FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
ý Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2002
or
o 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
(Exact name of registrant as specified in its charter)
MINNESOTA |
|
41-0856543 |
(State or other jurisdiction of Incorporation) |
|
(IRS Employer Identification Number) |
8170 UPLAND CIRCLE
CHANHASSEN, MINNESOTA 55317
(Address of Principal Executive Offices)
(952) 944-3462
(Registrants 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 ý No o
As of August 6, 2002, 10,189,727 shares of the registrants common stock, $.001 par value, were outstanding.
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 Companys views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words aim, believe, expect, anticipate, intend, estimate and other expressions which indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending upon a variety of factors, including, but not limited to: the level of continuing demand for data storage, including the effect of current economic conditions; competition and pricing pressures that may adversely affect our revenues and profits; our ability to hire and retain key technical and other personnel; our dependence on key suppliers; 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; and volatility in our stock price.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
2
Datalink Corporation
Balance Sheets
(In thousands, except share data)
|
|
June 30, 2002 |
|
December 31, 2001 |
|
||
|
|
(Unaudited) |
|
|
|
||
Assets |
|
|
|
|
|
||
Current assets |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
9,439 |
|
$ |
5,846 |
|
Accounts receivable, net |
|
10,573 |
|
15,127 |
|
||
Inventories |
|
4,148 |
|
3,885 |
|
||
Inventories shipped but not installed |
|
1,693 |
|
2,922 |
|
||
Income tax receivable |
|
1,787 |
|
1,610 |
|
||
Deferred income taxes, current portion |
|
1,439 |
|
1,435 |
|
||
Other current assets |
|
356 |
|
289 |
|
||
Total current assets |
|
29,435 |
|
31,114 |
|
||
Property and equipment, net |
|
5,793 |
|
6,341 |
|
||
Goodwill |
|
5,500 |
|
5,500 |
|
||
Intangibles, net |
|
2,761 |
|
3,223 |
|
||
Other assets |
|
542 |
|
590 |
|
||
Total assets |
|
$ |
44,031 |
|
$ |
46,768 |
|
Liabilities and Stockholders Equity |
|
|
|
|
|
||
Current liabilities |
|
|
|
|
|
||
Accounts payable |
|
$ |
10,476 |
|
$ |
15,210 |
|
Accrued expenses |
|
1,708 |
|
2,181 |
|
||
Note payable to former stockholder |
|
|
|
704 |
|
||
Deferred revenue |
|
2,335 |
|
2,290 |
|
||
Total current liabilities |
|
14,519 |
|
20,385 |
|
||
Deferred rent |
|
360 |
|
269 |
|
||
Total liabilities |
|
14,879 |
|
20,654 |
|
||
|
|
|
|
|
|
||
Commitments and contingencies |
|
|
|
|
|
||
|
|
|
|
|
|
||
Stockholders equity |
|
|
|
|
|
||
Common stock, $.001 par value, 50,000,000 shares authorized, 10,169,826 and 8,951,343 shares issued and outstanding as of June 30, 2002 and December 31, 2001, respectively |
|
10 |
|
9 |
|
||
Additional paid in capital |
|
25,771 |
|
20,205 |
|
||
Retained earnings |
|
3,371 |
|
5,900 |
|
||
Total stockholders equity |
|
29,152 |
|
26,114 |
|
||
Total liabilities and stockholders equity |
|
$ |
44,031 |
|
$ |
46,768 |
|
The accompanying notes are an integral part of these condensed financial statements.
