UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission File No. 000-21375
ONTRACK DATA INTERNATIONAL, INC.
(Exact name of business issuer as specified in its charter)
MINNESOTA 41-1521650
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6321 BURY DRIVE, SUITES 13-21, 55346
EDEN PRAIRIE, MINNESOTA (Zip Code)
(Address of principal executive office)
www.ontrack.com (612) 937-1107
(Web address) (Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes ___X___ No _______
As of April 30, 1999, the Company had 9,714,009 shares of Common Stock, $.01 par
value, outstanding.
1
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ONTRACK DATA INTERNATIONAL, INC.
INDEX
PART 1. FINANCIAL INFORMATION PAGE
----
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED):
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income for the
three months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7-9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 10
ITEM 2. CHANGES IN SECURITIES 10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 5. OTHER INFORMATION 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ONTRACK DATA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,552 $ 14,724
Marketable securities 20,529 18,872
Accounts receivable, net 4,208 3,759
Deferred income taxes and other current assets 2,387 2,228
------------ ------------
Total current assets 34,676 39,583
Long-term marketable securities 6,143 716
Capitalized software, net 1,977 2,131
Furniture and equipment, net 3,675 4,019
------------ ------------
TOTAL ASSETS $ 46,471 $ 46,449
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $ 2,772 $ 3,669
SHAREHOLDERS' EQUITY:
Common stock (9,714,009 and 9,697,234 shares issued and
outstanding at March 31, 1999 and December 31, 1998, respectively) 97 97
Additional paid-in capital 29,186 29,131
Accumulated other comprehensive income (14) 22
Retained earnings 14,430 13,530
------------ ------------
Total shareholders' equity 43,699 42,780
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 46,471 $ 46,449
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
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ONTRACK DATA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Data recovery services and products $ 7,151 $ 7,205
Software 1,259 1,702
------------ ------------
TOTAL REVENUES 8,410 8,907
COST OF REVENUES:
Data recovery services and products 1,876 1,328
Software 244 312
------------ ------------
TOTAL COST OF REVENUES 2,120 1,640
------------ ------------
GROSS MARGIN 6,290 7,267
OPERATING EXPENSES:
Research and development 1,437 1,655
Sales and marketing 2,213 1,952
General and administrative 1,577 1,660
------------ ------------
TOTAL OPERATING EXPENSES 5,227 5,267
------------ ------------
OPERATING INCOME 1,063 2,000
INTEREST AND OTHER INCOME 260 321
------------ ------------
INCOME BEFORE INCOME TAXES 1,323 2,321
PROVISION FOR INCOME TAXES 423 766
------------ ------------
NET INCOME $ 900 $ 1,555
============ ============
BASIC NET INCOME PER SHARE $ 0.09 $ 0.16
DILUTED NET INCOME PER SHARE $ 0.09 $ 0.15
WEIGHTED AVERAGE SHARES
USED IN COMPUTATION OF:
BASIC NET INCOME PER SHARE 9,697,420 9,916,917
DILUTED NET INCOME PER SHARE 9,732,094 10,165,457
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
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ONTRACK DATA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 900 $ 1,555
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 508 548
Amortization of capitalized software 154 --
Changes in operating assets and liabilities:
Accounts receivable (449) 443
Other current assets (159) (69)
Accounts payable and accrued expenses (933) (1,991)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21 486
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (164) (546)
Net sale (purchase) of short-term and long-term
marketable securities (7,084) 4,580
Other -- (70)
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (7,248) 3,964
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee
stock purchase plan 55 209
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 55 209
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,172) 4,659
Cash and cash equivalents, beginning of period 14,724 17,315
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,552 $ 21,974
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
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ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
ONTRACK Data International, Inc. (the "Company") provides data recovery
services and products, utility software and other computer data related
services. The Company's headquarters are in Minneapolis, Minnesota, and
it has locations in Los Angeles, California; San Jose, California;
Washington, DC.; New York, New York; London, England; Stuttgart,
Germany and Paris, France.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted as permitted by such rules and regulations. These
financial statements and related notes should be read in conjunction
with the financial statements and notes thereto included in the
Company's audited consolidated financial statements for the year ended
December 31, 1998 contained in the Company's Annual Report on Form 10-K
for 1998.
