders' equity............. $5,005,366
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 73
DIRECT CONNECT SYSTEMS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Net sales................................................... $11,822,771
Cost of sales............................................... 8,378,209
-----------
Gross profit........................................... 3,444,562
-----------
Operating expenses:
Sales and marketing....................................... 1,509,069
General and administrative................................ 1,231,869
-----------
Operating income....................................... 703,624
-----------
Interest expense, net....................................... (90,438)
Income before income tax expense....................... 613,186
Income tax expense:
Current................................................... 252,542
Deferred.................................................. (1,960)
-----------
250,582
-----------
Net income.................................................. 362,604
Retained earnings, beginning of year........................ 231,669
-----------
Retained earnings, end of year.............................. $ 594,273
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 74
DIRECT CONNECT SYSTEMS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 362,604
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 55,924
Deferred taxes......................................... (1,960)
Provision for doubtful accounts........................ 24,000
Change in assets and liabilities:
Accounts receivable.................................. (2,016,241)
Inventories.......................................... (676,592)
Other assets......................................... 48,227
Accounts payable..................................... 1,666,393
Accrued liabilities and deferred revenue............. (29,552)
-----------
Net cash used in operating activities............. (567,197)
-----------
Cash flows from investing activities:
-----------
Purchase of property and equipment........................ (112,224)
-----------
Net cash used in investing activities............. (112,224)
-----------
Cash flows from financing activities:
Excess of outstanding checks over bank balance............ 685,415
Bank line of credit net borrowings -- repayments.......... (39,829)
Principal payments on long-term debt...................... (61,985)
-----------
Net cash provided by financing activities......... 583,601
-----------
Decrease in cash............................................ (95,820)
Cash at beginning of year................................... 134,090
-----------
Cash at end of year......................................... $ 38,270
===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ 118,075
Income taxes........................................... $ 100,000
Supplemental schedule of noncash investing and financing
activities:
Equipment purchases financed with leases and notes
payable................................................ $ 10,350
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 75
DIRECT CONNECT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Direct Connect Systems, Inc. (the "Company") custom designs, installs and
services high performance data storage units for end-users. The Company also
provides storage management software solutions, consulting services and
maintenance and extended warranty contracts.
In July 1998, the Company and its stockholders entered into a definitive
agreement with Datalink Corporation ("Datalink"), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of Datalink common stock.
REVENUE RECOGNITION:
The Company recognizes product revenue as its products are shipped.
Software solution and consulting service revenue is recognized as such services
are rendered. Revenues, net of related costs, from extended warranty and
maintenance contracts are recognized over the period of the contracts, with the
unearned portions being recognized as deferred revenue. These are primarily
one-year contracts.
INVENTORIES:
Inventories, principally consisting of data storage products and components
are valued at the lower of cost or market with the cost determined on a
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and depreciation and amortization
are provided on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are depreciated over the shorter of estimated
useful lives or lease term.
Upon retirement or disposition of property and equipment, the cost and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is recognized in the statement of income.
ADVERTISING EXPENSE:
The Company charges to expense all advertising costs as incurred.
Advertising expense for the year ended December 31, 1997 was $133,356.
INCOME TAXES:
Deferred income tax liabilities and assets are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense consists
of the tax payable for the period and the change during the period in deferred
tax assets and liabilities.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of 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 the estimated useful lives of property and equipment.
F-24
<PAGE> 76
DIRECT CONNECT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. BALANCE SHEET INFORMATION:
Accounts receivable as of December 31, 1997 consisted of:
<TABLE>
<S> <C>
Accounts receivable....................................... $3,470,614
Less allowance for doubtful accounts...................... 48,232
----------
$3,422,382
==========
</TABLE>
Inventories as of December 31, 1997 consisted of:
<TABLE>
<S> <C>
Raw materials............................................. $1,056,021
Work in process........................................... 93,703
----------
$1,149,724
==========
</TABLE>
Property and equipment as of December 31, 1997 consisted of:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE
---------
<S> <C> <C>
Office equipment and software............................... 3-7 $244,514
Automobile.................................................. 5 57,676
Furniture and fixtures and leasehold improvements........... 7-10 53,688
--------
355,878
Less accumulated depreciation............................... 103,616
========
$252,262
========
</TABLE>
3. BANK LINE OF CREDIT:
The Company has up to a $1.5 million line of credit, which requires monthly
interest payments at the rate of prime plus 1 3/4% (10.25% at December 31,
1997), based upon levels of eligible accounts receivable, and is collateralized
by accounts receivable, inventories, property and equipment and life insurance
policies on the lives of certain corporate officers. The shareholders have
personally guaranteed this debt. This agreement, as amended, expires in April
1999. The agreement has certain financial covenants, including maintenance of
certain levels of accounts receivable and other account balances. Shareholder
loans payable are subordinated to borrowings under the line of credit.
4. LONG-TERM DEBT:
Long-term debt as of December 31, 1997 consisted of:
<TABLE>
<S> <C>
Loans payable to shareholders, unsecured requiring interest
at 10%, payable annually and maturing on April 30,
1999...................................................... $196,543
Other notes payable......................................... 45,313
--------
241,856
Less current portion........................................ 30,471
--------
$211,385
========
</TABLE>
F-25
<PAGE> 77
DIRECT CONNECT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future maturities of long-term debt as of December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Year
<S> <C>
1998........................................................ $ 30,471
1999........................................................ 206,588
2000........................................................ 4,797
--------
$241,856
========
</TABLE>
5. COMMITMENTS:
The Company leases office facilities under operating leases. Rent expense
was $78,532 for 1997. Future minimum lease payments for such leases are as
follows as of December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 72,705
1999........................................................ 74,925
2000........................................................ 57,443
--------
$205,073
========
</TABLE>
6. RETIREMENT PLANS:
The Company provides a qualified 401(k) defined contribution and profit
sharing plan for all full-time employees. There is no Company matching
requirement in this plan.
7. INCOME TAXES:
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts............................. $17,990
Deferred revenue............................................ 32,927
-------
50,917
Deferred tax liabilities:
Depreciation and other property and equipment basis
differences............................................... 24,691
-------
Net deferred tax asset...................................... $26,226
=======
</TABLE>
8. CONCENTRATIONS:
Sales to one customer in 1997 represented 18% of total revenues and 21% of
the December 31, 1997 accounts receivable balance.