3
Datalink Corporation
Condensed Statements of Operations
(In thousands, except per share data)
(Unaudited)
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
|
2002 |
|
2001 |
|
2002 |
|
2001 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net sales: |
|
|
|
|
|
|
|
|
|
||||
Products |
|
$ |
13,910 |
|
$ |
19,868 |
|
$ |
28,881 |
|
$ |
53,760 |
|
Services |
|
7,109 |
|
7,124 |
|
13,922 |
|
14,131 |
|
||||
|
|
21,019 |
|
26,992 |
|
42,803 |
|
67,891 |
|
||||
Cost of sales: |
|
|
|
|
|
|
|
|
|
||||
Cost of products |
|
10,863 |
|
14,411 |
|
22,212 |
|
39,295 |
|
||||
Cost of services |
|
5,113 |
|
5,109 |
|
10,045 |
|
10,055 |
|
||||
|
|
15,976 |
|
19,520 |
|
32,257 |
|
49,350 |
|
||||
Gross profit |
|
5,043 |
|
7,472 |
|
10,546 |
|
18,541 |
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
||||
Sales and marketing |
|
2,827 |
|
3,627 |
|
6,042 |
|
8,141 |
|
||||
General and administrative |
|
2,606 |
|
2,920 |
|
5,240 |
|
5,787 |
|
||||
Engineering |
|
1,357 |
|
1,427 |
|
2,874 |
|
2,740 |
|
||||
Amortization of intangibles |
|
231 |
|
585 |
|
462 |
|
1,174 |
|
||||
|
|
7,021 |
|
8,559 |
|
14,618 |
|
17,842 |
|
||||
Income (loss) from operations |
|
(1,978 |
) |
(1,087 |
) |
(4,072 |
) |
699 |
|
||||
Interest income, net |
|
39 |
|
31 |
|
57 |
|
69 |
|
||||
Income (loss) before income taxes |
|
(1,939 |
) |
(1,056 |
) |
(4,015 |
) |
768 |
|
||||
Income tax expense (benefit) |
|
(710 |
) |
(433 |
) |
(1,486 |
) |
315 |
|
||||
Net income (loss) |
|
$ |
(1,229 |
) |
$ |
(623 |
) |
$ |
(2,529 |
) |
$ |
453 |
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
(0.13 |
) |
$ |
(0.07 |
) |
$ |
(0.28 |
) |
$ |
0.05 |
|
Diluted |
|
$ |
(0.13 |
) |
$ |
(0.07 |
) |
$ |
(0.28 |
) |
$ |
0.05 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
9,374 |
|
8,915 |
|
9,168 |
|
8,908 |
|
||||
Diluted |
|
9,374 |
|
8,915 |
|
9,168 |
|
8,985 |
|
The accompanying notes are an integral part of the condensed financial statements
4
Datalink Corporation
Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
Six Months Ended, June 30, |
|
||||
|
|
2002 |
|
2001 |
|
||
|
|
|
|
|
|
||
Cash flows from operating activities: |
|
|
|
|
|
||
Net income (loss) |
|
$ |
(2,529 |
) |
$ |
453 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
||
Provision for bad debts |
|
57 |
|
55 |
|
||
Depreciation |
|
1,086 |
|
1,151 |
|
||
Amortization of intangibles |
|
462 |
|
1,174 |
|
||
Deferred income taxes |
|
(4 |
) |
387 |
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Accounts receivable |
|
4,497 |
|
4,075 |
|
||
Inventories |
|
966 |
|
5,521 |
|
||
Other current assets |
|
(67 |
) |
362 |
|
||
Other assets |
|
178 |
|
20 |
|
||
Accounts payable |
|
(4,734 |
) |
(8,155 |
) |
||
Accrued expenses |
|
(473 |
) |
(1,835 |
) |
||
Income taxes |
|
(177 |
) |
(518 |
) |
||
Deferred revenue |
|
45 |
|
28 |
|
||
Deferred rent |
|
91 |
|
|
|
||
Net cash provided by (used in) operating activities |
|
(602 |
) |
2,718 |
|
||
Cash flows from investing activities: |
|
|
|
|
|
||
Net assets acquired, net of cash acquired |
|
|
|
(176 |
) |
||
Purchase of property and equipment |
|
(538 |
) |
(2,904 |
) |
||
Net cash used in investing activities |
|
(538 |
) |
(3,080 |
) |
||
Cash flows from financing activities: |
|
|
|
|
|
||
Proceeds from issuance of common stock |
|
5,437 |
|
184 |
|
||
Payments on note payable to former stockholder |
|
(704 |
) |
(704 |
) |
||
Net cash provided by (used in) financing activities |
|
4,733 |
|
(520 |
) |
||
Increase (decrease) in cash and cash equivalents |
|
3,593 |
|
(882 |
) |
||
Cash and cash equivalents, beginning of period |
|
5,846 |
|
4,542 |
|
||
Cash and cash equivalents, end of period |
|
$ |
9,439 |
|
$ |
3,660 |
|
|
|
|
|
|
|
||
Supplementary Cash Flow Information: |
|
|
|
|
|
||
Cash paid for interest |
|
42 |
|
132 |
|
||
Cash (paid) received for income taxes |
|
1,309 |
|
(1,929 |
) |
The accompanying notes are an integral part of these condensed financial statements.
