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Previous: DATALINK CORP, 10-K405/A, EX-27, 2000-10-06 |
Next: DATALINK CORP, 10-Q/A, EX-27, 2000-10-06 |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
| /x/ |
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended: March 31, 2000
or
| / / | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 00029758
DATALINK CORPORATION
(Exact name of registrant as specified in its charter)
| MINNESOTA (State or other jurisdiction of Incorporation) |
41-0856543 (IRS Employer Identification Number) |
7423 WASHINGTON AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55439
(Address of Principal Executive Offices)
(952) 944-3462
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
As of May 10, 2000, 8,772,537 shares of issuer's common stock, $.001 par value, were outstanding.
We are making this filing solely to show the effect of the restatement of our financial statements noted below. We have not updated any other information in this document. For current information on us, please refer to other recent filings with the Securities and Exchange Commission.
We sell service contracts (usually maintenance service agreements) to some of our customers for hardware and software products we sell to them. We arrange for fulfillment of these service contracts primarily by purchasing maintenance service agreements for our customers from our hardware and software vendors or their designated third-party service providers. Prior to January 1, 2000, we recognized revenues and expenses related to sales of these agreements upon execution of the contract. Following discussions with the staff of the Securities and Exchange Commission, we revised our revenue recognition policy related to these agreements to defer revenues and direct costs resulting from these contracts, and to amortize these revenues and expenses into operations over the term of the contracts, which are generally twelve months.
As a result of this revision, we have restated our condensed consolidated financial statements for each of the three months ended March 31, 2000 and 1999 to retroactively reflect this change. To give effect to the above restatement, we have amended only the relevant sections of this Report on Form 10-Q/A.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. This report on Form 10-Q contains forward-looking statements, which reflect the Company's views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words "aim," "believe," "expect," "anticipate," "intend," "estimate" and other expressions which indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending upon a variety of factors, including, but not limited to: our ability to hire and retain key technical and other personnel; competition and pricing pressures that may adversely affect our revenues and profits; the level of continuing demand for data storage; our dependence on key suppliers; the strain placed on our resources by growth and expansion; our ability to adapt to rapid technological change; risks associated with possible future acquisitions; fluctuations in our quarterly operating results; future changes in applicable accounting rules; any remaining impact of Year 2000 issues; and volatility in our stock price.
2
Datalink Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
| |
March 31, 2000 |
December 31, 1999 |
||||||
|---|---|---|---|---|---|---|---|---|
| |
(Unaudited) |
|
||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 7,671 | $ | 6,515 | ||||
| Accounts receivable, net | 8,552 | 19,272 | ||||||
| Inventories | 7,771 | 9,528 | ||||||
| Inventories shipped but not installed | 7,914 | — | ||||||
| Other current assets | 581 | 361 | ||||||
| Deferred income taxes | 1,505 | 784 | ||||||
| Total current assets | 33,994 | 36,460 | ||||||
| Property and equipment, net | 2,375 | 2,496 | ||||||
| Intangibles, net | 3,207 | 3,412 | ||||||
| Other assets | 104 | 47 | ||||||
| Total assets | $ | 39,680 | $ | 42,415 | ||||
| Current liabilities | ||||||||
| Accounts payable | $ | 11,745 | $ | 13,695 | ||||
| Accrued expenses | 2,510 | 2,809 | ||||||
| Income taxes payable | 704 | 257 | ||||||
| Note payable to former stockholder, current portion | 705 | 705 | ||||||
| Capital lease obligation, current portion | 9 | 13 | ||||||
| Deferred compensation, current portion | 54 | 73 | ||||||
| Distribution payable to S corporation stockholders | 262 | 744 | ||||||
| Unearned revenue | 1,199 | 931 | ||||||
| Total current liabilities | 17,188 | 19,227 | ||||||
| Note payable to former stockholder, less current portion | 704 | 1,409 | ||||||
| Deferred income taxes | 631 | 648 | ||||||
| Total liabilities | 18,523 | 21,284 | ||||||
| Stockholders' equity | ||||||||
| Common stock, $.001 par value, 50,000,000 shares authorized, 8,772,537 shares issued and outstanding as of March 31, 2000 and December 31, 1999 | 9 | 9 | ||||||
| Additional paid in capital | 18,213 | 18,213 | ||||||
| Retained earnings | 2,935 | 2,909 | ||||||
| Total stockholders' equity | 21,157 | 21,131 | ||||||
| Total liabilities and stockholders' equity | $ | 39,680 | $ | 42,415 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Datalink Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
| |
Three Months Ended March 31, |
||||||||