F-26
<PAGE> 78
Inside back cover: Map of United States showing the Company's Current Sales
Territories.
<PAGE> 79
- ------------------------------------------------------
- ------------------------------------------------------
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.......................... 6
USE OF PROCEEDS....................... 12
TERMINATION OF S CORPORATION
STATUS AND PUT OPTION AND
DIVIDEND POLICY..................... 13
CAPITALIZATION........................ 14
DILUTION.............................. 16
SELECTED HISTORICAL FINANCIAL DATA.... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 19
BUSINESS.............................. 26
MANAGEMENT............................ 35
CERTAIN TRANSACTIONS.................. 39
PRINCIPAL STOCKHOLDERS................ 41
DESCRIPTION OF CAPITAL STOCK.......... 42
SHARES ELIGIBLE FOR FUTURE SALE....... 43
UNDERWRITING.......................... 44
LEGAL MATTERS......................... 45
EXPERTS............................... 45
CHANGE IN ACCOUNTANTS................. 45
ADDITIONAL INFORMATION................ 46
GLOSSARY.............................. 47
INDEX TO 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
John G. Kinnard and Company,
Incorporated
-----------
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In June 1999, the Company authorized the grant of non-incentive options
under the Incentive Plan to the four non-employee directors that will vest
coincident with the first closing on the Company's initial public offering to
purchase an aggregate of 36,000 shares of the Company's Common Stock. Once
vested, such options will be exercisable for ten years from the date of grant at
an exercise price equal to the initial public offering price per share. Also in
June 1999, the Company authorized the grant of incentive options under the
Incentive Plan to 134 employees of the Company to purchase an aggregate of
715,425 shares of the Company's Common Stock. The grant of all of the above
options is contingent upon the first closing of the Company's initial public
offering. All of the incentive options will vest 25% per year over four years
and, once vested, will be exercisable for ten years from the date of the Board
action at an exercise price equal to the initial public offering price per
share. The Company believes that the grant of all of these options will be
exempt from registration under the Securities Act because no sale of securities
will occur.
In connection with the acquisition of DCSI in July 1998, 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 was
exempt from registration under Section 4(2) of the Securities Act. Assuming a
public offering price of $9.00 per share, the Company will issue an additional
22,222 shares of the Company's Common Stock to the former DCSI stockholders.
ITEM 16. EXHIBITS.
(a) Exhibits.
<TABLE>
<C> <S>
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 1999 Incentive Compensation Plan (supersedes and replaces
prior exhibit of same number).
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).
10.8* Second Lease Agreement with Washington Avenue L.L.P.
10.9 Lease Extension Agreement with Washington Avenue L.L.P.
16.1* Letter from Hansen, Jergenson Nergaard & Co., L.L.P.,
regarding change in certifying accountant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Hansen, Jergenson, Nergaard & Co., L.L.P.
23.3* Consent of Messerli & Kramer P.A. (including in Exhibit
5.1).
24.1* Power of Attorney (included in signature page).
27.1 Financial Data Schedule (Edgar filing only).
</TABLE>
(b) Financial Statement Schedule
Report of Independent Accountants on Financial Statement Schedule.*
Schedule II -- Valuation and Qualifying Accounts.*
- ------------
* previously filed as part of the Registration Statement
II-1
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused Amendment No. 4 to this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Minneapolis, State of Minnesota, on June 15, 1999.
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
--------- ----- ----
<C> <S> <C>
/s/ GREG R. MELAND President and Chief Executive June 15, 1999
- --------------------------------------------- Officer and Director (Principal
Greg R. Meland Executive Officer)
/s/ DANIEL J. KINSELLA Chief Financial Officer (Principal June 15, 1999
- --------------------------------------------- Financial and Accounting Officer)
Daniel J. Kinsella
/s/ GREG R. MELAND Director June 15, 1999
- ---------------------------------------------
Robert M. Price*
/s/ GREG R. MELAND Director June 15, 1999
- ---------------------------------------------
James E. Ousley*
/s/ GREG R. MELAND Director June 15, 1999
- ---------------------------------------------
Margaret A. Loftus*
/s/ GREG R. MELAND Director June 15, 1999
- ---------------------------------------------
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-2
<PAGE> 82
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 1999 Incentive Compensation Plan (supersedes and replaces
prior exhibit of same number)...............................
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).....
10.8* Second Lease Agreement with Washington Avenue L.L.P. .......
10.9 Lease Extension Agreement with Washington Avenue L.L.P......
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-3
<PAGE> 1
EXHIBIT 10.2
DATALINK CORPORATION
1999 INCENTIVE COMPENSATION PLAN
ARTICLE 1.
ESTABLISHMENT, OBJECTIVES AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. Datalink Corporation, a Minnesota corporation
(hereinafter referred to as the "Company"), hereby establishes an incentive
compensation plan to be known as the "Datalink Corporation 1999 Incentive
Compensation Plan" (hereinafter referred to as the "Plan"), as set forth in this
document. The Plan permits the grant of Nonqualified Stock Options, Incentive
Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares,
Performance Units, Cash-Based Awards, Phantom Shares and Share-Based Awards.
The Plan was approved by the Board of Directors and the Stockholders of
the Company on June 11, 1999 (the "Effective Date") and supersedes the Incentive
Compensation Plan originally adopted as of June 1, 1998, pursuant to which no
awards were granted. The Plan shall remain in effect as provided in Section 1.3
hereof.
1.2 OBJECTIVES OF THE PLAN. The objectives of the Plan are to optimize the
profitability and growth of the Company through annual and long-term incentives
which are consistent with the Company's goals and which link the personal
interests of Participants to those of the Company's stockholders; to provide
Participants with an incentive for excellence in individual performance; and to
promote teamwork among Participants. The Plan is further intended to provide
flexibility to the Company in its ability to motivate, attract, and retain the
services of Participants who make significant contributions to the Company's
success and to allow Participants to share in the success of the Company.
1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date as set
forth in Section 1.1 hereof, and shall remain in effect, subject to the right of
the Board of Directors to amend or terminate the Plan at any time pursuant to
Article 17 hereof, until all Shares subject to it shall have been purchased or
acquired according to the Plan's provisions under Awards denominated in Shares,
and with respect to all Awards, in no event may an Award be granted under the
Plan on or after the tenth anniversary of the Effective Date.