5
Datalink Corporation
Notes To Condensed Financial Statements
(In thousands, except share and per share data)
(Unaudited)
1. Basis of Presentation
The interim condensed financial statements included in this Form 10-Q have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted, pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the financial statements and related notes thereto included in the Companys 2001 Annual Report on Form 10-K.
The condensed financial statements presented herein as of June 30, 2002, and for the three and six months ended June 30, 2002 and 2001, reflect, in the opinion of management, all adjustments (which consist only of normal, recurring adjustments) necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.
2. Inventories
Inventories, including inventories shipped but not installed, principally consist of data storage products and components, valued at the lower of cost or market with cost determined on a firstin, firstout (FIFO) method.
3. Net Income (Loss) Per Share
Basic net income per share is computed using the weighted average number of shares outstanding. Diluted net income per share includes the effect of common stock equivalents, if any, for each period. The number of additional shares is calculated by assuming that outstanding stock options were exercised and that the proceeds from such exercise were used to acquire shares of common stock at the average market price during the reporting period. All potentially dilutive common shares were excluded from the calculation because they were anti-dilutive for the three months ended June 30, 2002 and 2001 and for the six months ended June 30, 2002. For the six month period ended June 30, 2001, common stock equivalents of 77,000 shares were included in the calculation of diluted earnings per share.
4. Goodwill and Intangible Assets
In June 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. For all business combinations initiated after June 30, 2001, these Statements require the use of the purchase, rather than the pooling, method of accounting. Intangible assets acquired in a business combination are recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability.
6
The Statements also provide that effective January 1, 2002, goodwill is no longer amortized. Instead, goodwill and intangible assets with indefinite lives are tested for impairment annually and whenever there is an impairment indicator. The Company performed an initial impairment test upon adoption of the new statement and determined that no impairment exists. The following table presents a reconciliation of net income (loss) and income (loss) per share adjusted for the exclusion of goodwill, net of tax:
|
|
Three Months Ended June 30, 2002 |
|
Six Months Ended June 30, 2002 |
|
||||||||
|
|
2002 |
|
2001 |
|
2002 |
|
2001 |
|
||||
Reported net income (loss) |
|
$ |
(1,229 |
) |
$ |
(623 |
) |
$ |
(2,529 |
) |
$ |
453 |
|
Add: Goodwill amortization, net of tax |
|
|
|
238 |
|
|
|
479 |
|
||||
Adjusted net income (loss) |
|
$ |
(1,229 |
) |
$ |
(385 |
) |
$ |
(2,529 |
) |
$ |
932 |
|
|
|
|
|
|
|
|
|
|
|
||||
Reported basic and diluted earnings (loss) per share |
|
$ |
(0.13 |
) |
$ |
(0.07 |
) |
$ |
(0.28 |
) |
$ |
0.05 |
|
Add: Goodwill amortization, net of tax |
|
|
|
0.03 |
|
|
|
0.05 |
|
||||
Adjusted basic and diluted earnings (loss) per share |
|
$ |
(0.13 |
) |
$ |
(0.04 |
) |
$ |
(0.28 |
) |
$ |
0.10 |
|
Information regarding the Companys other intangible assets are as follows:
|
|
As of June 30, 2002 |
|
|||||||
|
|
Carrying Amount |
|
Accumulated Amortization |
|
Net |
|
|||
Customer lists |
|
$ |
4,300 |
|
$ |
1,735 |
|
$ |
2,565 |
|
Trademark and name |
|
450 |
|
254 |
|
196 |
|
|||
|
|
$ |
4,750 |
|
$ |
1,989 |
|
$ |
2,761 |
|
Amortization expense for the three and six months ended June 30, 2002 was $231 and $462, respectively. Estimated amortization expense for the remainder of fiscal 2002 and for each of the succeeding fiscal years based on the intangible assets as of June 30, 2002 is as follows:
|
|
(In thousands) |
|
|
2002 |
|
$ |
463 |
|
2003 |
|
860 |
|
|
2004 |
|
784 |
|
|
2005 |
|
654 |
|
|
Total |
|
$ |
2,761 |
|
The following information should be read in conjunction with the unaudited condensed financial statements and the notes thereto included in Item 1 of this Quarterly Report and with the Forward-Looking Statements section in this filing and other Company filings with the U.S. Securities and Exchange Commission.