|---|---|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
|||||||
| |
(Unaudited) |
||||||||
| Net sales: | |||||||||
| Product sales | $ | 24,329 | $ | 23,399 | |||||
| Service sales | 3,669 | 2,035 | |||||||
| Total net sales | 27,998 | 25,434 | |||||||
| Cost of sales: | |||||||||
| Product cost of sales | 17,664 | 17,448 | |||||||
| Service cost of sales | 2,648 | 1,478 | |||||||
| Total cost of sales | 20,312 | 18,926 | |||||||
| Gross profit | 7,686 | 6,508 | |||||||
| Sales and marketing | 3,475 | 2,516 | |||||||
| General and administrative | 2,135 | 1,690 | |||||||
| Engineering | 595 | 776 | |||||||
| Offering costs | — | 173 | |||||||
| Total operating expenses | 6,205 | 5,155 | |||||||
| Income from operations | 1,481 | 1,353 | |||||||
| Interest income (expense), net | 76 | (74 | ) | ||||||
| Income before income taxes | 1,557 | 1,279 | |||||||
| Income taxes | 638 | (556 | ) | ||||||
| Income before cumulative effect of a change in accounting principle | 919 | 1,835 | |||||||
| Cumulative impact of change in accounting principle, net of income taxes | (753 | ) | — | ||||||
| Net income | $ | 166 | $ | 1,835 | |||||
| Net income (loss) per share: | |||||||||
| Basic: | |||||||||
| Income per share before cumulative effect of a change in accounting principle | $ | 0.10 | $ | 0.27 | |||||
| Loss per share from the cumulative effect of a change in accounting principle | (0.08 | ) | — | ||||||
| Net income per share | $ | 0.02 | $ | 0.27 | |||||
| Fully diluted: | |||||||||
| Income per share before cumulative effect of a change in accounting principle | $ | 0.10 | $ | 0.27 | |||||
| Loss per share from the cumulative effect of a change in accounting principle | (0.08 | ) | — | ||||||
| Net income per share | $ | 0.02 | $ | 0.27 | |||||
| Weighted average shares outstanding: | |||||||||
| Basic | 8,773 | 6,710 | |||||||
| Fully diluted | 9,261 | 6,710 | |||||||
| Pro forma data: | |||||||||
| Pro forma income before cumulative effect of a change in accounting principle | $ | 919 | $ | 748 | |||||
| Cumulative effect per share, of a change in accounting principle, net of income taxes | (753 | ) | — | ||||||
| Pro forma net income | $ | 166 | $ | 748 | |||||
| Pro forma income per share before cumulative effect of a change in accounting principle | $ | 0.10 | $ | 0.09 | |||||
| Cumulative effect per share, of a change in accounting principle, net of income taxes | (0.08 | ) | — | ||||||
| Pro forma net income | $ | 0.02 | $ | 0.09 | |||||
| Weighted average shares used in calculating pro forma net income per share: | 9,261 | 8,019 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Datalink Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
| |
Three Months Ended, March 31, (Unaudited) |
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|---|---|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
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| Cash flows from operating activities: | |||||||||
| Net income | $ | 166 | $ | 1,835 | |||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||
| Provision for bad debts | — | 150 | |||||||
| Depreciation and amortization | 267 | 209 | |||||||
| Amortization of intangibles | 205 | 192 | |||||||
| Deferred income taxes | (738 | ) | (580 | ) | |||||
| Cumulative effect of a change in accounting principle | 753 | — | |||||||
| Changes in operating assets and liabilities: | |||||||||
| Accounts receivable | 4,967 | (1,338 | ) | ||||||
| Inventories | 1,757 | (127 | ) | ||||||
| Inventories shipped but not installed | (3,930 | ) | — | ||||||
| Other current assets | (220 | ) | (106 | ) | |||||
| Other assets | (57 | ) | 2 | ||||||
| Accounts payable | (1,950 | ) | (5,229 | ) | |||||
| Accrued expenses | 193 | (214 | ) | ||||||
| Income taxes payable | 971 | — | |||||||
| Deferred compensation | (19 | ) | (17 | ) | |||||
| Unearned revenue | 268 | 90 | |||||||
| Net cash provided by (used in) operating activities | 2,633 | (5,133 | ) | ||||||
| Cash flows from investing activities: | |||||||||
| Purchase of property and equipment | (146 | ) | (160 | ) | |||||
| Net cash used in investing activities | (146 | ) | (160 | ) | |||||
| Cash flows from financing activities: | |||||||||
| Proceeds from borrowings on line of credit | — | 29,034 | |||||||
| Principal payments on line of credit | — | (26,595 | ) | ||||||
| Distributions paid | (622 | ) | (998 | ) | |||||
| Payments on note payable to former stockholder | (705 | ) | — | ||||||
| Principal payments on capital lease obligations | (4 | ) | — | ||||||
| Book cash overdraft | — | 1,642 | |||||||
| Net cash provided by (used in) financing activities | (1,331 | ) | 3,083 | ||||||
| Increase (decrease) in cash and cash equivalents | 1,156 | (2,210 | ) | ||||||
| Cash and cash equivalents, beginning of period | 6,515 | 2,798 | |||||||
| Cash and cash equivalents, end of period | $ | 7,671 | $ | 588 | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
Datalink Corporation
Notes To Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
1. Basis of Presentation
Company
Datalink Corporation (the "Company") is a premier independent provider of networked data storage solutions. The Company analyzes, custom designs, integrates, installs and supports high-end networked data storage solutions for its customers.