ARTICLE 2.
DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings
set forth below, and when the meaning is intended, the initial letter of the
word shall be capitalized:
2.1 "AFFILIATE" shall have the meaning ascribed to such term in Rule 12b-2 of
the General Rules and Regulations of the Exchange Act.
<PAGE> 2
2.2 "AWARD" means, individually or collectively, a grant under this Plan of
Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights,
Restricted Stock, Performance Shares, Performance Units, Cash-Based Awards,
Phantom Shares or Other Share-Based Awards.
2.3 "AWARD AGREEMENT" means an agreement entered into by the Company and each
Participant setting forth the terms and provisions applicable to Awards granted
under this Plan.
2.4 "BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the meaning ascribed
to such term in Rule 13d-3 of the General Rules and Regulations under the
Exchange Act.
2.5 "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the Company.
2.6 "CASH-BASED AWARD" means an Award granted to a Participant, as described in
Article 9 herein.
2.7 "CHANGE IN CONTROL" of the Company shall be deemed to have occurred as of
the first day (the "Date of Determination") that any one or more of the
following conditions shall have been satisfied:
(a) Any Person (other than those Persons owning stock of the Company as
of the day before the IPO Date, or other than a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company, or a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as
their ownerships of stock of the Company): (i) becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
representing thirty percent (30%) or more of the combined voting power
of the Company's then outstanding securities; and (ii) such Person's
ownership as of the Date of Determination exceeds the combined voting
power beneficially owned as of the Date of Determination by the
stockholders who were also stockholders of the Company on the day
before the IPO Date; or
(b) During any period of two (2) consecutive years (not including any
period prior to the IPO Date), individuals who at the beginning of such
period constitute the Board (and any new Director, whose election was
approved by a vote of at least two-thirds (2/3) of the Directors then
still in office who either were Directors at the beginning of the
period or whose election or nomination for election was so approved),
cease for any reason to constitute a majority thereof; or
(c) The stockholders of the Company approve: (i) a plan of complete
liquidation of the Company; or (ii) an agreement for the sale or
disposition of all or substantially all the Company's assets; or (iii)
a merger, consolidation, or reorganization of the Company with or
involving any other corporation, other than a merger, consolidation, or
reorganization that would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least sixty-five percent (65%)
of the combined
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<PAGE> 3
voting power of the voting securities of the Company (or such surviving
entity) outstanding immediately after such merger, consolidation, or
reorganization.
However, in no event shall a "Change in Control" be deemed to have
occurred, with respect to a Participant, if the Participant is part of a
purchasing group which consummates the Change-in-Control transaction. A
Participant shall be deemed "part of a purchasing group" for purposes of the
preceding sentence if the Participant is an equity participant in the purchasing
company or group (except for: (i) passive ownership of less than three percent
(3%) of the stock of the purchasing company; or (ii) ownership of equity
participant in the purchasing company or group which is otherwise not
significant, as determined prior to the Change in Control by a majority of the
nonemployee continuing Directors).
2.8 "CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
2.9 "COMMITTEE" means any committee appointed by the Board to administer Awards
to Employees, as specified in Article 3 herein. Any such committee shall be
comprised entirely of Directors who are considered "outside directors" under
Section 162(m) of the Code.
2.10 "COMPANY" means Datalink Corporation, a Minnesota corporation, including
any and all Subsidiaries and Affiliates, and any successor thereto as provided
in Article 20 herein.
2.11 "COVERED EMPLOYEE" means a Participant who, as of the date of vesting
and/or payout of an Award, as applicable, is one of the group of "covered
employees," as defined in the regulations promulgated under Code Section 162(m),
or any successor statute.
2.12 "DIRECTOR" means any individual who is a member of the Board of Directors
of the Company or any Subsidiary or Affiliate; provided, however, that any
Director who is employed by the Company or any Subsidiary or Affiliate shall be
considered an Employee under the Plan and shall not be considered a Director.
2.13 "EFFECTIVE DATE" shall have the meaning ascribed to such term in Section
1.1 hereof.
2.14 "EMPLOYEE" means any employee of the Company or its Subsidiaries or
Affiliates. Directors who are employed by the Company shall be considered
Employees under this Plan.
2.15 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from
time to time, or any successor act thereto.
2.16 "FAIR MARKET VALUE" shall be determined on the basis of the opening sale
price on the principal securities exchange on which the Shares are traded or, if
there is no such sale on the relevant date, then on the last previous day on
which a sale was reported; if the security is not listed for trading on a
national securities exchange, the fair market value of a security as determined
in good faith by the Board.
-3-
<PAGE> 4
2.17 "FREESTANDING SAR" means an SAR that is granted independently of any
Options, as described in Article 7 herein.
2.18 "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase Shares
granted under Article 6 herein and which is designated as an Incentive Stock
Option and which is intended to meet the requirements of Code Section 422.
2.19 "INSIDER" shall mean an individual who is, on the relevant date, an
officer, director or more than ten percent (10%) beneficial owner of any class
of the Company's equity securities that is registered pursuant to Section 12 of
the Exchange Act, all as defined under Section 16 of the Exchange Act.
2.20 "IPO DATE" means the first day on which Shares are publicly traded on the
Nasdaq National Market.
2.21 "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to purchase Shares
granted under Article 6 herein and which is not intended to meet the
requirements of Code Section 422.
2.22 "OPTION" means an Incentive Stock Option or a Nonqualified Stock Option, as
described in Article 6 herein.
2.23 "OPTION PRICE" means the price at which a Share may be purchased by a
Participant pursuant to an Option.
2.24 "PARTICIPANT" means an Employee, Director, or other individual designated
by the Board who has been selected to receive an Award or who has an outstanding
Award granted under the Plan.
2.25 "PERFORMANCE-BASED EXCEPTION" means the performance-based exception from
the tax deductibility limitations of Code Section 162(m).
2.26 "PERFORMANCE SHARE" means an Award granted to a Participant, as described
in Article 9 herein.
2.27 "PERFORMANCE UNIT" means an Award granted to a Participant, as described in
Article 9 herein.
