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Datalink 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-32.1
  4. Ex-32.1

Table of Contents

 

 

 

FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

(Mark One)

 

x      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended:  June 30, 2010

 

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

 

DATALINK CORPORATION

(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 55317-8589

(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  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large Accelerated Filer o

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  Yes  o  No  x

 

As of August 13, 2010, 13,307,830 shares of the registrant’s common stock, $.001 par value, were outstanding.

 

 

 



Table of Contents

 

DATALINK CORPORATION

 

Index

 

Page No.

 

 

 

 

 

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet – June 30, 2010 and December 31, 2009

 

3

 

 

 

 

 

 

 

 

 

Statement of Operations – Three and six months ended June 30, 2010 and 2009

 

4

 

 

 

 

 

 

 

 

 

Statement of Cash Flows – Three and six months ended June 30, 2010 and 2009

 

5

 

 

 

 

 

 

 

 

 

Notes to Financial Statements

 

6

 

 

 

 

 

 

 

 

Item 2.

Managements’ Discussion and Analysis of Financial Condition and Results of Operations

 

11

 

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

16

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

17

 

 

 

 

 

 

 

 

Item 6.

Exhibits

 

17

 

 

 

 

 

 

 

 

 

Signatures

 

18

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

Datalink Corporation

Balance Sheets

(In thousands, except share data)

 

 

 

June 30,
2010
(Unaudited)

 

December 31,
2009

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

12,268

 

$

12,901

 

Short term investments

 

 

2,730

 

Accounts receivable, net

 

34,915

 

45,612

 

Inventories

 

1,934

 

1,669

 

Deferred customer support contract costs

 

43,763

 

38,050

 

Inventories shipped but not installed

 

9,218

 

8,973

 

Income tax receivable

 

1,270

 

1,073

 

Other current assets

 

488

 

288

 

Total current assets

 

103,856

 

111,296

 

Property and equipment, net

 

2,136

 

1,808

 

Goodwill

 

23,669

 

23,701

 

Finite life intangibles, net

 

6,491

 

7,810

 

Deferred customer support contract costs non-current

 

13,875

 

11,186

 

Other assets

 

377

 

394

 

Total assets

 

$

150,404

 

$

156,195

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

19,908

 

$

33,062

 

Note payable due to seller of acquired business

 

 

3,000

 

Accrued commissions

 

3,003

 

2,860

 

Accrued sales and use tax

 

568

 

1,228

 

Accrued expenses, other

 

2,688

 

3,092

 

Current deferred tax liability

 

814

 

814

 

Sublease reserve current

 

277

 

288

 

Customer deposits

 

5,629

 

3,994

 

Current deferred revenue from customer support contracts

 

55,081

 

48,765

 

Other current liabilities

 

13

 

14

 

Total current liabilities

 

87,981

 

97,117

 

Deferred income tax liability

 

1,357

 

1,357

 

Deferred revenue from customer support contracts non-current

 

17,410

 

13,850

 

Sublease reserve non-current

 

213

 

348

 

Other liabilities non-current

 

203

 

108

 

Total liabilities

 

107,164

 

112,780

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $.001 par value, 50,000,000 shares authorized, 13,304,961 and 13,260,788 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively

 

13

 

13

 

Additional paid in capital

 

42,306

 

41,595

 

Retained earnings

 

921

 

1,807

 

Total stockholders’ equity

 

43,240

 

43,415

 

Total liabilities and stockholders’ equity

 

$

150,404

 

$

156,195

 

 

The accompanying notes are an integral part of these financial statements.

 

3



Table of Contents

 

Datalink Corporation

Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net sales:

 

 

 

 

 

 

 

 

 

Products

 

$

43,990

 

$

22,915

 

$

82,166

 

$

42,167

 

Services

 

26,885

 

20,782

 

51,253

 

41,398

 

 

 

70,875

 

43,697

 

133,419

 

83,565

 

Cost of sales:

 

 

 

 

 

 

 

 

 

Cost of products

 

34,119

 

17,062

 

63,981

 

31,462

 

Cost of services

 

19,719

 

14,995

 

37,792

 

29,890

 

Amortization of intangibles

 

277

 

 

554

 

 

Total cost of sales

 

54,115

 

32,057

 

102,327

 

61,352

 

Gross profit

 

16,760

 

11,640

 

31,092

 

22,213

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

8,098

 

5,275

 

15,765

 

10,776

 

General and administrative

 

3,822

 

2,835

 

7,325

 

5,765

 

Engineering

 

4,330

 

2,970

 

8,256

 

5,790

 

Integration and transaction costs

 

192

 

 

581

 

 

Amortization of intangibles

 

383

 

177

 

765

 

355

 

 

 

16,825

 

11,257

 

32,692

 

22,686

 

Earnings (loss) from operations

 

(65

)

383

 

(1,600

)

(473

)

Interest income, net

 

3

 

22

 

8

 

61

 

Earnings (loss) before income taxes

 

(62

)

405

 

(1,592

)

(412

)

Income tax expense (benefit)

 

(67

)

122

 

(706

)

(99

)

Net earnings (loss)

 

$

5

 

$

283

 

$

(886

)

$

(313

)

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.00

 

$

0.02

 

$

(0.07

)

$

(0.03

)

Diluted

 

0.00

 

0.02

 

(0.07

)

(0.03

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

12,789

 

12,444

 

12,763

 

12,450

 

Diluted

 

13,005

 

12,514

 

12,763

 

12,450

 

 

The accompanying notes are an integral part of these financial statements.

