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 September 30, 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 (IRS Employer Identification No.)
incorporation or organization)
9023 COLUMBINE ROAD, 55347
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 October 31, 1999, the Company had 9,959,944 shares of Common Stock, $.01
par value, outstanding.
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
INDEX
PART 1. FINANCIAL INFORMATION PAGE
----
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED):
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 1999
and 1998 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 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 7-10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
2
<PAGE>
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>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,733 $ 14,724
Marketable securities 15,402 18,872
Accounts receivable, net 5,753 3,759
Deferred income taxes and other assets 2,301 2,228
------------ ------------
Total current assets 35,189 39,583
Long-term marketable securities 3,502 716
Furniture and equipment, net 6,232 4,019
Capitalized software, net 1,373 2,131
Goodwill, net 6,906 --
------------ ------------
TOTAL ASSETS 53,202 46,449
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $ 5,708 $ 3,669
SHAREHOLDERS' EQUITY:
Common stock (9,959,944 and 9,697,234 shares issued and
outstanding at September 30, 1999 and December 31, 1998,
respectively) 100 97
Additional paid-in capital 30,295 29,131
Accumulated other comprehensive income 4 22
Retained earnings 17,095 13,530
------------ ------------
Total shareholders' equity 47,494 42,780
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 53,202 $ 46,449
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Data recovery services and products $ 9,522 $ 7,601 $ 24,480 $ 22,041
Software 2,525 1,470 5,042 5,003
------------ ------------ ------------ ------------
TOTAL REVENUES 12,047 9,071 29,522 27,044
COST OF REVENUES:
Data recovery services and products 2,319 1,626 6,264 4,380
Software 515 304 939 905
------------ ------------ ------------ ------------
TOTAL COST OF REVENUES 2,834 1,930 7,203 5,285
------------ ------------ ------------ ------------
Gross margin 9,213 7,141 22,319 21,759
OPERATING EXPENSES:
Research and development 1,994 1,738 4,914 5,000
Sales and marketing 2,721 2,282 7,135 6,424
General and administrative 2,037 1,775 5,398 5,152
Amortization of goodwill 357 -- 357 --
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 7,109 5,795 17,804 16,576
------------ ------------ ------------ ------------
OPERATING INCOME 2,104 1,346 4,515 5,183
INTEREST AND OTHER INCOME 303 569 823 1,220
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 2,407 1,915 5,338 6,403
PROVISION FOR INCOME TAXES 819 613 1,773 2,049
------------ ------------ ------------ ------------
NET INCOME $ 1,588 $ 1,302 $ 3,565 $ 4,354
============ ============ ============ ============
BASIC NET INCOME PER SHARE $ 0.16 $ 0.13 $ 0.36 $ 0.44
DILUTED NET INCOME PER SHARE $ 0.16 $ 0.13 $ 0.36 $ 0.43
WEIGHTED AVERAGE SHARES
USED IN COMPUTATION OF:
BASIC NET INCOME PER SHARE 9,911,467 9,894,394 9,774,353 9,919,335
DILUTED NET INCOME PER SHARE 9,965,732 10,006,938 9,810,036 10,072,004
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 3,565 $ 4,354
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 1,512 1,671
Amortization of capitalized software 758 --
Amortization of goodwill 357 --
Changes in operating assets and liabilities:
Accounts receivable (1,994) (134)
Other current assets 228 (166)
Accounts payable and accrued expenses (387) (3,371)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,039 2,354
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Mijenix Corporation (6,564) --
Purchase of furniture and equipment (1,317) (1,886)
Net increase of short-term and long-term
marketable securities 684 2,773
------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (7,197) 887
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock -- (2,232)
Proceeds from exercise of stock options and employee
stock purchase plan 167 433
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 167 (1,799)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,991) 1,442
Cash and cash equivalents, beginning of period 14,724 17,315
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,733 $ 18,757
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
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; Washington, D.C.; New
York, New York; Boulder, Colorado; 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 for the third quarter and nine months ended September 30,
1999 are not necessarily indicative of the results to be expected 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 third quarter and nine
months ended September 30, 1999 and 1998 are foreign currency
translation adjustments. Comprehensive income is not separately
reported, as amounts were not significant.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES
DATA RECOVERY SERVICES AND PRODUCTS:
Data recovery services and products revenues for the third quarter of 1999
increased 25% compared to the third quarter of 1998. For the nine months ended
September 30, 1999, data recovery services and products revenues increased 11%.