2.28 "PERIOD OF RESTRICTION" means the period during which the transfer of
Shares of Restricted Stock is limited in some way (based on the passage of time,
the achievement of performance goals, or upon the occurrence of other events as
determined by the Board, at its discretion), and the Shares are subject to a
substantial risk of forfeiture, as provided in Article 8 herein.
-4-
<PAGE> 5
2.29 "PERSON" shall have the meaning ascribed to such term in Section 3(a)(9) of
the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) thereof.
2.30 "PHANTOM SHARES" means an Award granted to a Participant pursuant to
Article 10 herein.
2.31 "RESTRICTED STOCK" means an Award granted to a Participant pursuant to
Article 8 herein.
2.32 "SHARE -BASED AWARD" means an Award granted to a Participant pursuant to
Article 11 herein.
2.33 "SHARES" means the shares of Common Stock of the Company.
2.34 "STOCK APPRECIATION RIGHT" or "SAR" means an Award, granted alone or in
connection with a related Option, designated as an SAR, pursuant to the terms of
Article 7 herein.
2.35 "SUBSIDIARY" means any corporation, partnership, joint venture, or other
entity in which the Company has a fifty percent (50%) or greater voting
interest.
2.36 "TANDEM SAR" means an SAR that is granted in connection with a related
Option pursuant to Article 7 herein, the exercise of which shall require
forfeiture of the right to purchase a Share under the related Option (and when a
Share is purchased under the Option, the Tandem SAR shall similarly be
canceled).
ARTICLE 3.
ADMINISTRATION
3.1 GENERAL. The Plan shall be administered by the Board, or (subject to the
following) by any Committee appointed by the Board. The members of the Committee
shall be appointed from time to time by, and shall serve at the discretion of,
the Board of Directors. The Board may delegate to the Committee any or all of
the administration of the Plan; provided, however, that the administration of
the Plan with respect to Awards granted to Directors may not be so delegated. To
the extent that the Board has delegated to the Committee any authority and
responsibility under the Plan, all applicable references to the Board in the
Plan shall be to the Committee. The Committee shall have the authority to
delegate administrative duties to employees, officers or Directors of the
Company.
3.2 AUTHORITY OF THE BOARD. Except as limited by law or by the Articles of
Incorporation or Bylaws of the Company, and subject to the provisions herein,
the Board shall have full power to select Employees and Directors and other
individuals who shall participate in the Plan; determine the sizes and types of
Awards; determine the terms and conditions of Awards in a manner consistent with
the Plan; construe and interpret the Plan and any agreement or
-5-
<PAGE> 6
instrument entered into under the Plan; establish, amend, or waive rules and
regulations for the Plan's administration; and (subject to the provisions of
Article 17 herein) amend the terms and conditions of any outstanding Award as
provided in the Plan. Further, the Board shall make all other determinations
which may be necessary or advisable for the administration of the Plan. As
permitted by law (and subject to Section 3.1 herein), the Board may delegate its
authority as identified herein.
3.3 DECISIONS BINDING. All determinations and decisions made by the Board
pursuant to the provisions of the Plan and all related orders and resolutions of
the Board shall be final, conclusive and binding on all persons, including the
Company, its stockholders, Directors, Employees, Participants, and their estates
and beneficiaries.
ARTICLE 4.
SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS
4.1 NUMBER OF SHARES AVAILABLE FOR GRANTS. Subject to adjustment as provided in
Section 4.2 herein, the number of Shares hereby reserved for issuance to
Participants under the Plan shall be one million three hundred fifty thousand
(1,350,000).
4.2 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in corporate
capitalization, such as a stock split, or a corporate transaction, such as any
merger, consolidation, separation, including a spin-off, or other distribution
of stock or property of the Company, any reorganization (whether or not such
reorganization comes within the definition of such term in Code Section 368) or
any partial or complete liquidation of the Company, such adjustment shall be
made in the number and class of Shares which may be delivered under Section 4.1,
in the number and class of and/or price of Shares subject to outstanding Awards
granted under the Plan, and in the Award limits set forth in Section 4.1 as may
be determined to be appropriate and equitable by the Board, in its sole
discretion, to prevent dilution or enlargement of rights; provided, however,
that the number of Shares subject to any Award shall always be a whole number.
ARTICLE 5.
ELIGIBILITY AND PARTICIPATION
5.1 ELIGIBILITY. Persons eligible to participate in this Plan include all
Employees, Directors, and other individuals designated by the Board.
5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Board may,
from time to time, select from all eligible Employees, Directors, and other
individuals designated by the Board, those to whom Awards shall be granted and
shall determine the nature and amount of each Award.
-6-
<PAGE> 7
ARTICLE 6.
STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options
may be granted to Participants in such number, and upon such terms, and at any
time and from time to time as shall be determined by the Board, provided,
however, that no Director shall be granted any ISO.
6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an Award Agreement
that shall specify the Option Price, the duration of the Option, the number of
Shares to which the Option pertains, termination and transferability rights, and
such other provisions as the Board shall determine. The Award Agreement also
shall specify whether the Option is intended to be an ISO within the meaning of
Code Section 422, or an NQSO whose grant is intended not to fall under the
provisions of Code Section 422.
6.3 OPTION PRICE. The Option Price for each grant of an Option under this Plan
shall be determined by the Board.
6.4 DURATION OF OPTIONS. Each Option granted to a Participant shall expire at
such time as the Board shall determine at the time of grant; provided, however,
that no Option shall be exercisable later than the tenth (10th) anniversary date
of its grant.
6.5 EXERCISE OF OPTIONS. Options granted under this Article 6 shall be
exercisable at such times and be subject to such restrictions and conditions as
the Board shall in each instance approve, which need not be the same for each
grant or for each Participant.