 

4



Table of Contents

 

Datalink Corporation

Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(886

)

$

(313

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Provision for bad debts

 

(11

)

9

 

Depreciation

 

441

 

421

 

Amortization of intangibles

 

1,319

 

355

 

Income tax receivable

 

(197

)

 

Amortization of sublease reserve

 

(146

)

(156

)

Stock based compensation expense

 

567

 

506

 

Changes in operating assets and liabilities

 

 

 

 

 

Accounts receivable

 

10,708

 

10,970

 

Inventories

 

(510

)

3,242

 

Deferred costs/revenues/customer deposits, net

 

3,109

 

(3,127

)

Accounts payable

 

(13,154

)

(11,212

)

Accrued expenses

 

(921

)

(1,480

)

Other

 

(57

)

(406

)

Net cash provided by (used in) operating activities

 

262

 

(1,191

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sale of short term investments

 

2,730

 

1,473

 

Purchase of property and equipment

 

(769

)

(30

)

Net cash provided by investing activities

 

1,961

 

1,443

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payment of note payable due to seller of acquired business

 

(3,000

)

 

Excess tax from stock compensation

 

(29

)

(108

)

Proceeds from issuance of common stock from option exercise

 

251

 

 

Tax withholding payments reimbursed by restricted stock

 

(78

)

(70

)

Net cash used in financing activities

 

(2,856

)

(178

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(633

)

74

 

Cash and cash equivalents, beginning of period

 

12,901

 

26,257

 

Cash and cash equivalents, end of period

 

$

12,268

 

$

26,331

 

 

 

 

 

 

 

Supplementary cash flow information:

 

 

 

 

 

Cash paid for income taxes

 

$

57

 

$

273

 

Cash received for income tax refunds

 

$

538

 

$

 

 

The accompanying notes are an integral part of these financial statements.

 

5



Table of Contents

 

Datalink Corporation

Notes To Financial Statements

(Unaudited)

 

1.             Basis of Presentation

 

We have prepared the interim financial statements included in this Form 10-Q without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  We have condensed or omitted certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, pursuant to such rules and regulations.  You should read these financial statements in conjunction with the financial statements and related notes thereto included in our 2009 Annual Report on Form 10-K.

 

The financial statements presented herein as of June 30, 2010, and for the three and six months ended June 30, 2010 and 2009, 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.

 

Management makes estimates and assumptions affecting the amounts of assets, liabilities, revenues and expenses we report, and our disclosure of contingent assets and liabilities at the date of the financial statements.  The results of the interim periods are not necessarily indicative of the results for the full year.  Accordingly, you should read these condensed financial statements in conjunction with the audited financial statements and the related notes included in our 2009 Annual Report on Form 10-K.  Actual results could differ materially from these estimates and assumptions.

 

Recently Issued Accounting Standards:

 

In October 2009, the FASB issued guidance now codified as FASB ASC Topic 605 “Revenue Recognition - Multiple-Deliverable Revenue Arrangements.”  This update addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit.  This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on:  (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates.  This guidance also eliminates the residual method of allocation and requires allocation of arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method.  In addition, this guidance significantly expands required disclosures for a vendor’s multiple-deliverable revenue arrangements.  This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted.  A company may elect, but is not required, to adopt this guidance retrospectively for all prior periods.  We are currently evaluating the impact that adoption of this update will have, if any, on our financial statements.

 

In October 2009, the FASB issued guidance now codified as FASB ASC Topic 985 “Software — Certain Revenue Arrangements that Include Software Elements.”  This update excludes from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality.  This guidance is effective for us on January 1, 2011.  We are currently evaluating the impact that adoption of this update will have, if any, on our financial statements.

 

In January 2010, the FASB issued revised guidance on disclosures related to fair value measurements.  This guidance requires new disclosures about significant transfers in and out of Level 1 and Level 2 and separate disclosures about purchases, sales, issuances, and settlements with respect to Level 3 measurements.  The guidance also clarifies existing fair value disclosures about valuation techniques and inputs used to measure fair value.  The new disclosures and clarifications of existing disclosures became effective for us beginning in the first quarter of 2010, except for the disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which will be effective for us in the first quarter of 2011.  We do not expect the adoption to have a material impact on our financial statements.

 

2.             Net Loss per Share

 

We compute basic net loss per share using the weighted average number of shares outstanding.  Diluted loss per share includes the effect of common stock equivalents, if any, for each period.  Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock instruments unless their effect is anti-dilutive.  The following table computes basic and diluted loss per share:

 

6



Table of Contents

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands, except per share data)

 

Net earnings (loss)

 

$

5

 

$

283

 

$

(886

)

$

(313

)

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

13,305

 

12,922

 

13,305

 

12,922

 

Weighted average common shares of non-vested stock

 

(516

)

(478

)

(542

)

(472

)

Shares used in the computation of basic net earnings (loss) per share

 

12,789

 

12,444

 

12,763

 

12,450

 

Net earnings (loss) per share — basic

 

$

0.00

 

$

0.02

 

$

(0.07

)

$

(0.03

)

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Shares used in the computation of basic net earnings (loss) per share

 

12,789

 

12,444

 

12,763

 

12,450

 

Employee and non-employee director stock options

 

73

 

42

 

 

 

Non-vested stock

 

143

 

28

 

 

 

Shares used in the computation of diluted net earnings (loss) per share

 

13,005

 

12,514

 

12,763

 

12,450

 

Net earnings (loss) per share - diluted

 

$

0.00

 

$

0.02

 

$

(0.07

)

$

(0.03

)