Data recovery services and products revenues consist of the following:
Three Months Nine Months
Ended September 30 Ended September 30
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Data recovery lab services $ 7,014 $ 7,120 $ 18,993 $ 20,394
Remote data recovery services 355 251 1,305 551
Data recovery products 564 -- 1,747 --
Information management services 1,589 230 2,435 1,096
-------- -------- -------- --------
Total data recovery services
and products revenues $ 9,522 $ 7,601 $ 24,480 $ 22,041
======== ======== ======== ========
The increases in revenues from remote data recovery services and data recovery
products are a result of the Company's efforts to leverage its data recovery
technology into new revenue generating products and services. Information
management revenues increased dramatically in the third quarter in part due to a
large project, which contributed approximately $1.1 million in revenue during
the quarter. This project will continue to generate revenue in the fourth
quarter of 1999. The remaining increase in information management revenue is a
result of increased project opportunities.
SOFTWARE:
Software revenues for the third quarter of 1999 increased 72% compared to the
third quarter of 1998. The increase is due entirely to sales of products of the
Company's newly acquired wholly-owned subsidiary headquartered in Boulder,
Colorado, Mijenix Corporation ("Boulder division"). These products contributed
approximately $1.2 million in revenue during the quarter. For the nine months
ended September 30, 1999, software revenues increased 1% compared to the first
nine months of 1998. The increase is a net result of the new revenues the
Boulder division generated combined with a decline in the sales of Disk Manager.
While Disk Manager continues to contribute strong operating margins, downward
pricing pressure continues from the Company's main customers.
7
<PAGE>
GROSS MARGINS
DATA RECOVERY SERVICES AND PRODUCTS:
Gross margins on data recovery services and products revenues for the third
quarter and nine months ended September 30, 1999 were 76% and 74%, respectively,
compared to 79% and 80% for the comparable periods of 1998. The decreases are
due primarily to the amortization of capitalized software related to the
TIRAMISU(TM) product line and, to a lesser degree, higher data recovery
engineering labor costs.
SOFTWARE:
Gross margins on software revenues for the third quarter and nine months ended
September 30, 1999 were 80% and 81%, respectively, and were approximately the
same as the comparable periods of 1998. As revenues from the Boulder division
products make up a larger portion of software revenues, software gross margins
are expected to decline to the range of 70% to 75%.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT:
Research and development expenses for the third quarter of 1999 increased 15%
compared to the third quarter of 1998 and decreased 2% in the first nine months
of 1999 compared to the same period of 1998. As a percentage of revenues,
research and development expenses were 17% for both the third quarter and nine
months ended September 30, 1999, compared to 19% for the comparable periods of
1998. The third quarter increase is due primarily to research and development
expenditures incurred by the Boulder division as they prepare new products for
launch.
SALES AND MARKETING:
Sales and marketing expenses for the third quarter of 1999 increased 19%
compared to the third quarter of 1998 and increased 11% in the first nine months
of 1999 compared to the same period of 1998. The increases are due principally
to the activities of the Boulder division. As a percentage of revenues, sales
and marketing expenses were 23% and 24% for the third quarter and nine months
ended September 30, 1999, respectively, compared to 25% and 24% for the
comparable periods of 1998. The decline in third quarter percentage is due to
the increase in consolidated revenues.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the third quarter of 1999 increased 15%
compared to the third quarter of 1998 and increased 5% in the first nine months
of 1999 compared to the same period of 1998. The increases are due mainly to the
expenses of the Boulder division. As a percentage of revenues, general and
administrative expenses were 17% and 18% for the third quarter and nine months
ended September 30, 1999, respectively, compared to 20% and 19% for the
comparable periods of 1998. The decreased percentage is due to increased
revenues, as general and administrative expenses do not fluctuate directly with
revenues.