6.6 PAYMENT. Options granted under this Article 6 shall be exercised by the
delivery of a written notice of exercise to the Company, setting forth the
number of Shares with respect to which the Option is to be exercised,
accompanied by full payment for the Shares. The Option Price upon exercise of
any Option shall be payable to the Company in full either: (a) in cash or its
equivalent, or (b) by tendering previously acquired Shares having an aggregate
Fair Market Value at the time of exercise equal to the total Option Price
(provided that the Shares which are tendered must have been held by the
Participant for at least six (6) months prior to their tender to satisfy the
Option Price), or (c) by a combination of (a) and (b). The Board also may allow
cashless exercise as permitted under Federal Reserve Board's Regulation T,
subject to applicable securities law restrictions, or by any other means which
the Board determines to be consistent with the Plan's purpose and applicable
law. Subject to any governing rules or regulations, as soon as practicable after
receipt of a written notification of exercise and full payment, the Company
shall deliver to the Participant, in the Participant's name, Share certificates
in an appropriate amount based upon the number of Shares purchased under the
Option(s).
6.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Board may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option
granted under this Article 6 as it may deem advisable, including, without
limitation, restrictions under applicable federal
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<PAGE> 8
securities laws, under the requirements of any stock exchange or market upon
which such Shares are then listed and/or traded, and under any blue sky or state
securities laws applicable to such Shares.
6.8 ANNUAL DIRECTOR GRANTS. Commencing with the Company's 2000 annual
stockholders' meeting and on the date of each subsequent annual stockholders'
meeting occurring while the Plan remains in effect each Director then serving on
the Board on the date of any such meeting shall be granted Nonqualified Stock
Options to purchase 3,000 Shares. These Nonqualified Stock Options shall be
exercisable commencing one year after the date of grant; provided, however, that
if a Director fails to serve until the annual stockholders' meeting immediately
succeeding a grant of such Options, the number of Shares that may be purchased
by such Director shall be determined by multiplying 3,000 by a fraction (i) the
numerator of which is the number of days between the date such Options were
granted and the date the Director ceased serving on the Board and (ii) the
denominator of which is the number of days between the date such Options were
granted and the date of the annual stockholders' meeting immediately succeeding
the date of grant. The Option Price of each Nonqualified Stock Option granted
pursuant to this Section 6.8 shall be the Fair Market Value of a Share on the
date of grant. These Nonqualified Stock Options will expire ten years after the
date of grant.
ARTICLE 7.
STOCK APPRECIATION RIGHTS
7.1 GRANT OF SARs. Subject to the terms and conditions of the Plan, SARs may be
granted to Participants at any time and from time to time as shall be determined
by the Board. The Board may grant Freestanding SARs, Tandem SARs, or any
combination of these forms of SAR. The Board shall have complete discretion in
determining the number of SARs granted to each Participant (subject to Article 4
herein) and, consistent with the provisions of the Plan, in determining the
terms and conditions pertaining to such SARs. The grant price of a Freestanding
SAR shall equal the Fair Market Value of a Share on the date of grant of the
SAR. The grant price of Tandem SARs shall equal the Option Price of the related
Option.
7.2 EXERCISE OF TANDEM SARs. Tandem SARs may be exercised for all or part of the
Shares subject to the related Option upon the surrender of the right to exercise
the equivalent portion of the related Option. A Tandem SAR may be exercised only
with respect to the Shares for which its related Option is then exercisable.
Notwithstanding any other provision of this Plan to the contrary, with respect
to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR will
expire no later than the expiration of the underlying ISO; (ii) the value of the
payout with respect to the Tandem SAR may be for no more than one hundred
percent (100%) of the difference between the Option Price of the underlying ISO
and the Fair Market Value of the Shares subject to the underlying ISO at the
time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only
when the Fair Market Value of the Shares subject to the ISO exceeds the Option
Price of the ISO.
-8-
<PAGE> 9
7.3 EXERCISE OF FREESTANDING SARs. Freestanding SARs may be exercised upon
whatever terms and conditions the Board, in its sole discretion, imposes upon
them.
7.4 SAR AGREEMENT. Each SAR grant shall be evidenced by an Award Agreement that
shall specify the grant price, the term of the SAR, and such other provisions as
the Board shall determine.
7.5 TERM OF SARs. The term of an SAR granted under the Plan shall be determined
by the Board, in its sole discretion; provided, however, that such term shall
not exceed ten (10) years.
7.6 PAYMENT OF SAR AMOUNT. Upon exercise of an SAR, a Participant shall be
entitled to receive payment from the Company in an amount determined by
multiplying:
(a) The difference between the Fair Market Value of a Share on the date
of exercise over the grant price; by
(b) The number of Shares with respect to which the SAR is exercised.
At the discretion of the Board, the payment upon SAR exercise may be in cash, in
Shares of equivalent value, or in some combination thereof. The Board's
determination regarding the form of SAR payout shall be set forth in the Award
Agreement pertaining to the grant of the SAR.
ARTICLE 8.
RESTRICTED STOCK
8.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the Plan,
the Board, at any time and from time to time, may grant Shares of Restricted
Stock to Participants in such amounts as the Board shall determine.
8.2 RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall be evidenced
by a Restricted Stock Award Agreement that shall specify the Period(s) of
Restriction, the number of Shares of Restricted Stock granted, and such other
provisions as the Board shall determine.
8.3 OTHER RESTRICTIONS. Subject to Article 12 herein, the Board shall impose
such other conditions and/or restrictions on any Shares of Restricted Stock
granted pursuant to the Plan as it may deem advisable including, without
limitation, a requirement that Participants pay a stipulated purchase price for
each Share of Restricted Stock, restrictions based upon the achievement of
specific performance goals (Company-wide, divisional, and/or individual),
time-based restrictions on vesting following the attainment of the performance
goals, and/or restrictions under applicable federal or state securities laws.
The Company may retain the certificates representing Shares of Restricted Stock
in the Company's possession until such time as all conditions and/or
restrictions applicable to such Shares have been satisfied. Except as otherwise
provided in this Article 8, Shares of Restricted Stock covered by each
Restricted Stock grant made under the Plan shall
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<PAGE> 10
become freely transferable by the Participant after the last day of the
applicable Period of Restriction.
8.4 VOTING RIGHTS. Participants holding Shares of Restricted Stock granted
hereunder may be granted the right to exercise full voting rights with respect
to those Shares during the Period of Restriction.
8.5 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction,
Participants holding Shares of Restricted Stock granted hereunder may be
credited with regular cash dividends paid with respect to the Shares while they
are so held. The Board may apply any restrictions to the dividends that the
Board deems appropriate. Without limiting the generality of the preceding
sentence, if the grant or vesting of Restricted Shares granted to a Covered
Employee is designed to comply with the requirements of the Performance-Based
Exception, the Board may apply any restrictions it deems appropriate to the
payment of dividends declared with respect to such Restricted Shares, including,
without limitation, that the dividends and/or the Restricted Shares maintain
eligibility for the Performance-Based Exception.