 

We excluded the following non-vested common stock and options to purchase shares of common stock from the computation of diluted earnings per share as their effect would have been anti-dilutive

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Non-vested common stock

 

 

130,000

 

18,750

 

347,049

 

 

 

 

 

 

 

 

 

 

 

Options to purchase shares of common stock

 

202,835

 

752,353

 

184,093

 

837,079

 

 

3.             Stock Based Compensation

 

Non-vested Stock:

 

Total stock-based compensation expense related to non-vested stock was $142,000 and $147,000 for the three months ended June 30, 2010 and 2009, respectively.  Total stock-based compensation expense related to non-vested stock was $303,000 and $294,000 for the six months ended June 30, 2010 and 2009, respectively.  Unrecognized stock-based compensation expense related to non-vested stock was $1.7 million at June 30, 2010 which we will amortize ratably through December 2013.

 

The following table summarizes our non-vested stock activity for the six months ended June 30, 2010:

 

 

 

Number of Shares

 

Weighted Average
Grant-Date Fair Value

 

Non-vested stock at January 1, 2010

 

575,799

 

$

4.65

 

Granted

 

55,000

 

$

4.42

 

Cancelled

 

(81,668

)

$

6.93

 

Shares vested

 

(49,125

)

$

6.03

 

Non-vested stock at June 30, 2010

 

500,006

 

$

4.08

 

 

Stock Options:

 

The following table represents stock option activity for the six months ended June 30, 2010:

 

 

 

Number of Shares

 

Weighted
Average
Exercise Price

 

Weighted Average
Remaining
Contract Life in
Years

 

Outstanding options as of January 1, 2010

 

1,239,920

 

$

4.57

 

6.10

 

Options granted

 

 

$

 

 

 

Options exercised

 

(62,954

)

$

3.57

 

 

 

Options cancelled

 

(68,680

)

$

10.64

 

 

 

Outstanding options as of June 30, 2010

 

1,108,286

 

$

4.25

 

6.08

 

Exercisable options as of June 30, 2010

 

571,619

 

$

4.88

 

3.42

 

 

7



Table of Contents

 

Total stock-based compensation expense related to stock options was $91,000 and $64,000 for the three months ended June 30, 2010 and 2009, respectively.  Total stock-based compensation expense related to stock options was $183,000 and $129,000 for the six months ended June 30, 2010 and 2009, respectively.  Unrecognized stock-based compensation expense related to stock options was $848,000 at June 30, 2010 which we will amortize ratably through July 2013.

 

Other:

 

During the three months ended June 30, 2010 and 2009, we recognized expense of $39,000 and $45,000 related to the issuance of 9,000 and 10,500 shares of fully vested common stock to members of our Board of Directors.  During the six months ended June 30, 2010 and 2009, we recognized expense of $80,000 and $82,000 related to the issuance of 18,000 and 23,422 shares of fully vested common stock to members of our Board of Directors.

 

4.             Income Taxes

 

We base the provision for income taxes upon estimated annual effective tax rates in the tax jurisdictions in which we operate.  For the three months ended June 30, 2010 and 2009, our effective tax rate was 108% and 30%, respectively.  For the six months ended June 30, 2010 and 2009, our effective tax rate was 44% and 24%, respectively.  The lower tax rate for the three and six months ended June 30, 2009 as compared to the same periods in 2010 resulted primarily from the impact of discrete items.  We had approximately $141,000 and $94,000 of discrete items which we recognized in the three and six month periods ended June 30, 2009, respectively. These discrete items lowered our effective tax rate to 30% and 24% for those periods, whereas discrete items were minimal for the same periods in 2010.  We expect our annual effective tax rate for 2010 to be 44%.

 

As part of the process of preparing financial statements, we estimate federal and state income taxes. Management estimates the actual current tax exposure together with assessing temporary differences resulting from different treatment for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we include within our balance sheet. Management must then assess the likelihood that we will utilize deferred tax assets to offset future taxable income during the periods in which we may deduct these temporary differences.  For the three and six months ended June 30, 2010, we recorded income tax benefit of $67,000 and $706,000, respectively, with an effective tax rates of 108% and 44%.

 

We assess our uncertain tax positions for tax years that are still open for examination.  At the adoption date of January 1, 2007 and at June 30, 2010 and 2009, we had no unrecognized tax benefits which would affect our effective tax rate if recognized.

 

We classify interest and penalties arising from the underpayment of income taxes in the statement of income under general and administrative expenses. As of June 30, 2010 and 2009, we had no accrued interest or penalties related to uncertain tax positions. The tax years 2006-2009 remain open to examination by both the Federal government and by other major income taxing jurisdictions to which we are subject.

 

5.             Goodwill and Valuation of Long-Lived Assets

 

We assess the carrying amount of our goodwill for potential impairment annually or more frequently if events or a change in circumstances indicate that impairment may have occurred.  We have only one operating and reporting unit that earns revenues, incurs expenses and makes available discrete financial information for review by our chief operations decision maker.  Accordingly, we complete our goodwill impairment testing on this single reporting unit.

 

Testing for goodwill impairment is a two step process. The first step screens for potential impairment.  If there is an indication of possible impairment we must complete the second step to measure the amount of impairment loss, if any.  The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of our market capitalization with the carrying value of our net assets. If our total market capitalization is at or below the carrying value of our net assets, we perform the second step of the goodwill impairment test to measure the amount of impairment loss we record, if any.  We consider goodwill impairment test estimates critical due to the amount of goodwill recorded on our balance sheet and the judgment required in determining fair value amounts.