In the opinion of management, the interim financial statements reflect
adjustments, consisting of normal recurring accruals, which are
necessary to present fairly the Company's financial position, results
of operations and cash flow for the periods indicated. The results of
operations of the three months ended March 31, 1999 are not necessarily
indicative of the results for the full year.
NET INCOME PER SHARE
Basic net income per share includes no dilution and is computed by
dividing net income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted net
income per share reflects the potential dilution of securities that
could share in the earnings of the Company. The difference between the
Company's basic and diluted net income per share data as presented is
due to the dilutive impact from stock options whose exercise price was
below the average common stock price for the respective period
presented.
COMPREHENSIVE INCOME
The components of comprehensive income for the three months ended March
31, 1999 and 1998 are foreign currency translation adjustments.
Comprehensive income is not separately reported, as amounts were not
significant.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF FIRST QUARTER ENDED MARCH 31, 1999 AND 1998
REVENUES
DATA RECOVERY SERVICES AND PRODUCTS:
Data recovery services and products revenues for the first quarter of 1999
decreased 1% compared to the first quarter of 1998. 1999 data recovery services
and products revenues include $333,000 relating to sales of the Company's newly
acquired do-it-yourself data recovery software product, TIRAMISU(TM).
SOFTWARE:
Software revenues for the first quarter of 1999 decreased 26% compared to the
first quarter of 1998. The expected decrease in software revenues is attributed
to pricing pressure with the Company's DISK MANAGER(R) product from the
Company's main customers, the hard drive manufacturers. The Company expects this
pricing pressure to continue.
GROSS MARGINS
DATA RECOVERY SERVICES AND PRODUCTS:
Gross margin on data recovery services and products revenues for the first
quarter ended March 31, 1999 was approximately 74% compared to 82% for the
comparable period of 1998. The decrease is due to the inclusion of amortization
of capitalized software related to the TIRAMISU(TM) product line and increased
engineering labor costs.
SOFTWARE:
Gross margin on software revenues for the first quarter ended March 31, 1999 was
81% compared to 82% for the comparable period of 1998. The decrease in margin
percentage in the first quarter is due to lower OEM royalty revenues.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT:
Research and development expenses for the first quarter of 1999 decreased 13%
compared to the first quarter of 1998. As a percentage of revenues, research and
development expenses were 17% for the quarter ended March 31, 1999 compared to
19% for the comparable period of 1998. The reductions are due principally to
less engineering labor costs.
7
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SALES AND MARKETING:
Sales and marketing expenses for the first quarter of 1999 increased 13%
compared to the first quarter of 1998. As a percentage of revenues, sales and
marketing expenses were 26% for the first quarter March 31, 1999 compared to 22%
for the comparable period of 1998. The increased dollars and percentages are due
to an increase in salaries worldwide and additional marketing and promotion
costs in Europe.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the first quarter of 1999 decreased 5%
compared to the first quarter of 1998. As a percentage of revenues, general and
administrative expenses were 19% for both the first quarter ended March 31, 1999
and for the comparable period of 1998. The decline in general and administrative
expenses for the first quarter of 1999 is due principally to lower compensation
related costs.
INTEREST AND OTHER INCOME
The decrease in interest and other income for the quarter is due principally to
lower interest rates. To a lesser extent the decline was also due to exchange
losses resulting from currency fluctuations in the value of the Euro against the
US Dollar.
PROVISION FOR INCOME TAXES
For the quarter ended March 31, 1999, the Company provided for taxes at an
effective rate of 32%. The effective rate is lower than the statutory rate
because of the impact of tax exempt interest income earned on investments and
the impact of research and development credits.