Accounting
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly the financial position, results of operations, and changes in cash flows for the interim periods presented.
Certain footnote information has been condensed or omitted from these financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Form 10-K for the year ended December 31, 1999.
Revenue Recognition
In December 1999, the SEC staff issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," which clarified the SEC staff's views regarding the recognition and reporting of revenues in certain transactions. In consideration of the views expressed in SAB No. 101 and effective as of January 1, 2000, the Company modified its revenue recognition policy related to products when the Company provides any installation or configuration services in connection with the sale. The Company will recognize revenue from hardware and software product sales when it completes its installation and configuration services. Under the transition provisions outlined in SAB No. 101, the Company accounted for this change in accounting policy prospectively as of January 1, 2000 and recorded a charge to earnings of $753 representing the cumulative effect, net of income taxes, of this change in accounting policy. Prior to January 1, 2000, the Company recognized product revenue when the hardware and software was shipped to its customers or after they accepted products under evaluation.
The Company also revised its revenue recognition policy related to service contracts to defer revenues and direct costs resulting from these contracts, and to amortize such revenues and expenses into operations over the term of the contracts, which are generally twelve months. The Company arranges for fulfillment of these service contracts (usually maintenance service agreements) primarily by purchasing maintenance service agreements for its customers from its hardware and software vendors or their designated third-party service providers. Prior to January 1, 2000, the Company recognized revenues and expenses related to sales of service agreements upon execution of the contract. The condensed consolidated financial statements for the three-month periods ended March 31, 2000 and 1999 have been revised to retroactively reflect the adoption of this change (See Note 2).
The Company recognizes installation and consulting service revenue as it renders these services.
2. Revisions to Previously Issued Financial Statements
The Company sells service contracts (usually maintenance service agreements) to some of its customers for hardware and software products the Company sells to them. The Company arranges for fulfillment of these service contracts primarily by purchasing maintenance service agreements for its customers from its hardware and software vendors or their designated third-party service providers. Prior to January 1, 2000, the Company recognized revenues and expenses related to sales of these
6
agreements upon execution of the contract. Following discussion with the staff of the Securities and Exchange Commission, the Company revised its revenue recognition policy related to these agreements to defer revenues and direct costs resulting from these contracts, and to amortize such revenues and expenses into operations over the term of the contracts, which are generally twelve months.
As a result of this revision, the Company has restated its condensed consolidated financial statements for the three month periods ended March 31, 2000 and 1999 to retroactively reflect this change. The change in accounting policy did not have any impact on the previously reported consolidated balance sheet at March 31, 2000. The impact of the restatement on these condensed consolidated financial statements is reflected below.