 

Goodwill as of June 30, 2010 and December 31, 2009 was $23.7 million.  We conducted our annual goodwill impairment test as of December 31, 2009.  Based on this analysis, we determined that there was no impairment to goodwill.  We will continue to monitor conditions and changes that could indicate impairment of our recorded goodwill.

 

8



Table of Contents

 

We perform an impairment test for finite-lived assets and other long-lived assets, such as fixed assets, whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.  At each of June 30, 2010 and 2009, we determined that no triggering events had occurred during the quarter and our long-lived assets were not impaired.

 

Identified intangible assets are summarized as follows:

 

 

 

Amortizable

As of June 30, 2010

 

As of December 31, 2009

 

 

 

Period
(years)

 

Gross
Assets

 

Accumulated
Amortization

 

Net
Assets

 

Gross
Assets

 

Accumulated
Amortization

 

Net
Assets

 

Customer relationships

 

6-8

 

$

8,110

 

$

(2,688

)

$

5,422

 

$

8,110

 

$

(2,092

)

$

6,018

 

Services agreement

 

4

 

67

 

(13

)

54

 

67

 

(4

)

63

 

Certification

 

2

 

467

 

(175

)

292

 

467

 

(59

)

408

 

Trademarks

 

3

 

263

 

(48

)

215

 

263

 

(4

)

259

 

Order backlog

 

1

 

1,108

 

(600

)

508

 

1,108

 

(46

)

1,062

 

Total identified intangible assets

 

 

 

$

10,015

 

$

(3,524

)

$

6,491

 

$

10,015

 

$

(2,205

)

$

7,810

 

 

Amortization expense for identified intangible assets is summarized below:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Statement of Operations

 

 

 

2010

 

2009

 

2010

 

2009

 

Classification

 

Customer relationships

 

$

298

 

$

177

 

$

596

 

$

355

 

Operating expenses

 

Services agreement

 

4

 

 

8

 

 

Operating expenses

 

Certification

 

59

 

 

117

 

 

Operating expenses

 

Trademarks

 

22

 

 

44

 

 

Operating expenses

 

Order backlog

 

277

 

 

554

 

 

Cost of sales

 

Total identified intangible assets

 

$

660

 

$

177

 

$

1,319

 

$

355

 

 

 

 

Based on the identified intangible assets recorded at June 30, 2010, future amortization expense for the next five years is as follows:

 

 

 

(in thousands)

 

Remainder of 2010

 

1,272

 

2011

 

1,471

 

2012

 

1,292

 

2013

 

553

 

2014

 

481

 

Thereafter

 

1,423

 

 

 

$

6,492

 

 

6.             Acquisitions

 

We determine the fair value of the assets acquired and liabilities assumed at the acquisition date.  The fair values of the assets acquired and liabilities assumed represent our estimate of fair values.  We determine our valuations through a combination of methods, which include internal rate of return calculations, discounted cash flow models, outside valuations and appraisals and market conditions.  We did not consummate any acquisitions during the three and six months ended June 30, 2010.  For the acquisitions we completed in 2009, we have included the results of these acquisitions in the accompanying interim statement of operations from the respective acquisition dates forward.

 

Networking Solutions Division of Cross Telecom.  On October 1, 2009, we acquired the networking solutions division of Minneapolis-based Cross Telecom’s (“Cross”), which qualified as a business combination.  We completed an asset purchase of $2.0 million paid in cash.  Simultaneously, Cross entered into a services agreement with us to purchase at least $1.8 million of networking products and services from us over the next three years.  Cross has agreed to pay any shortfall between customer purchases and the guaranteed annual purchase amount.  We believe that we will meet the revenue targets and accordingly, we determined that the reverse earnout to had no fair value at the date of this business combination. We estimated the fair values of the assets acquired to goodwill and finite lived intangibles, which consisted of the services agreement and certifications.  They have estimated lives of four and two years, respectively, and we are amortizing them using the straight line method.

 

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Reseller Business of Incentra, LLC.  On December 17, 2009, we acquired the reseller business of Incentra, which designs, procures, implements and supports data center solutions with storage, networking, security and servers from leading manufacturers.  We did not acquire Incentra’s managed services portfolio and related operations.  We accomplished the acquisition through the purchase of substantially all of the assets of Incentra’s reseller business pursuant to an Asset Purchase Agreement.

 

Under the Asset Purchase Agreement, we paid Incentra $13.8 million.  We paid $8.8 million at closing in cash, of which we held back $440,000 as security for certain indemnification obligations of Incentra.  In addition, we paid Incentra $5.0 million for the working capital associated with Incentra’s reseller business through the delivery of $2.0 million in cash and a $3.0 million secured promissory paid on March 31, 2010.  The promissory note was secured by the assets we purchased under the Asset Purchase Agreement.  We agreed to share one-half of any working capital in excess of $5 million as of June 30, 2010 with Incentra.

 

In connection with this acquisition, we estimated the fair values of the net assets acquired, including finite lived intangible assets, based on their respective fair values at the acquisition date, resulting in goodwill of approximately $4.5 million.  We paid a premium over the fair value of the net tangible and identified intangible assets acquired (i.e. goodwill), because we believe this acquisition expands our regional presence and customer portfolio and enables us to provide our customers with complete data center solutions.  We anticipate operational synergies and efficiencies through combined general and administrative and corporate functions.