We are an independent information storage architect. We derive our revenues principally from analyzing, designing, implementing and supporting information storage infrastructures. Our solutions can include hardware products, such as disk arrays, tape systems, interconnection components, and storage management software products. We recognize revenue from hardware and software product sales when we complete our installation and configuration services.
As indicated above, our customers frequently 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 sell support service contracts to our customers. When customers purchase support services through us, customers receive the benefit of integrated support. We have a qualified, independent support desk to provide customer support services. We fulfill on-site assistance by purchasing support service agreements for our customers from our hardware and software vendors or their designated third-party service providers and by arranging on-site support assistance with the appropriate vendor if necessary. We defer revenues net of direct
7
costs resulting from these contracts, and amortize these amounts into operations, over the term of the contracts, which are generally twelve months.
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. Completion of our installation and configuration services may also delay recognition of revenues. Current economic conditions and competition also affect our customers decisions to place orders with us. As a result, our net sales may fluctuate from quarter to quarter.
RESULTS OF OPERATIONS
Net Sales. Our total net sales decreased $6.0 million, or 22.1%, to $21.0 million for the three months ended June 30, 2002, from $27.0 million for the comparable quarter in 2001. Our total net sales decreased $25.1 million, or 37.0%, to $42.8 million for the six months ended June 30, 2002, from $67.9 million for the six months ended June 30, 2001. Our product sales decreased $6.0 million, or 30.0% to $13.9 million for the three months ended June 30, 2002, from $19.9 million for the comparable quarter in 2001. Our product sales decreased $24.9 million, or 46.3% to $28.9 million for the six months ended June 30, 2002, from $53.8 million for the six months ended June 30, 2001. With persistent economic uncertainty, many companies have frozen their information technology budgets pending a strengthening of their businesses, opting to buy only what they require to meet minimum needs rather than implementing comprehensive infrastructure changes. Our decrease in product sales reflects this change in the business environment.
Our service sales remained flat from the second quarter of 2001 to the second quarter of 2002 at $7.1 million. Our service sales decreased $209,000 or 1.5%, to $13.9 million for the six months ended June 30, 2002, from $14.1 million for the six months ended June 30, 2001. Our service sales have remained relatively flat because of the continued stream of revenue produced by the high level of renewal rates on our maintenance contracts.
Gross Profit. Our total gross profit as a percentage of net sales decreased to 24.0% for the quarter ended June 30, 2002, as compared to 27.7% for the comparable quarter in 2001. Our total gross profit as a percentage of net sales decreased to 24.6% for the six months ended June 30, 2002, as compared to 27.3% for the six months ended June 30, 2001. Product gross profit as a percentage of product sales decreased to 21.9% in the second quarter of 2002 from 27.5% for the comparable quarter in 2001. Product gross profit as a percentage of product sales decreased to 23.1% for the six months ended June 30, 2002 from 26.9% for the six months ended June 30, 2001. Service gross profit as a percentage of service sales remained relatively flat at 28.1% for the second quarter of 2002 as compared to 28.3% for the second quarter of 2001. Service gross profit as a percentage of service sales decreased to 27.8% for the six months ended June 30, 2002 from 28.8% for the comparable period in 2001. Due to the current economic environment, our customers are continuing to seek storage solutions to meet minimum needs rather than implementing comprehensive infrastructure changes. Solutions that meet a minimum need generally carry lower margins than comprehensive infrastructure changes. In addition, our gross profit percentage has suffered due to the high level of pricing competition in the marketplace. Given these developments, we cannot assure when or if our gross profit as a percentage of net sales will return to historically higher levels.
Sales and Marketing. Sales and marketing expenses include wages and commissions paid to sales and marketing personnel, travel costs and advertising, promotion and hiring expenses. Sales and marketing expenses totaled $2.8 million, or 13.4% of net sales for the quarter ended June 30, 2002 compared to $3.6 million, or 13.4% of net sales for the second quarter in 2001. Sales and marketing expenses totaled $6.0 million, or 14.1% of net sales for the six months ended June 30, 2002 compared to $8.1 million, or 12.0% of net sales for the six months ended June 30, 2001. The decrease in sales expense in absolute dollars is a result of a decrease in commissions related to lower sales and gross margins in the first half of 2002 as compared to the first half of 2001 and a decrease in travel and entertainment due to increased efforts to
8
minimize expenses in these areas. The increase in sales expense as a percentage of sales for the first six months of 2002 as compared to the first six months of 2001 resulted primarily from increased expenses related to investments in management for our new regional structure. These investments were completed in 2001; however, the hiring and related expenses were not fully realized until the third quarter of 2001.