| |
Three months ended March 31, 2000 |
Three months ended March 31, 1999 |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
As previously reported |
As restated |
As previously reported |
As restated |
|||||||||
| Consolidated Statement of Operations Data: | |||||||||||||
| Total sales | $ | 25,682 | $ | 25,434 | |||||||||
| Total cost of sales | 19,071 | 18,926 | |||||||||||
| Sales and marketing expense | 2,529 | 2,516 | |||||||||||
| Cumulative impact of change in accounting principle, net of income taxes | $ | (1,327 | ) | $ | (753 | ) | |||||||
| Net income | $ | (408 | ) | $ | 166 | $ | 1,925 | $ | 1,835 | ||||
| Net income per share, basic | $ | (0.05 | ) | $ | 0.02 | $ | 0.29 | $ | 0.27 | ||||
| Net income per share, diluted | $ | (0.04 | ) | $ | 0.02 | $ | 0.29 | $ | 0.27 | ||||
| |
As of December 31, 1999 |
||||||
|---|---|---|---|---|---|---|---|
| |
As previously reported |
As restated |
|||||
| Balance Sheet Data: | |||||||
| Deferred income tax assets | $ | 427 | $ | 784 | |||
| Unearned revenue | 931 | ||||||
| Retained earnings | $ | 3,483 | $ | 2,909 | |||
In addition, the Company has modified its financial statements for each of the three-month periods ended March 31, 2000 and 1999 to separately present its net sales of products and services and the related costs of sales.
3. Additional Public Offering
On March 7, 2000, the Company filed a registration statement with the SEC for a second public offering of 2,500,000 of its common stock to the public, 2,200,000 of which are to be sold by the Company and 300,000 of which are to be sold by particular selling shareholders. As of the date of this report, the offering has been delayed due to market conditions.
7
4. Inventories
Inventories, principally consisting of data storage products and components (finished goods), are valued at the lower of cost or market with cost determined on a first-in, first-out (FIFO) method. The inventories shipped but not installed category is inventory that has been shipped to customer locations and is awaiting installation or configuration services from the Company. For more information, see Revenue Recognition under Note 1 of this report.
5. Net Income Per Share
Basic and diluted
Basic net income per share has been computed using the weighted average number of shares outstanding. The diluted net income per share includes the effect of common stock equivalents for each period. The number of shares utilized in the denominator of the diluted net income per share computation, as compared to the basic net income per share computation, has been increased by 488,000 equivalent shares for the three month period ended March 31, 2000.
Pro forma
Concurrent with the initial public offering (IPO) on August 6, 1999, the Company terminated its status as an S corporation and became subject to federal and state income taxes. Accordingly, for informational purposes, the accompanying statements of operations for the three months ended March 31, 1999, include a pro forma adjustment for the estimated income taxes that would been recorded had the Company been a C corporation during the first quarter of 1999, based on then applicable tax laws.
Pro forma net income per share is computed by dividing pro forma net income by the weighted average number of shares outstanding for the applicable period including common stock equivalents after giving effect to the weighted average number of shares that would have been required to be sold at the IPO price, after deducting the underwriting discount, to fund the distribution to the S corporation stockholders of all previously taxed, but undistributed, S corporation earnings totaling $9,128.
6. Income Taxes
Concurrent with the completion of the IPO on August 6, 1999, the Company's S corporation status was terminated and the Company's taxable income became subject to federal and state C corporation income tax regulations.
Prior to January 4, 1999, Direct Connect Systems, Inc. ("DCSI") was a C corporation and accordingly, was subject to corporate income taxes. Effective January 4, 1999, DCSI merged into the Company and, therefore, became part of the S corporation. Accordingly, from January 4 to August 6, 1999, none of the consolidated income of the Company was subject to corporate income taxes and, as of January 4, 1999, all of the deferred tax assets and liabilities related to DCSI were eliminated. This resulted in a one-time tax benefit of $580 that is included in the Company's results of operations for the three months ended March 31, 1999.
7. Comprehensive Income
The Company's comprehensive income is equal to its net income for all periods presented.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and with "Forward-Looking Statements" section in this filing and other Datalink Corporation filings with the Securities and Exchange Commission.
We are an independent provider of networked data storage solutions. We derive our revenues principally from designing and installing data storage systems. Our solutions can include hardware products, such as disk arrays, tape systems and interconnection components, and storage management software products. Prior to January 1, 2000, we recognized revenues for product and software sales when we shipped the products and software to our customers or after they accepted products under evaluation. However, in December 1999, the SEC staff issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," which clarified the SEC staff's view regarding the recognition and reporting of revenues in particular transactions. In light of SAB No. 101, we modified our revenue recognition policy related to hardware and software products when we provide any installation or configuration services in connection with the sale. We now recognize revenue from hardware and software product sales when we complete our installation and configuration services. This change was effective as of January 1, 2000. Under the SAB No. 101 transition provisions, we accounted for this change in accounting policy prospectively. As of January 1, 2000, we recorded a charge to earnings of $753,000, representing the cumulative effect, net of income taxes, of this change in our accounting policy.