 

The following table summarizes the preliminary allocation of the purchase price pending completion of the determination of the income tax basis of assets acquired and liabilities assumed in conjunction with our 2009 income tax filings:

 

 

 

(in thousands)

 

Assets acquired at their fair value:

 

 

 

Accounts receivable, net

 

$

12,202

 

Inventory

 

275

 

Fixed assets

 

119

 

Finite-lived intangibles

 

5,219

 

Goodwill

 

4,535

 

Other assets

 

333

 

Total assets acquired

 

22,683

 

 

 

 

 

Liabilities assumed at their fair value:

 

 

 

Accounts payable

 

6,640

 

Deferred maintenance contracts, net

 

705

 

Accrued liabilities

 

1,538

 

Total liabilities assumed

 

8,883

 

 

 

 

 

Net purchase price

 

$

13,800

 

 

The finite lived intangibles which consisted of trademarks, order backlog and customer relationships have estimated lives of three years, one year and eight years, respectively, and we are amortizing them using the straight line method.

 

Integration costs for 2010 include salaries, benefits, retention bonuses and severances of exiting employees, some of whom assisted with the initial integration of Incentra.  Total integration and transaction costs were $192,000 and $581,000 for the three and six months ended June 30, 2010, respectively.

 

The pro forma unaudited results of operations for 2009 assuming consummation of our Incentra acquisition as of January 1, 2009 and excluding any pro forma information for the Cross acquisition as that pro forma impact was not significant, are as follows:

 

 

 

Three and Six Months ended June 30,

 

 

 

2009

 

2009

 

 

 

(in thousands, except per share data)

 

Net sales

 

$

95,201

 

$

161,955

 

Net loss

 

(5,101

)

(15,887

)

 

 

 

 

 

 

Per share data:

 

 

 

 

 

Basic loss

 

$

(0.41

)

$

(1.28

)

Diluted loss

 

$

(0.41

)

$

(1.28

)

 

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The pro forma unaudited results do not purport to be indicative of the results which we would have obtained had we completed the acquisition as of the pro forma date.

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

OVERVIEW

 

Datalink provides solutions and services that make data centers more efficient, manageable and responsive to changing business needs.  Focused on mid and large-size companies, Datalink assesses, designs, deploys, and supports infrastructures — servers, storage and networks — at the heart of the data center. Our portfolio of solutions and services spans three practices: consolidation and virtualization, enhanced data protection and advanced network infrastructures.  Datalink offers a full suite of practice-specific analysis, design, implementation, management, and support services.

 

Our solutions can include hardware products, such as servers, disk arrays, tape systems, networking and interconnection components and software products.  Trends in the data center marketplace support our strategy to offer our customers a single vendor to provide their data center infrastructure needs.  Gartner estimates the server virtualization management market will grow by nearly a 30% compound annual growth rate (CAGR) between 2008 and 2013.  Although Gartner estimates that storage costs are approximately 10% of a typical data center spending budget, Datalink’s data center portfolio covers services and products estimated by Gartner to represent over 55% of a data center’s spending budget.  As of June 30, 2010, we have 32 locations throughout the United States.  We historically have derived our greatest percentage of net sales from customers located in the central part of the United States.

 

We sell support service contracts to most of our customers.  When customers purchase support services through us, customers receive the benefit of integrated system wide support.  We have a qualified, independent support desk that takes calls from customers, diagnoses the issues they are facing and either solves the problem or coordinates with Datalink and/or vendor technical staff to meet the customer’s needs.  Our support service agreements with our customers include an underlying agreement with the product manufacturer.  The manufacturer provides on-site support assistance if necessary. We defer revenues and direct costs resulting from these contracts, and amortize these revenues and expenses into operations, over the term of the contracts, which are generally twelve months.

 

The data center infrastructure solutions and services market is rapidly evolving and highly competitive.  Our competition includes other independent storage, server and networking system integrators, high end value-added resellers, distributors, consultants and the internal sales force of our suppliers.  Our ability to hire and retain qualified outside sales representatives and engineers with enterprise-class information storage, server and networking experience is critical to effectively competing in the marketplace and achieving our growth strategies.

 

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 center infrastructure 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 and timing to place orders with us and the size of those orders.  As a result, our net sales may fluctuate from quarter to quarter.

 

We view the current data center infrastructure market as providing significant opportunity for growth.  Currently, Datalink’s market share is a small part of the overall market.  However, the providers of the data center infrastructure industry’s products and technologies are increasing their utilization of indirect sales approaches to broaden their reach and optimize their margins. Increasingly, they are turning to companies such as Datalink to sell their products.  While these trends provide opportunity for Datalink, we must improve our business model to generate sustainable, profitable growth.  Our model requires highly skilled sales and technical staff which results in substantial fixed costs for us.  We believe the best way to improve our company and create long-term shareholder value is to focus on building scaleable capabilities and a leverageable cost structure.  Our current strategies are focused on:

 

·                  Increasing our sales team productivity.

·                  Scaling our existing geographic locations and expanding into new locations.

·                  Expanding our customer support revenues.

·                  Enhancing our professional services business.

 

To pursue these strategies, we are:

 

·                  Improving our training, tools and recruiting efforts for sales and technical teams to increase productivity.

·                  Investing in customer-facing teams to acquire top tier sales and technical talent which we believe will increase our market share in key locations.

·                  Deepening our presence in existing enterprise accounts and penetrating new enterprise accounts.

 

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·                  Exploring potential acquisitions that we believe can strengthen our resources and capabilities in key geographic locations.

·                  Targeting high growth market segments and deploying new technologies which to save costs for our customers.

·                  Driving high levels of efficiency by streamlining our supply chain and expanding our professional services tools.