8
<PAGE>
GOODWILL
Effective July 15, 1999 the Company completed the acquisition of the Boulder
division. The purchase price consisted of $6 million in cash and 215,345 shares
of Ontrack common stock. The acquisition is being accounted for as a purchase
and accordingly, goodwill of $7.3 million was recorded. The terms of the
purchase contain an earn-out whereby the former shareholders of the Boulder
division can receive up to $2.5 million of additional consideration if certain
financial goals are met during the period July 16, 1999 to December 31, 1999.
Goodwill is being amortized over a period of 60 months. Any amounts paid
pursuant to the earn-out will be added to the purchase price and amortized over
the remainder of the 60-month period. See the Company's Report on Form 8-K filed
July 27, 1999 for more information.
INTEREST AND OTHER INCOME
The decrease in interest and other income for the third quarter and nine months
ended September 30, 1999 is due principally to exchange differences resulting
from currency fluctuations in the value of the Euro against the US dollar.
PROVISION FOR INCOME TAXES
For the third quarter and nine months ended September 30, 1999, the Company
provided for taxes at effective rates of 34% and 33%, respectively. The
effective rate is lower than the statutory rate because of the impact of
tax-exempt interest income earned on investments and research and development
credits.
NET INCOME PER SHARE
The changes in basic and diluted net income per share for the third quarter and
nine months ended September 30, 1999 and 1998 are due to changes in net income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operations was $4.0 million and $2.4 million for the nine
months ended September 30, 1999 and 1998, respectively. Cash used in investment
activities was primarily for the Mijenix acquisition discussed above, and for
the purchases of furniture and equipment.
The Company has invested its cash principally in high-grade taxable and tax
exempt government securities. As of September 30, 1999, $3.5 million is
classified as long-term, with the remaining amount classified as cash and cash
equivalents or short-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. Under this plan, Company personnel have identified business
systems that are critical to the
9
<PAGE>
Company's business operations that require testing. The Company has completed
testing and remediation of its software products, the software and hardware used
in product development, its internal systems, non-information technology
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
and remediation 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 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 believes all systems will be compliant and does not anticipate any
problems due to the date change. In the event that a system should fail, plans
have been developed to allow daily operations to continue.
The Company believes that its expenses for the Year 2000 compliance through
September 30, 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 made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There has been no material change in the Company's exposure to market risk since
December 31, 1998. 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 more information.
10
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibit 27.1, Financial Data Schedule
(b). Reports on Form 8-K.
Form 8-K was filed on July 27, 1999 relating to the
acquisition of Mijenix Corporation.
11
<PAGE>
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: November 12, 1999 By: /s/ Michael W. Rogers
----------------------------------------
Michael W. Rogers
Chairman and Chief Executive Officer
Date: November 12, 1999 By: /s/ Thomas P. Skiba
----------------------------------------
Thomas P. Skiba
Vice President & Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,733
<SECURITIES> 15,402
<RECEIVABLES> 6,781
<ALLOWANCES> 1,028
<INVENTORY> 198
<CURRENT-ASSETS> 35,189
<PP&E> 15,161
<DEPRECIATION> 8,929
<TOTAL-ASSETS> 53,202
<CURRENT-LIABILITIES> 5,708
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 47,394
<TOTAL-LIABILITY-AND-EQUITY> 53,202
<SALES> 5,042
<TOTAL-REVENUES> 29,522
<CGS> 939
<TOTAL-COSTS> 7,203
<OTHER-EXPENSES> 17,804
<LOSS-PROVISION> 97
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 5,338
<INCOME-TAX> 1,773
<INCOME-CONTINUING> 3,565
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,565
<EPS-BASIC> .36
<EPS-DILUTED> .36
</TABLE>