NET INCOME PER SHARE
The changes in basic and diluted net income per share for the quarter ended
March 31, 1999 and 1998 are due to changes in net income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operations was $21,000 and $486,000 for the three months
ended March 31, 1999 and 1998, respectively. The decline was due to lower net
income. Cash provided by and used in investment activities was primarily for the
purchase and sale of short-term and long-term marketable securities.
The Company has invested its cash principally in high grade taxable and tax
exempt government securities, $6,143,000 of which are classified as long-term,
with the remaining amount classified as cash and cash equivalents or short-term
and long-term marketable securities.
YEAR 2000 COMPLIANCE
The "Year 2000" problem concerns the inability of existing information systems
to properly recognize and process date-sensitive information beyond January 1,
2000. If not corrected, these systems could fail or create erroneous
information. The Company has undertaken various initiatives to evaluate and
respond to the potential impact of the Year 2000 issue on its computer and other
operating systems. A Year 2000 committee has formulated a plan to address the
Year 2000 issue.
8
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Under this plan, Company personnel have identified business systems that are
critical to the Company's business operations that require testing. The Company
has completed testing and remediation of its software products and the software
and hardware used in product development. The Company is in the process of
testing its internal systems, the hardware and software tools it uses in its
data recovery business and the systems in its satellite offices. The Company has
completed this testing except for certain systems that are being updated for
reasons other than Year 2000 compliance. These systems are expected to be tested
and remediated by December 31, 1999. The Company also expects its
non-information technology systems to be compliant after it moves into its new
leased office space, anticipated for the third quarter of 1999.
The Company is also communicating and working with its significant vendors,
customers and other business partners to minimize Year 2000 risks and protect
the Company and its customers from potential service interruptions. However, the
Company could be adversely affected by the failure of third parties to become
Year 2000 compliant, including the risk of operational outages due to
disruptions in communications or electrical service. Although the Company
believes the effect of such disruptions would be localized and temporary, there
is no assurance that these or other Year 2000 risks will not have a material
financial impact in any future period.
After assessing the information received from vendors, customers and other
business partners, and evaluating the completion of its Year 2000 project, the
Company will develop contingency plans if appropriate. It is anticipated that
these plans will be developed before the fall of 1999.
The Company believes that its expenses for the Year 2000 compliance through
March 31, 1999 are not material, and total expenses for compliance are not
expected to exceed $100,000.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of federal
securities laws. These statements include statements regarding intent, belief,
or current expectations of the company and its management. These forward-looking
statements are not guarantees of the future performance and involve a number of
risks and uncertainties that may cause the Company's actual results to differ
materially from the results discussed in these statements. Please refer to the
Management's Discussion and Analysis section of the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, for cautionary statements on
important factors to consider in evaluating the forward-looking statements
included in this Form 10-Q.
9
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ONTRACK DATA INTERNATIONAL, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
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 AND REPORTS ON FORM 8-K
(a). Exhibit 27.1 Financial Data Schedule
(b). Reports on Form 8-K
None
10
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ONTRACK DATA INTERNATIONAL, INC.
SIGNATURES
In accordance with 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.
ONTRACK DATA INTERNATIONAL, INC.
(Registrant)
Date: May 13, 1999 By: /s/ Michael W. Rogers
----------------------------------------
Michael W. Rogers
Chairman and Chief Executive Officer
Date: May 13, 1999 By: /s/ Thomas P. Skiba
----------------------------------------
Thomas P. Skiba
Vice President & Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,552
<SECURITIES> 20,529
<RECEIVABLES> 4,588
<ALLOWANCES> 380
<INVENTORY> 89
<CURRENT-ASSETS> 34,676
<PP&E> 12,006
<DEPRECIATION> 8,331
<TOTAL-ASSETS> 46,471
<CURRENT-LIABILITIES> 2,772
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 43,602
<TOTAL-LIABILITY-AND-EQUITY> 46,471
<SALES> 1,592
<TOTAL-REVENUES> 8,410
<CGS> 417
<TOTAL-COSTS> 2,120
<OTHER-EXPENSES> 5,227
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,323
<INCOME-TAX> 423
<INCOME-CONTINUING> 900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 900
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