As indicated above, our customers usually engage us for assistance in the installation of our solutions. Occasionally, they also engage us for consulting services. We recognize revenues for this work as we render these services.
We also sell service contracts (usually maintenance service agreements) to most of our customers. We arrange for fulfillment of these service contracts primarily by purchasing maintenance service agreements or our customers from our hardware and software vendors or their designated third-party service providers. Prior to January 1, 2000, we recognized revenues and expenses related to sales of these agreements upon execution of the contract. Following discussion with the staff of the Securities and Exchange Commission, we revised our revenue recognition policy related to these agreements to defer revenues and direct costs resulting from these contracts, and to amortize such revenues and expenses into operations over the term of the contracts, which are generally twelve months.
As a result of this revision, we have restated our condensed consolidated financial statements for the three month periods ended March 31, 2000 and 1999 to retroactively reflect this change. The restatement did not have any impact on the previously reported balance sheet at March 31, 2000. The restatement increased net income for the three month period ended March 31, 2000 by $574,000, or $0.06 per diluted share, and reduced net income for the three month period ended March 31, 1999 by $90,000, or $0.02 per diluted share, from the previously published amounts.
In the past, we have experienced fluctuations in the timing of orders from our customers, and we expect to continue to experience these fluctuations in the future. These fluctuations have resulted from, among other things, the time required to design, test and evaluate our data storage solutions before customers deploy them, the size of customer orders, the complexity of our customers' network environments, necessary system configuration to deploy our solutions and new product introductions by suppliers. As a result, our net sales may fluctuate from quarter to quarter.
Prior to our initial public offering in August 1999, we were an S corporation. The only income tax expense we reported prior to August 1999 resulted from the C corporation taxable income of Direct Connect Systems, Inc., or DCSI, allocated to us between July 1998, when we acquired DCSI, and January 1999, when we merged DCSI into us. Upon our August 1999 initial public offering, we became
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a C corporation and began reporting income tax expense. This change in tax status complicates comparison of our historical operating results.
RESULTS OF OPERATIONS
Net Sales. Our total net sales increased $2.6 million, or 10.0%, to $28.0 million for the first quarter ended March 31, 2000, from $25.4 million for the comparable quarter in 1999. As described above, we changed our revenue recognition policies in response to a recent SEC staff accounting bulletin. As a result, our 2000 operating results are not directly comparable with 1999 results. Our service sales increased $1.6 million to $3.7 million for the first quarter ended March 31, 2000, from $2.1 million for the comparable quarter in 1999. The increase in service sales is due to an increase in sales of maintenance contracts and product installation services. The increases in total sales represent more data storage solution installations for our customers and the increasing complexity of our data storage solutions. We believe that growing data storage needs and the emergence of new technologies for networked data storage has increased customer demand for our solutions. We have continued to hire additional sales and engineering personnel and opened sales offices in new geographic locations. In the first quarter of 2000, we derived 26% of our revenues from one customer.
Gross Profit. Our gross profit as a percentage of net sales increased to 27.5% for the first quarter ended March 31, 2000, from 25.6% for the comparable quarter in 1999. This increase was primarily due to the increasing percentage of our sales generated from large storage systems solutions sold to end-user customers. We typically generate higher margins on solutions we provide directly to end-user customers than sales we make through value-added resellers and original equipment manufacturers. Also, as the complexity of our data storage solutions has increased, we have been able to generate higher gross margins.
Sales and Marketing. Sales and marketing expenses include wages and commissions paid to sales and marketing personnel, travel costs, advertising, promotion and hiring expenses. Sales and marketing expenses totaled $3.5 million, or 12.4% of net sales for the first quarter ended March 31, 2000, compared to $2.5 million, or 9.9% of net sales for the first quarter in 1999. The increase in 2000 of our sales and marketing expenses as a percentage of our net sales and in absolute dollars over the 1999 period was principally attributable to an increase in commissions paid to our sales representatives on sales to end-user customers and to the hiring of new sales representatives. New sales representatives are usually less productive during their first two years than more seasoned sales personnel.
General and Administrative. General and administrative expenses include wages for administrative personnel, professional fees, depreciation and amortization, communication expenses and rent and related facility expenses. General and administrative expenses were $2.1 million, or 7.6% of net sales for the first quarter ended March 31, 2000, as compared to $1.7 million, or 6.6% of net sales for the first quarter in 1999. The increase in absolute dollars of expenses is primarily due to additions to the administrative staff to support future sales growth. We have also incurred public company reporting and insurance costs, which we did not have in the first quarter of 1999. Our rent and communication expenses also have increased as we have expanded and added sales offices.
