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 June 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 (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 July 31, 1999, the Company had 9,944,064 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
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the three and six months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 2. CHANGES IN SECURITIES 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12-13
ITEM 5. OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
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 JUNE 30 DECEMBER 31
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 15,194 $ 14,724
Marketable securities 17,142 18,872
Accounts receivable, net 3,276 3,759
Deferred income taxes and other assets 1,768 2,228
-------- --------
Total current assets 37,380 39,583
Long-term marketable securities 4,131 716
Capitalized software, net 1,591 2,131
Furniture and equipment, net 4,357 4,019
-------- --------
TOTAL ASSETS $ 47,459 $ 46,449
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $ 2,631 $ 3,669
SHAREHOLDERS' EQUITY:
Common stock ( 9,728,719 and 9,697,234 shares issued and
outstanding at June 30, 1999 and December 31, 1998, respectively) 97 97
Additional paid-in capital 29,233 29,131
Accumulated other comprehensive income (9) 22
Retained earnings 15,507 13,530
-------- --------
Total shareholders' equity 44,828 42,780
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 47,459 $ 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 SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Data recovery services and products $ 7,807 $ 7,235 $ 14,958 $ 14,440
Software 1,258 1,831 2,517 3,533
=========== =========== =========== ===========
TOTAL REVENUES 9,065 9,066 17,475 17,973
COST OF REVENUES:
Data recovery services and products 2,070 1,426 3,945 2,754
Software 180 289 424 601
----------- ----------- ----------- -----------
TOTAL COST OF REVENUES 2,250 1,715 4,369 3,355
----------- ----------- ----------- -----------
GROSS MARGIN 6,815 7,351 13,106 14,618
OPERATING EXPENSES:
Research and development 1,483 1,607 2,920 3,262
Sales and marketing 2,201 2,190 4,414 4,142
General and administrative 1,784 1,718 3,361 3,378
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 5,468 5,515 10,695 10,782
----------- ----------- ----------- -----------
OPERATING INCOME 1,347 1,836 2,411 3,836
INTEREST AND OTHER INCOME 260 330 520 651
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,607 2,166 2,931 4,487
PROVISION FOR INCOME TAXES 530 670 954 1,436
----------- ----------- ----------- -----------
NET INCOME $ 1,077 $ 1,496 $ 1,977 $ 3,051
=========== =========== =========== ===========
BASIC NET INCOME PER SHARE $ 0.11 $ 0.15 $ 0.20 $ 0.31
DILUTED NET INCOME PER SHARE $ 0.11 $ 0.15 $ 0.20 $ 0.30
WEIGHTED AVERAGE SHARES USED IN COMPUTATION OF:
BASIC NET INCOME PER SHARE 9,714,172 9,946,943 9,705,796 9,932,013
DILUTED NET INCOME PER SHARE 9,732,281 10,100,061 9,732,188 10,114,112
</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>
SIX MONTHS
ENDED JUNE 30
---------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 1,977 $ 3,051
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 996 1,091
Amortization of capitalized software 540 --
Changes in operating assets and liabilities:
Accounts receivable 483 (74)
Other current assets 460 (494)
Accounts payable and accrued expenses (1,069) (2,518)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,387 1,056
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (1,334) (970)
Net purchase of short-term and long-term
marketable securities (1,685) (4,429)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (3,019) (5,399)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee
stock purchase plan 102 332
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 102 332
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 470 (4,011)
Cash and cash equivalents, beginning of period 14,724 17,315
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,194 $ 13,304
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<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 second quarter and six months ended
June 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 second quarter and
six months ended June 30, 1999 and 1998 are foreign currency
translation adjustments. Comprehensive income is not separately
reported, as amounts were not significant.
6
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3. SUBSEQUENT EVENTS
In July, 1999 the Company completed its acquisition of Mijenix
Corporation. The purchase price consisted of $6 million in cash and
215,345 shares of its common stock. The agreement also contained an
earnout whereby additional consideration will be paid if certain
financial goals are met. See the Company's Report on Form 8-K filed
July 27, 1999 for more information.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
DATA RECOVERY SERVICES AND PRODUCTS:
Data recovery services and products revenues for the second quarter of 1999
increased 8% compared to the second quarter of 1998. For the six months ended
June 30, 1999, data recovery services and products revenues increased 4%. Data
recovery services and products revenues consists of the following:
Three Months Six Months
Ended June 30 Ended June 30
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
Data recovery lab services $ 5,896 $ 6,518 $11,979 $13,274
Remote data recovery services 615 185 950 300
Data recovery products 850 -- 1,183 --
Computer evidence services 446 532 846 866
------- ------- ------- -------
Total data recovery services
and products revenues $ 7,807 $ 7,235 $14,958 $14,440
======= ======= ======= =======
SOFTWARE:
Software revenues for the second quarter of 1999 decreased 31% compared to the
second quarter of 1998. For the six months ended June 30, 1999, software
revenues decreased 29% compared to the first six months of 1998. While our
primary software product continues to contribute strong operating margins,
downward pricing pressure continues from our main customers.