General and Administrative. General and administrative expenses include wages for administrative personnel, professional fees, depreciation, communication expenses and rent and related facility expenses. General and administrative expenses were $2.6 million, or 12.4% of net sales for the quarter ended June 30, 2002, as compared to $2.9 million, or 10.8% of net sales for the second quarter in 2001. General and administrative expenses were $5.2 million, or 12.2% of net sales for the six months ended June 30, 2002, as compared to $5.8 million, or 8.5% of net sales for the six months ended June 30, 2001. When comparing the second quarter of 2002 to the second quarter of 2001, the decrease in general and administrative expenses in absolute dollars reflects lower hiring costs due to fewer new hires, lower professional services fees due to the completion of several process improvement consulting engagements in 2001 and lower depreciation expense. Our general and administrative expenses were higher as a percentage of net sales because of the reduction in sales.
Engineering. Engineering expenses include employee wages and travel, hiring and training expenses for our professional engineers and technicians. We record engineering costs associated with installation services to our cost of service sales. Engineering expenses were $1.4 million, or 6.5% of net sales for the second quarter ended June 30, 2002, as compared to $1.4 million, or 5.3% of net sales for the second quarter in 2001. Engineering expenses were $2.9 million, or 6.7% of net sales for the six months ended June 30, 2002, as compared to $2.7 million, or 4.0% of net sales for the six months ended June 30, 2001. Because fewer installations were performed in the first half of 2002 as compared to the first half of 2001, fewer engineering costs associated with installation services were recorded as cost of service sales, causing engineering expenses to increase in both absolute dollars and as a percentage of net sales.
Goodwill and Other Intangible Amortization. Amortization of goodwill and other intangible assets was $231,000, or 1.1% of net sales for the quarter ended June 30, 2002, as compared to $585,000, or 2.2% of net sales for the second quarter in 2001. Amortization of goodwill and other intangible assets was $462,000, or 1.1% of net sales for the six months ended June 30, 2002, as compared to $1.2 million, or 1.7% of net sales for the six months ended June 30, 2001. The decrease is a result of the adoption of Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Intangible Assets. This Statement requires that we no longer amortize goodwill and intangible assets with indefinite lives, but instead test for impairment annually or whenever impairment is indicated. There was no transitional impairment loss recorded upon adoption. Had we continued to amortize goodwill and all intangible assets in 2002, amortization of goodwill and other intangible assets would have been $541,000 and $1.1 million, or 2.6% and 2.5% of net sales, for the three and six months ended June 30, 2002, respectively. The effect on earnings would have been a reduction of net income of $195,000 and $391,000, net of tax, for the three and six months ended June 30, 2002, respectively.
Income Taxes. Our income tax benefit for the three and six months ended June 30, 2002 was $710,000 and $1.5 million, respectively. Our income tax benefit for the three months ended June 30, 2001 was $433,000. Our income tax expense for the six months ended June 30, 2001 was $315,000. These figures represent an effective tax rate of 37% in 2002 and 41% in 2001. The income tax benefit in the second quarter of 2002 is a result of our operating loss for the quarter. The rate decrease is a result of the effect that permanent differences, such as non-deductible goodwill amortization in 2001, have on reported versus taxable income as well as state taxes. Based on an assessment of our taxable earnings history, we have determined it to be more likely than not that our net deferred tax asset will be realized in future periods.
Overall Cost Reduction Initiatives. Because of the continuing difficult economic climate, we have actively sought to reduce costs across our business. Our principal fixed expense is for personnel. Through attrition and layoffs, we have reduced employee headcount to 187 at June 30, 2002 from 221 at June 30, 2001. We have also significantly reduced and continue to monitor discretionary areas of spending, such as travel and
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entertainment. As a result of our efforts, our fixed expenses during the second quarter of 2002 are down by $1.1 million as compared to the second quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $602,000 for the six months ended June 30, 2002. The cash used in 2002 resulted primarily from our net loss partially offset by a $1.3 million income tax refund. Operating activities provided $2.7 million of cash during the six months ended June 30, 2001. The cash provided in 2001 resulted primarily from our net income and a reduction in working capital which was consistent with our reduced revenues for that time period.