ARTICLE 9.
PERFORMANCE UNITS, PERFORMANCE SHARES, AND CASH-BASED AWARDS
9.1 GRANT OF PERFORMANCE UNITS/SHARES AND CASH-BASED AWARDS. Subject to the
terms of the Plan, Performance Units, Performance Shares, and/or Cash-Based
Awards may be granted to Participants in such amounts and upon such terms, and
at any time and from time to time, as shall be determined by the Board.
9.2 VALUE OF PERFORMANCE UNITS/SHARES AND CASH-BASED AWARDS. Each Performance
Unit shall have an initial value that is established by the Board at the time of
grant. Each Performance Share shall have an initial value equal to the Fair
Market Value of a Share on the date of grant. Each Cash-Based Award shall have a
value as may be determined by the Board. The Board shall set performance goals
in its discretion which, depending on the extent to which they are met, will
determine the number and/or value of Performance Units/Shares and Cash-Based
Award that will be paid out to the Participant. For purposes of this Article 9,
the time period during which the performance goals must be met shall be called a
"Performance Period."
9.3 EARNING OF PERFORMANCE UNITS/SHARES AND CASH-BASED AWARDS. Subject to the
terms of this Plan, after the applicable Performance Period has ended, the
holder of Performance Units/Shares and Cash-Based Awards shall be entitled to
receive payout on the number and value of Performance Units/Shares and of
Cash-Based Awards earned by the Participant over the Performance Period, to be
determined as a function of the extent to which the corresponding performance
goals have been achieved.
9.4 FORM AND TIMING OF PAYMENT OF PERFORMANCE UNITS/SHARES AND CASH-BASED
AWARDS. Payment of earned Performance Units/Shares and Cash-Based Awards shall
be made in lump-sum payments at such time or times designated by the Board
following the
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<PAGE> 11
close of the applicable Performance Period. Subject to the terms of this Plan,
the Board in its sole discretion, may pay earned Performance Units/Shares and
Cash-Based Awards in the form of cash or in Shares (or in a combination thereof)
which have an aggregate Fair Market Value equal to the value of the earned
Performance Units/Shares and Cash-Based Awards at the close of the applicable
Performance Period plus or minus any investment return from the close of the
Performance Period to the date of payment as determined by the Board in its
discretion. Such Shares may be granted subject to any restrictions deemed
appropriate by the Board. The determination of the Board with respect to the
form and timing of payout of such Awards shall be set forth in the Award
Agreement pertaining to the grant of the Award. At the discretion of the Board,
Participants may be entitled to receive any dividends declared with respect to
Shares which have been earned in connection with grants of Performance Units
and/or Performance Shares which have been earned, but not yet distributed to
Participants (such dividends shall be subject to the same accrual, forfeiture,
and payout restrictions as apply to dividends earned with respect to Shares of
Restricted Stock, as set forth in Section 8.5 herein). In addition, Participants
may, at the discretion of the Board, be entitled to exercise their voting rights
with respect to such Shares.
ARTICLE 10.
PHANTOM SHARES
10.1 GRANT OF PHANTOM SHARES. Subject to the terms of the Plan, Phantom Shares
may be granted to Participants in such amounts and upon such terms, and at any
time and from time to time, as shall be determined by the Board.
10.2 VALUE OF PHANTOM SHARES. Each Phantom Share shall have an initial value
equal to the Fair Market Value of a Share on the date of grant. The Board shall
establish the terms and conditions of such Award, including any vesting
provisions.
10.3 EARNING OF PHANTOM SHARES. Subject to the terms of this Plan, the holder of
any vested Phantom Shares shall be entitled to receive payout on the number and
value of Phantom Shares earned by the Participant over the Performance Period,
to be determined by the extent to which the corresponding performance goals have
been achieved.
10.4 FORM AND TIMING OF PAYMENT OF PERFORMANCE UNITS/SHARES. Payment of earned
Phantom Shares shall be made in a single lump sum at such time as designated by
the Board. Subject to the terms of this Plan, the Board, in its sole discretion,
may pay earned Phantom Shares in the form of cash or in Shares (or in a
combination thereof) which have an aggregate Fair Market Value equal to the
value of the earned Phantom Shares at such time as designated by the Board. Such
Shares may be granted subject to any restrictions deemed appropriate by the
Board. The determination of the Board with respect to the form of payout of such
Awards shall be set forth in the Award Agreement pertaining to the grant of the
Award. At the discretion of the Board, Participants may be entitled to receive
any dividends declared with respect to Shares which have been earned in
connection with grants of Phantom Shares which have been earned, but not yet
distributed to Participants (such dividends shall be subject to the same
accrual, forfeiture, and
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<PAGE> 12
payout restrictions as apply to dividends earned with respect to Shares of
Restricted Stock, as set forth in Section 8.5 herein).
ARTICLE 11.
OTHER SHARE-BASED AWARDS
Subject to the terms of the Plan, the Board may grant other Share-Based
Awards under this Plan, including without limitation, those Awards pursuant to
which Shares are acquired or may in the future be acquired. The Board, in its
sole discretion, shall determine the terms and conditions of such other
Share-Based Awards.
ARTICLE 12.
PERFORMANCE MEASURES
Unless and until the Board proposes for stockholder vote and
stockholders approve a change in the general performance measures set forth in
this Article 12, the attainment of which may determine the degree of payout
and/or vesting with respect to Awards to Covered Employees which are designed to
qualify for the Performance-Based Exception, the performance measure(s) to be
used for purposes of such grants shall be chosen from among:
(a) Earnings per share;
(b) Net income (before or after taxes);
(c) Return measures (including, but not limited to, return on
assets, equity, or sales);
(a) Cash flow return on investments which equals net cash flows
divided by owners equity;
(e) Earnings before or after taxes;
(f) Gross revenues;
(g) Share price (including, but no limited to, growth measures and
total stockholder return); and
(h) Economic value added.