Engineering. Engineering expenses include employee wages and travel, hiring and training expenses for the professional engineers and technicians. Engineering expenses decreased to $595,000, or 2.1% of net sales for the first quarter ended March 31, 2000, as compared to $776,000, or 3.0% of net sales for the comparable quarter in 1999. The decrease in expenses is principally due to our increased success in 2000 of recovering engineering costs we incur to prepare for and make customer installations. Our higher recovery percentage was partially offset by the addition of new engineering personnel and the increased compensation levels for our engineers to more effectively compete for qualified engineers with networked storage solutions experience. Competition for these engineers is
10
intense and we expect that future compensation levels may continue to increase. Additionally, our engineering travel expenses increased due to the continued geographic expansion of our business.
Offering Costs. We incurred approximately $173,000 of expenses during the first quarter ended March 31, 1999, in conjunction with our initial public offering. Our offering was twice delayed by market conditions. As required, we expensed these previously deferred costs each time we determined that the offering would be delayed more than 90 days.
Income Taxes. Our income tax expense in the first quarter of 2000 was $638,000, representing an effective tax rate of 41%. Until August 1999, when we became a public company, we were an S corporation and were not taxed on our income. The income tax credit we recorded for the first quarter of 1999 resulted from the merger of DCSI into us. DCSI was a C corporation that had deferred tax assets and liabilities. When we eliminated these items, we received a one-time tax benefit. For more information, see Note 6 to our Consolidated Financial Statements filed with our report on Form 10-K for the year ended December 31, 1999. We expect our 2000 effective income tax rate to be approximately 41%.
Cumulative Impact of Changes in Accounting Principle. In the first quarter of 2000, we incurred a one-time, non-cash charge of $753,000 representing the cumulative effect, net of income taxes, of the accounting change we made effective as of January 1, 2000 to our revenue recognition policy related to the installation of products.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2.6 million for the three months ended March 31, 2000. The cash provided in 2000 reflected our increasing sales and net income and a reduction in accounts receivable of $5.0 million, offset by an increase in inventories of $2.2 million primarily reflecting the deferral of revenue on hardware and software sales at March 31, 2000 for which we provide installation or configuration services. Operating activities used $5.1 million of cash during the three months ended March 31, 1999. We used this cash primarily to reduce our accounts payable by $5.2 million, partially offset by our net income.
Net cash used by financing activities was $1.3 million for the three months ended March 31, 2000. We used this cash to make final dividend distributions to our ten pre-initial public offering S corporation stockholders. We also retired part of a note due to a former S corporation stockholder. For the three months ended March 31, 1999, net cash provided by financing activities was $3.1 million primarily from borrowings on our line of credit and a bank cash overdraft.
We believe that funds generated from operations together with the available credit under our revolving credit agreement, will be sufficient to finance our current operations and planned capital expenditures for at least the next twelve months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
All of our operations are based in the U.S. and all of our transactions are denominated in U.S. dollars. Our interest income is sensitive to changes in the general level of U.S. interest rates. Due to the nature of our short-term investments, we have concluded that there is no material market risk exposure. Therefore, no quantitative tabular disclosures are required.
The following discusses our exposure to market risk related to changes in interest rates, foreign exchange rates and equity prices.
Interest rate risk. As of March 31, 2000, we had $7.7 million of cash and money market accounts. A decrease in market rates of interest would have no material effect on the value of these assets. We
11
have no short or long-term debt with variable interest rates. Therefore, an increase in market rates would not significantly affect our financial results.
Foreign currency exchange rate risk. We develop and sell all of our products in the United States. Therefore, we are not currently exposed to any direct foreign currency exchange rate risk.
Equity price risk. We do not own any equity investments. Therefore, we are not currently exposed to any direct equity price risk.
12
As of the date of this filing, we are not involved in any material legal proceedings. We also were not involved in any material legal proceedings that were terminated during the first quarter of 2000.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a vote of Security Holders.
No matters were submitted during the first quarter of the Company's 2000 fiscal year to a vote of security holders, through the solicitation of proxies or otherwise.
None
Item 6. Exhibits and Reports on Form 8-K.
13
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: October 6, 2000 | DATALINK CORPORATION | |||
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By: |
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/s/ DANIEL J. KINSELLA Daniel J. Kinsella Chief Financial Officer |
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