·                  Expanding our customer support capabilities and tools-based professional services offerings that we believe will provide more value to our customers.

 

All of these plans have various challenges and risks associated with them, including that:

 

·                  Continued worldwide economic troubles may adversely affect our customers’ buying patterns.

·                  We may not increase our productivity and may lose, or not successfully recruit and retain key sales, technical or other personnel.

·                  Competition is intense and may adversely impact our profit margin.  Customers have many options for data storage and infrastructure products and services.

·                  We may not successfully identify acquisition candidates or profitably integrate any business we acquire.

 

RESULTS OF OPERATIONS

 

We ended the second quarter of 2010 with a backlog of $44 million, which represents firm orders we expect to recognize as revenue within the next 90 days.  This compares to a backlog of $43 million as of March 31, 2010 and $28 million as of June 30, 2009.  In the current environment, we continue to see the negative impact of the worldwide economic downturn on many of our customers, resulting in greater scrutiny given to storage spending projects and providing us with less visibility into their purchasing plans.  We have also had some customers decide to significantly delay the implementation of projects which they have already purchased and paid for.  We cannot predict what impact these economic uncertainties will have on our profitability going forward.

 

The following table shows, for the periods indicated, certain selected financial data expressed as a percentage of net sales.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of sales

 

76.4

 

73.4

 

76.7

 

73.4

 

Gross profit

 

23.6

 

26.6

 

23.3

 

26.6

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

11.4

 

12.0

 

11.8

 

12.9

 

General and administrative

 

5.4

 

6.5

 

5.5

 

6.9

 

Engineering

 

6.1

 

6.8

 

6.2

 

6.9

 

Integration and transaction costs

 

0.3

 

 

0.4

 

 

Amortization of intangibles

 

0.5

 

0.4

 

0.6

 

0.4

 

Total operating expenses

 

23.7

 

25.7

 

24.5

 

27.1

 

Earnings (loss) from operations

 

(0.1

)%

0.9

%

(1.2

)%

(0.5

)%

 

The following table shows, for the periods indicated, revenue and gross profit information for our product and service sales.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands)

 

Product sales

 

$

43,990

 

$

22,915

 

$

82,166

 

$

42,167

 

Service sales

 

26,885

 

20,782

 

51,253

 

41,398

 

 

 

 

 

 

 

 

 

 

 

Product gross profit

 

$

9,594

 

$

5,853

 

$

17,631

 

$

10,705

 

Service gross profit

 

7,166

 

5,787

 

13,461

 

11,508

 

 

 

 

 

 

 

 

 

 

 

Product gross profit as a percentage of product sales

 

21.8

%

25.5

%

21.4

%

25.4

%

Service gross profit as a percentage of service sales

 

26.7

%

27.8

%

26.3

%

27.8

%

 

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The increase in our product revenues for the three and six months ended June 30, 2010, as compared to the same periods in 2009, reflects the impact of our acquisition of Incentra in December 2009.  Our product revenues reflect a diversification in the mix of our offerings.  In addition to storage, our server and network sales have increased as we begin to realize synergies from our Incentra acquisition.  Going forward, we expect our product revenues will continue to reflect our customers’ closer scrutiny of expenditures as they focus more attention on the actual or anticipated impact that current economic conditions may have on the growth and profitability of their businesses.

 

Our service sale increase for the three and six months  ended  June 30, 2010, as compared to the same period in 2009 was also due to the impact of our acquisition of Incentra in December 2009.  With the decrease in product revenues in late 2008 and 2009, we expect our customer support contract revenues may suffer and we cannot assure that our future customer support contract sales will not decline without sustainable growth in our product revenues.

 

We had no single customer account for 10% or greater of our revenues for the three and six months ended June 30, 2010 or 2009.

 

Gross Profit.  Our total gross profit as a percentage of net sales decreased to 23.6% for the quarter ended June 30, 2010, as compared to 26.6% for the comparable quarter in 2009.  Our total gross profit as a percentage of net sales decreased to 23.3% for the six months ended June 30, 2010, as compared to 26.6% for the comparable period in 2009.   Product gross profit as a percentage of product sales decreased to 21.8% in the second quarter of 2010 from 25.5% for the comparable quarter in 2009.  Product gross profit as a percentage of product sales decreased to 21.4% for the six months ended June 30, 2010 from 25.4% for the same period in 2009.  Service gross profit as a percentage of service sales decreased to 26.7% for the second quarter of 2010 from 27.8% for the comparable quarter in 2009.  Service gross profit as a percentage of service sales decreased to 26.3% for the six months ended June 30, 2010 from 27.8% for the same period in 2009.

 

Our product gross profit as a percentage of product sales is impacted by the mix and type of projects we complete for our customers.  Our product gross profit for the three and six months ended June 30, 2010 was lower than prior periods as we implemented our strategy of selling total solutions into the data center, which includes lower margin servers and networking solutions.  Our product gross profit is also impacted by various vendor incentive programs that provide economic incentives for achieving various sales performance targets.  Vendor incentives were $1.1 million and $436,000, respectively, for the three month periods ended June 30, 2010 and 2009.  Vendor incentives were $1.7 million and $1.0 million, respectively, for the six month periods ended June 30, 2010 and 2009.  Several of our vendors have tightened eligibility for their programs in the current economic climate and may further change or terminate their programs at any time.  Accordingly, we cannot assure that we will achieve and receive similar vendor incentives in the future.  We expect that as we continue implementing our strategy to sell comprehensive data center solutions with servers and networking products, we will report lower product gross margins as networking products generate lower margins.  We estimate that our product gross margins for the remainder of 2010 will be between 20% and 22%.