The Board shall have the discretion to adjust the determinations of the degree
of attainment of the preestablished performance goals; provided, however, that
Awards which are designed to qualify for the Performance-Based Exception, and
which are held by Covered Employee, may not be adjusted upward (the Board shall
retain the discretion to adjust such Awards downward). In the event that
applicable tax and/or securities laws change to permit Board discretion to alter
the governing performance measures without obtaining stockholder approval of
such changes, the
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<PAGE> 13
Board shall have sole discretion to make such changes without obtaining
stockholder approval. In addition, in the event that the Board determines that
it is advisable to grant Awards which shall not qualify for the
Performance-Based Exception, the Board may make such grants without satisfying
the requirements of Code Section 162(m).
ARTICLE 13.
BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his or her death before
he or she receives any or all of such benefit. Each such designation shall
revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company, and will be effective only when filed by the
Participant in writing with the Company during the Participant's lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
ARTICLE 14.
DEFERRALS
The Board may permit or require a Participant to defer such
Participant's receipt of the payment of cash or the delivery of Shares that
would otherwise be due to such Participant by virtue of the exercise of an
Option or SAR, the lapse or waiver of restrictions with respect to Restricted
Stock, or the satisfaction of any requirements or goals with respect to
Performance Units/Shares. If any such deferral election is required or
permitted, the Board shall, in its sole discretion, establish rules and
procedures for such payment deferrals.
ARTICLE 15.
RIGHTS OF EMPLOYEES/DIRECTORS
15.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way
the right of the Company to terminate any Participant's employment at any time,
nor confer upon any Participant any right to continue in the employ of the
Company.
15.2 PARTICIPATION. No Employee or Director shall have the right to be selected
to receive an Award under this Plan, or, having been so selected, to be selected
to receive a future Award.
15.3 TERMINATION OF EMPLOYMENT/DIRECTORSHIP RELATIONSHIP. Each Participant's
Award Agreement shall set forth the extent to which the Participant shall have
the right to exercise and/or receive payment for any Award following termination
of the Participant's employment or directorship with the Company, or termination
of relationship with the Company. Such provisions shall be determined in the
sole discretion of the Board, shall be included in the Award Agreement entered
into with each Participant, need not be uniform among Awards and may reflect
distinctions based on the reasons for termination.
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<PAGE> 14
15.4 NONTRANSFERABILITY. Except as otherwise provided in a Participant's Award
Agreement, Awards may not be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated, other than by will or by the laws of decent and
distribution. Further, except as otherwise provided in a Participant's Award
Agreement, a Participant's rights under the Plan shall be exercisable during the
Participant's lifetime only by the Participant or the Participant's legal
representative.
ARTICLE 16.
CHANGE IN CONTROL
16.1 TREATMENT OF OUTSTANDING AWARDS. Upon the occurrence of a Change in
Control, unless otherwise specifically prohibited under applicable laws, or by
the rules and regulations of any governing governmental agencies or national
securities exchanges:
(a) Any and all Options and SARs granted hereunder shall become
immediately exercisable, and shall remain exercisable throughout their
entire term;
(b) Any restriction periods and restrictions imposed on Restricted
Shares which are not performance-based shall lapse;
(c) The target payout opportunities attainable under all outstanding
Awards of performance-based Restricted Stock, Performance Units,
Performance Shares, and Cash-Based Awards and Share-Based Awards shall
be deemed to have been fully earned for the entire Performance
Period(s) as of the effective date of the Change in Control. The
vesting of all Awards denominated in Shares shall be accelerated as of
the effective date of the Change in Control, and there shall be paid
out to Participants within thirty (30) days following the effective
date of the Change in Control a pro rata number of shares based upon an
assumed achievement of all relevant targeted performance goals and upon
the length of time within the Performance Period which has elapsed
prior to the Change in Control. Awards denominated in cash shall be
paid pro rata to participants in cash within thirty (30) days following
the effective date of the Change in Control, with the proration
determined as a function of the length of time within the Performance
Period which has elapsed prior to the Change in Control, and based on
an assumed achievement of all relevant targeted performance goals.
16.2 TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE-IN-CONTROL PROVISIONS.
Notwithstanding any other provision of this Plan (but subject to the limitations
of Section 17.3 hereof) or any Award Agreement provision, the provisions of this
Article 16 may not be terminated, amended, or modified on or after the date of a
Change in Control to affect adversely any Award theretofore granted under the
Plan without the prior written consent of the Participant with respect to said
Participant's outstanding Awards; provided, however, the Board may terminate,
amend, or modify this Article 16 at any time and from time to time prior to the
date of a Change in Control.
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<PAGE> 15
16.3 POOLING OF INTERESTS ACCOUNTING. Notwithstanding any other provision of the
Plan to the contrary, in the event that the consummation of a Change in Control
is contingent on using pooling of interests accounting methodology, the Board
may take any action necessary to preserve the use of pooling of interests
accounting.
ARTICLE 17.
AMENDMENT, MODIFICATION, AND TERMINATION
17.1 AMENDMENT, MODIFICATION, AND TERMINATION. Subject to Section 17.3 and 17.4,
the Board may at any time and from time to time, alter, amend, suspend or
terminate the Plan in whole or in part, provided that no amendment shall be made
without stockholder approval if such approval is necessary to comply with any
applicable tax or regulatory requirements. Prior to such approval, Awards may be
made under the Plan expressly subject to such approval.
17.2 ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR NONRECURRING
EVENTS. The Board may make adjustments in the terms and conditions of, and the
criteria included in, Awards in recognition of unusual or nonrecurring events
(including, without limitation, the events described in Section 4.2 hereof)
affecting the Company or the financial statements of the Company or of changes
in applicable laws, regulations, or accounting principles, whenever the Board
determines that such adjustments are appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan; provided that no such adjustment shall be authorized to the
extent that such authority would be inconsistent with the Plan's meeting the
requirements of Section 162(m) of the Code.
17.3 AWARDS PREVIOUSLY GRANTED. Notwithstanding any other provision of the Plan
to the contrary (but subject to Sections 4.2 and 16.3 hereof), no termination,
amendment, or modification of the Plan shall adversely affect in any material
way any Award previously granted under the Plan, without the written consent of
the Participant holding such Award.