Net cash used in investing activities was $538,000 for the six months ended June 30, 2002. We used this cash primarily to implement our customer relationship management information system. In the six months ended June 30, 2001, we used $3.1 million in cash primarily to purchase of furniture and fixtures for our new corporate headquarters in Chanhassen, Minnesota and for information system software, a new phone system and engineering laboratory equipment.
Net cash provided by financing activities was $4.7 million for the six months ended June 30, 2002. We received $5.3 million from a direct private offering of newly issued common stock to institutional investors and $127,000 from stock sold under our employee stock purchase plan. The cash provided was partially offset by the final scheduled payment of $704,000 on a note due to a former S corporation stockholder. During the six months ended June 30, 2001, net cash used in financing activities was $520,000 for a scheduled payment of $704,000 on a note due to a former S corporation stockholder partially offset by $184,000 of cash received for the stock sold under our employee stock purchase plan.
Effective June 30, 2002, we signed a new credit agreement with a commercial bank that provides for an $8 million revolving line of credit for financing our working capital needs. The term of the agreement ends June 30, 2003. Borrowings under the line of credit are secured by our accounts receivable and inventory and are subject to certain financial and operating covenants, including covenants that require us to maintain a maximum level of funded debt-EBITDA ratio and a minimum amount of working capital, tangible net worth and debt-net worth ratio. We had no outstanding borrowings as of June 30, 2002.
Our contractual cash obligations, consisting of operating leases, as of June 30, 2002 for the remainder of 2002 and each of the full years thereafter are summarized as follows:
2002 |
|
$ |
1,250,000 |
|
2003 |
|
2,247,000 |
|
|
2004 |
|
2,076,000 |
|
|
2005 |
|
1,950,000 |
|
|
2006 |
|
1,836,000 |
|
|
Future |
|
7,118,000 |
|
|
|
|
$ |
16,477,000 |
|
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. We are planning approximately $500,000 of capital expenditures in the last two quarters of 2002 primarily related to the implementation of our customer relationship management information system software and engineering laboratory equipment.
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. However, due to the nature of our short-term investments, we have concluded that these are exposed to no material market risk.
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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 June 30, 2002, we had $9.4 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 or their related interest income. We have no short or long-term debt with variable interest rates. Therefore, an increase in market rates would not significantly affect our interest expense.
Foreign currency exchange rate risk. We market 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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 second quarter of 2002.
Item 2. Changes in Securities and Use of Proceeds.
(c) Sale of Unregistered Securities. In May 2002, we sold an aggregate of 1,180,000 shares of our Common Stock, plus five-year warrants to purchase an additional 200,000 shares at an exercise price of $4.50 per share, to five institutional investors for $5.3 million. Based upon representations made by these purchasers to us, we relied on Section 4(2) of the Securities Act of 1933, as amended, for an exemption from registration of the issuance of these securities.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a vote of Security Holders.
At the Annual Meeting of Shareholders held on May 2, 2002, Paul F. Lidsky, Margaret A. Loftus, Greg R. Meland, James E. Ousley and Robert M. Price were re-elected as directors with the following votes:
|
FOR |
|
WITHHELD |
|
|
|
|
Paul F. Lidsky |
8,041,178 |
|
41,542 |
Margaret A. Loftus |
8,040,878 |
|
41,841 |
Greg R. Meland |
7,927,916 |
|
154,804 |
James E. Ousley |
8,041,078 |
|
41,642 |
Robert M. Price |
8,041,378 |
|
41,342 |
No other matters were voted upon at the meeting:
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.19 Credit agreement dated June 30, 2002 with Wells Fargo Bank, National Association
99.1 Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated June 11, 2002 to announce that the Company had completed the $5.3 million private placement of securities described in Item 2 of this Part above.
The Company filed a current report on Form 8-K dated June 27, 2002, as amended by a current report on Form 8-K/A dated July 9, 2002, regarding a change in independent accountants from Arthur Andersen LLP to KPMG LLP for the fiscal year ending December 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 14, 2002 Datalink Corporation
|
/s/ DANIEL J. KINSELLA |
|
|
|
|
|
Daniel J. Kinsella, Chief Financial Officer |
|
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