 

Our service gross profit as a percentage of service sales for the three and six months ended June 30, 2010 decreased 1.1% and 1.5%, respectively, as compared to the same periods in 2009.  This decrease is primarily due to $283,000 and $656,000 of Incentra-related acquisition accounting adjustments to reduce acquired maintenance contracts to fair value for the three and six months ended June 30, 2010, respectively. We expect these adjustments will continue to impact future quarters.  Excluding these adjustments, service gross profit margin would have been 27.4% compared to reported of 27.8 % for the three months ended June 30, 2009 and 27.2% compared to reported of 27.8% for the six months ended June 30, 2009.  We estimate that, taking into account the Incentra-related acquisition accounting adjustments, our service gross margins for the remainder of 2010 will be between 27% and 30%.

 

Our total gross profit for the three and six months ended June 30, 2010 includes amortization of intangibles of $277,000 and $554,000, respectively, related to order backlog acquired in connection with our Incentra acquisition.  This finite lived intangible has an estimated life of one year and will be fully amortized in 2010.

 

Sales and Marketing.  Sales and marketing expenses include wages and commission paid to sales and marketing personnel, travel costs and advertising, promotion and hiring expenses.  Sales and marketing expenses totaled $8.1 million, or 11.4% of net sales for the quarter ended June 30, 2010, compared to $5.3 million, or 12.0% of net sales for the second quarter in 2009.  Sales and marketing expenses totaled $15.8 million, or 11.8% of net sales for the six months ended June 30, 2010, compared to $10.8 million, or 12.9% of net sales for the same period in 2009.

 

Sales and marketing expenses increased $2.8 and $5.0 million for the three and six month periods ended June 30, 2010, as compared to the same periods in 2009.  This is primarily due to an increase in compensation expense in connection with our Incentra acquisition, which increased our sales and marketing headcount by approximately 73%.

 

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 $3.8 million,

 

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Table of Contents

 

or 5.4% of net sales for the quarter ended June 30, 2010, compared to $2.8 million, or 6.5% of net sales for the second quarter in 2009.  General and administrative expenses were $7.3 million, or 5.5% of net sales for the six months ended June 30, 2010, compared to $5.8 million, or 6.9% of net sales for the same period in 2009.  Our general and administrative expenses have decreased as a percentage of net sales for both the three and six month periods ended June 30, 2010 as compared to the same periods in 2009.  This decrease reflects the impact of a modest increase in expenses related to the Incentra acquisition to support a significant increase in revenues.

 

General and administrative expenses increased $987,000 and $1.6 million for the three and six months ended June 30, 2010, as compared to the same periods in 2009. The increase in general and administrative expenses for the second quarter 2010 as compared to the same period in 2009, was primarily due to increased rent and facility charges of $504,000 for the additional Incentra offices we acquired and expenses of $536,000 for our 2010 national sales meeting.  The increase in general and administrative expenses for the six months ended June 30, 2010 as compared to the same period in 2009, was also due to increased rent and facility charges of $855,000 for the additional Incentra offices we acquired and expenses of $536,000 for our 2010 national sales meeting.

 

Engineering.  Engineering expenses include employee wages, bonuses and travel, hiring and training expenses for our field and customer support engineers and technicians.  Engineering expenses were $4.3 million, or 6.1% of net sales for the quarter ended June 30, 2010, compared to $3.0 million, or 6.8% of net sales for the second quarter in 2009.  Engineering expenses were $8.3 million, or 6.2% of net sales for the six months ended June 30, 2010, compared to $5.8 million, or 6.9% of net sales for the same period in 2009.

 

Engineering expenses increased $1.4 million and $2.5 million for the three and six months ended June 30, 2010, respectively, as compared to the same periods in 2009.  The increase in engineering expenses is primarily due to an increase in compensation expense in connection with our Incentra acquisition, which increased our engineering headcount by approximately 31%.

 

Integration and Transaction Costs.  We had $192,000 and $0 of integration and transaction costs for the three months ended June 30, 2010 and 2009, respectively.  We had $581,000 and $0 of integration and transaction costs for the six months ended June 30, 2010 and 2009, respectively.  Integration costs for 2010 are related to facility abandonment costs and our transition services agreement which consists of transition benefits, retention bonuses and severances of terminated employees, some of whom assisted with the initial integration of Incentra.

 

Amortization of Intangibles.  We had $660,000 of intangible asset amortization expenses for the three months ended June 30, 2010 as compared to intangible amortization expenses of $177,000 for the same three months in 2009.  We had $1.3 million of intangible asset amortization expenses for the six months ended June 30, 2010 as compared to intangible amortization of expenses of $355,000 for the same six months in 2009.  Amortization of intangibles expenses increased due to the acquisitions of Cross and Incentra in 2009.

 

Earnings (loss) from Operations.  We had a loss from operations of $65,000 compared to earnings from operations of $383,000 for the three months ended June 30, 2010 and 2009, respectively.  We had a loss from operations of $1.6 million and $473,000 for the six months ended June 30, 2010 and 2009, respectively. The loss from operations for the three and six month period ended June 30, 2010 is a result of integration and transaction costs and amortization of intangibles associated with our Incentra acquisition.