17.4 COMPLIANCE WITH CODE SECTION 162(m). At all times when Code Section 162(m)
is applicable, all Awards granted under this Plan shall comply with the
requirements of Code Section 162(m); provided, however, that in the event the
Board determines that such compliance is not desired with respect to any Award
or Awards available for grant under the Plan, then compliance with Code Section
162(m) will not be required. In addition, in the event that changes are made to
Code Section 162(m) to permit greater flexibility with respect to any Award or
Awards available under the Plan, the Board may, subject to this Article 17, make
any adjustments it deems appropriate.
ARTICLE 18.
WITHHOLDING
18.1 TAX WITHHOLDING. The Company shall have the power and the right to deduct
or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal,
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<PAGE> 16
state, and local taxes, domestic or foreign, required by law or regulation to be
withheld with respect to any taxable event arising as a result of this Plan.
18.2 SHARE WITHHOLDING. With respect to withholding required upon the exercise
of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon
any other taxable event arising as a result of Awards granted hereunder,
Participants may elect, subject to the approval of the Board, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold
Shares having a Fair Market Value on the date the tax is to be determined equal
to the minimum statutory total tax which could be imposed on the transaction.
All such elections shall be irrevocable, made in writing, signed by the
Participant, and shall be subject to any restrictions or limitations that the
Board, in its sole discretion, deems appropriate.
ARTICLE 19.
INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or of
the Board, shall be indemnified and held harmless by the Company against and
from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, action, suit, or proceeding to which he or she may be a party or in which
he or she may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him or her in
settlement thereof, with the Company's approval, or paid by him or her in
satisfaction of any judgment in any such action, suit, or proceeding against him
or her, provided he or she shall give the Company an opportunity, at its own
expense, to handle and defend the same before he or she undertakes to handle and
defend it on his or her own behalf. The foregoing right of indemnification shall
not be exclusive of any other rights of indemnification to which such persons
may be entitled under the Company's Articles of Incorporation of Bylaws, as a
matter of law, or otherwise, or any power that the Company may have to indemnify
them or hold them harmless.
ARTICLE 20.
SUCCESSORS
All obligations of the Company under the Plan with respect to Awards
granted hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the business
and/or assets of the Company.
ARTICLE 21.
LEGAL CONSTRUCTION
21.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any
masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
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<PAGE> 17
21.2 SEVERABILITY. In the event any provision of the Plan shall be held illegal
or invalid for any reason, the illegality or invalidity shall not affect the
remaining parts of the Plan, and the Plan shall be construed and enforced as if
the illegal or invalid provision had not been included.
21.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
21.4 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions under
this Plan are intended to be exempt from the application of Section 16(b) of the
Exchange Act by virtue of compliance with all applicable conditions of Rule
16b-3 of the General Rules and Regulations of the Exchange Act.
21.5 GOVERNING LAW. To the extent not preempted by federal law, the Plan, and
all agreements hereunder, shall be construed in accordance with and governed by
the laws of the state of Minnesota.
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<PAGE> 1
EXHIBIT 10.9
LEASE EXTENSION AGREEMENT
Date: March 3/4, 1999
RE: The extension of the lease term under the two (2) Lease Agreements entered
into by Datalink Corporation, as Lessee, for leased space at the Edina
Southwest Building, Bays 1 through 9:
(1.) Lease Agreement dated February 26, 1997, for 26,653 square feet
in Bays 2 through 9.
(2.) Lease Agreement dated July 26, 1998 for 10,530 square feet in Bay 1
and a portion of Bay 2.
Parties:
7423 Washington Avenue LLP, as successor Lessor under Lease
Agreement (1.) above, and Lessor under Lease Agreement (2.) above
- hereinafter referred to as the "Lessor" and,
Datalink Corporation
- hereinafter referred to as the "Lessee"
The Parties agree to the following:
(1.) As consideration of the Lessee agreeing to pay for its tenant
improvements made in 1998, the Lessor and Lessee agree that the
termination dated for both above mentioned Lease Agreements shall be
extended so that the termination date of both is December 31, 2002.
(2.) The monthly rents set forth under the two (2) above mentioned Lease
Agreements shall remain the same through December 31, 1999, and then
the rent, as set forth in paragraph 6, shall be increased by three
percent (3.00%) as of January of 2000, and remain the same
thereafter.
(3.) The Lessee shall have the right and option to extended the lease
term with two (2), three (3) year options, such option(s) shall be
offered to the Lessee at the market rate in existence at the time of
the extension.
(4.) All other terms and conditions of the two (2) above mentioned Lease
Agreements shall remain unchanged and in full force and effect.
Lessor: Lessee:
7423 Washington Avenue LLP Datalink Corporation
by Greg Meland by Greg Meland
-------------------- --------------------
its Managing Partner its President & CEO
------------------- --------------------
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated March 4, 1999, except as to the information contained in Note
11 for which the date is June 14, 1999, relating to the consolidated financial
statements of Datalink Corporation and our report dated July 20, 1998, relating
to the financial statements of Direct Connect Systems, Inc., which appear in
such Registration Statement. We also consent to the references to us under the
headings "Experts" and "Selected Historical Financial Data" in such Registration
Statement."
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 15, 1999
S-1
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the references to our firm under the captions "Change in
Accountants" and "Selected Historical Financial Data" in this Registration
Statement on Form S-1.
/s/ Hansen, Jergenson, Nergaard & Co. LLP
Minneapolis, Minnesota
June 15, 1999
S-2
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<ARTICLE> 5
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<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 2,797,724 587,983
<SECURITIES> 0 0
<RECEIVABLES> 15,714,174 17,052,627
<ALLOWANCES> 84,214 234,214
<INVENTORY> 6,694,870 6,821,578
<CURRENT-ASSETS> 25,407,744 24,597,040
<PP&E> 3,728,216 3,888,257
<DEPRECIATION> 1,261,270 1,470,521
<TOTAL-ASSETS> 32,143,877 31,089,806
<CURRENT-LIABILITIES> 18,731,198 18,603,749
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19,059,410 20,476,156
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<CGS> 65,739,837 19,071,452
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<INTEREST-EXPENSE> 280,555 73,880
<INCOME-PRETAX> 6,679,200 1,736,913
<INCOME-TAX> 147,746 (556,093)
<INCOME-CONTINUING> 6,531,454 2,293,006
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