GROSS MARGINS
DATA RECOVERY SERVICES AND PRODUCTS:
Gross margin on data recovery services and products revenues for the second
quarter and six months ended June 30, 1999 were approximately 73% and 74%,
respectively compared to 80% and 81% for the comparable periods of 1998. The
decrease is due primarily to the inclusion of amortization of capitalized
software related to the TIRAMISU(TM) product line and to a lesser degree,
increased engineering labor costs.
SOFTWARE:
Gross margin on software revenues for the second quarter and six months ended
June 30, 1999 were 86% and 83%, respectively, compared to 84% and 83% for the
comparable periods of 1998.
8
<PAGE>
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT:
Research and development expenses for the second quarter of 1999 decreased 8%
compared to the second quarter of 1998 and decreased 10% in the first six months
of 1999 compared to the same period of 1998. As a percentage of revenues,
research and development expenses were 16% and 17% for the second quarter and
six months ended June 30, 1999, respectively, compared to 18% for the comparable
periods of 1998. The expected decrease is in line with the Company's plans to
focus research and development dollars more precisely.
SALES AND MARKETING:
Sales and marketing expenses for the second quarter of 1999 increased 1%
compared to the second quarter of 1998 and increased 7% in the first six months
of 1999 compared to the same period of 1998. As a percentage of revenues, sales
and marketing expenses were 24% and 25% for the second quarter and six months
ended June 30, 1999, respectively, compared to 24% and 23% for the comparable
periods of 1998.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the second quarter of 1999 increased 4%
compared to the second quarter of 1998 and decreased 1% in the first six months
of 1999 compared to the first six months of 1998. As a percentage of revenues,
general and administrative expenses were 20% and 19% for the second quarter and
six months ended June 30, 1999, respectively, compared to 19% for the comparable
periods of 1998.
INTEREST AND OTHER INCOME
The decrease in interest and other income for the second quarter and six months
is due principally to exchange losses resulting from currency fluctuations in
the value of the Euro against the US Dollar.
PROVISION FOR INCOME TAXES
For the second quarter and six months ended June 30, 1999, the Company provided
for taxes at an effective rate of 33%. 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 second quarter and
six months ended June 30, 1999 and 1998 are due to changes in net income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operations was $3.4 million and $1.1 million for the six
months ended June 30, 1999 and 1998, respectively. Cash provided by and used in
investment activities was primarily for the purchase of furniture and equipment
and the purchase and sale of short-term and long-term marketable securities.
9
<PAGE>
The Company has invested its cash principally in high-grade taxable and tax
exempt government securities. As of June 30, 1999, $4.1 million are classified
as long-term, with the remaining amount classified as cash and cash equivalents
or short-term marketable securities.
In July, 1999 the Company completed its acquisition of Mijenix Corporation. The
purchase price consisted of $6 million in cash and 215,345 shares of its common
stock. The agreement also contained an earnout whereby additional consideration
will be paid if certain financial goals are met. See the Company's Report on
Form 8-K filed July 27, 1999 for more information.
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 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 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 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 June
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. 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
10
<PAGE>
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.
11
<PAGE>
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
The Annual Meeting of Stockholders was held at Hennepin
Technical College Auditorium, 9200 Flying Cloud Drive, Eden
Prairie, Minnesota, on May 20, 1999. The stockholders took the
following actions:
(a). The stockholders elected six directors to serve for one-year
terms. The stockholders present in person or by proxy cast
the following numbers of votes in connection with the
election of directors, resulting in the election of all
nominees:
Votes
Votes For Withheld
--------- --------
Michael W. Rogers 8,778,788 626,409
John E. Pence 8,826,278 578,919
Gary S. Stevens 8,779,388 625,809
Roger D. Shober 8,822,708 582,489
Robert M. White, Ph.D. 8,778,268 626,929
Lee B. Lewis 8,822,828 582,369
(b). The stockholders approved the amendment of the Company's
1996 Stock Incentive Plan to increase the number of shares
reserved for issuance under the Plan and permit compliance
with IRC Section 162(m). 8,619,096 votes were cast for the
resolution; 766,246 votes were cast against the resolution;
and shares representing 19,855 votes abstained.
(c). The stockholders ratified the appointment of Grant Thornton
LLP as the Company's independent auditors for fiscal 1999.
9,379,932
12
<PAGE>
votes were cast for the resolution; 11,680 votes were cast
against the resolution; and shares representing 13,585 votes
abstained.
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
Form 8-K was filed on July 27, 1999 relating to the
acquisition of Mijenix Corporation.
13
<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: August 12, 1999 By:
/s/ Michael W. Rogers
------------------------------------
Michael W. Rogers
Chairman and Chief Executive Officer
Date: August 12, 1999 By:
/s/ Thomas P. Skiba
------------------------------------
Thomas P. Skiba
Vice President & Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30,
1999
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 15,194
<SECURITIES> 17,142
<RECEIVABLES> 3,808
<ALLOWANCES> 532
<INVENTORY> 70
<CURRENT-ASSETS> 37,380
<PP&E> 13,056
<DEPRECIATION> 8,699
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<CURRENT-LIABILITIES> 2,631
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0
0
<COMMON> 97
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<TOTAL-LIABILITY-AND-EQUITY> 47,459
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<TOTAL-REVENUES> 17,475
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<OTHER-EXPENSES> 10,695
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