 

Income Taxes.  We had income tax benefit of $67,000 and income tax expense of $122,000 for the three months ended June 30, 2010 and 2009, respectively.  We had income tax benefit of $706,000 and $99,000 for the six months ended June 30, 2010 and 2009, respectively.  Our estimated effective tax rate for the three and six months ended June 30, 2010 was 108% and 44%, respectively.  The effective tax rate has increased due to the effect of the permanent differences in relation to our projected income.  Our estimated effective tax rate for 2009 was (55%).  For the balance of 2010, we expect to report an income tax provision using an effective tax rate of approximately 44%.

 

LIQUIDITY AND CAPITAL RESOURCES

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

Total cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

262

 

$

(1,191

)

Investing activities

 

1,961

 

1,443

 

Financing activities

 

(2,856

)

(178

)

Increase (decrease) in cash and cash equivalents

 

$

(633

)

$

74

 

 

Net cash provided by operating activities was $262,000 for the six months ended June 30, 2010 as compared to net cash used by operating activities of $1.2 million for the six months ended June 30, 2009.  The increase in cash provided by operations was due primarily to non-cash add backs including depreciation of $441,000 and amortization of intangibles of $1.3 million reduced by a net

 

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Table of Contents

 

working capital decrease of $768,000.  Net cash used by operating activities for the six months ended June 30, 2009 was primarily due to our loss for the period of $313,000 and a decrease in accrued expenses related to variable compensation of $1.5 million.

 

Net cash provided by investing activities was $2.0 million and $1.4 million for the six months ended June 30, 2010 and 2009, respectively. The primary source of cash for the six months of 2010 and 2009 came from our sale of short-term investments.  We are planning for up to $700,000 of capital expenditures for the remainder of 2010 to enhance our management information systems and upgrade our computer equipment.

 

Net cash used in financing activities was $2.9 million and $178,000 for the six months ended June 30, 2010 and 2009, respectively.  We used $3.0 million of cash during the 2010 period to repay our Incentra acquisition promissory note.  Net cash used in financing activities for the 2009 period was from tax withholding payments reimbursed by restricted stock.

 

We are currently exploring the possibility of obtaining a secured credit facility for the purpose of smoothing our operating cash flows, particularly, if we elect to take advantage of early pay discounts with some of our vendors.  Nevertheless, with our current cash position, we believe we have the liquidity to meet our operating needs for the foreseeable future.  We have filed a “shelf” registration statement with the SEC to pursue possible future equity fundraising to support our acquisition strategy and increase our general working capital.

 

Our contractual cash obligations consist of future minimum lease payments due under non-cancelable operating leases.  These obligations are for the last six months of 2010 and each of the full years thereafter as follows:

 

 

 

(in thousands)

 

 

 

Lease
Obligations

 

Sublease
Agreements

 

Net Lease
Obligations

 

2010

 

$

1,270

 

$

(368

)

$

902

 

2011

 

2,239

 

(719

)

1,520

 

2012

 

1,064

 

(239

)

825

 

2013

 

429

 

 

429

 

Thereafter

 

383

 

 

383

 

 

 

$

5,385

 

$

(1,326

)

$

4,059

 

 

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, including our internal projections of anticipated 2010 results, which reflect our views regarding 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 storage, including the effects of current economic and credit conditions; competition and pricing pressures and timing of our installations that may adversely affect our revenues and profits; fixed employment costs that may impact profitability if we suffer revenue shortfalls; our ability to hire and retain key technical and sales personnel; our dependence on key suppliers; our ability to adapt to rapid technological change; risks associated with integrating current and possible futures acquisitions; fluctuations in our quarterly operating results; future changes in applicable accounting rules; and volatility in our stock price.  Further, our revenues for any particular quarter are not necessarily reflected by our backlog of contracted orders, which also may fluctuate unpredictably.  We cannot assure that our 2009 acquisition of Cross Telecom assets will increase our revenues or profits.  We also cannot assure that in conjunction with our 2009 acquisition of certain assets and assumption of certain liabilities of Incentra, LLC’s reseller business, we will retain Incentra’s employee base, customers and advanced technology certifications or generate anticipated revenues or profits from the acquired business.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

We have identified our critical accounting policies in our Annual Report on From 10-K for the fiscal year ended December 31, 2009 in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Critical Accounting Policies and Estimates.”  There were no significant changes to our critical accounting policies during the three and six months ended June 30, 2010.

 

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Table of Contents

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes since December 31, 2009 in our market risk.  For further information on market risk, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures, about market risk in our 2009 Annual Report on Form 10-K.

 

Item 4. Disclosure Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures.  Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934), as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”).

 

The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information relating to us, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

 

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were operating effectively.

 

Changes in Internal Control over Financial Reporting.  There was no change in our internal control over financial reporting during our most recently competed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

16



Table of Contents

 

PART II. OTHER INFORMATION

 

Item 1.   Legal Proceedings.

 

We are involved in certain legal actions, all of which have arisen in the ordinary course of business.  Management believes that the ultimate resolution of such matters is unlikely to have a material adverse effect on our consolidated results of operation and/or financial condition.

 

Item 1A.  Risk Factors.

 

There have been no material changes from the risk factors we previously disclosed in “Part I—Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

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.

 

None

 

Item 5.  Other Information

 

None

 

Item 6.   Exhibits

 

(a)           Exhibits

 

31.1

 

Certifications by the President and Chief Executive Officer and Vice President Finance and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certifications by the President and Chief Executive Officer and Vice President Finance and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This Exhibit is “furnished” pursuant to SEC rules, but is deemed not “filed”.)

 

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Table of Contents

 

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 13, 2010

Datalink Corporation

 

 

 

 

 

By:

/s/ Gregory T. Barnum

 

Gregory T. Barnum, Vice President Finance and

 

Chief Financial Officer

 

18


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