<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended SEPTEMBER 30, 1996
OR
[ ] 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: 000-26222
ONTRAK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0074302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1010 RINCON CIRCLE, SAN JOSE, CA 95131
(Address of principal executive offices) (Zip code)
(408) 577-1010
(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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding as of October 31, 1996
----- -----------------------------------------
COMMON STOCK 7,530,915
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ONTRAK SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
--------
Condensed Consolidated Statement of Operations for
the Quarters Ended September 30, 1996 and 1995. . . . . 3
Condensed Consolidated Balance Sheet as of
September 30, 1996 and June 30, 1996 . . . . . . . . . 4
Condensed Consolidated Statement of Cash Flows for
the Quarters Ended September 30, 1996 and 1995 . . . . . 5
Notes to Condensed Consolidated Financial Statements . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONTRAK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Quarter Ended
September 30,
------------------
1996 1995
------- -------
Net revenue $16,487 $10,502
Cost of revenue 7,893 5,013
------- -------
Gross profit 8,594 5,489
------- -------
Operating expenses:
Research, development and engineering 4,605 2,521
Selling, general and administrative 2,682 1,885
------- -------
Total operating expenses 7,287 4,406
------- -------
Income from operations 1,307 1,083
Interest and other income, net 390 326
------- -------
Income before provision for income taxes 1,697 1,409
Provision for income taxes 559 493
------- -------
Net income $ 1,138 $ 916
------- -------
------- -------
Net income per share $ 0.14 $ 0.11
------- -------
------- -------
Weighted average common and
common equivalent shares 8,170 8,013
------- -------
------- -------
The accompanying notes are an integral part
of these condensed consolidated financial statements
3
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ONTRAK SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------ --------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $23,482 $24,217
Short term investments 11,212 12,372
Accounts receivable, net 11,005 8,918
Inventory 7,365 6,892
Prepaid expenses and other current assets 2,175 2,440
------- -------
Total current assets 55,239 54,839
Property and equipment, net 8,776 7,293
------- -------
$64,015 $62,132
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term obligations $ 283 $ 283
Accounts payable 3,885 3,124
Accrued liabilities 5,403 5,462
------- -------
Total current liabilities 9,571 8,869
------- -------
Long-term obligations, less current portion 1,102 1,173
------- -------
Shareholders' equity:
Common stock, no par value, 30,000 shares
authorized; 7,528 and 7,518 shares issued
and outstanding 46,780 46,666
Retained earnings 6,562 5,424
------- -------
Total shareholders' equity 53,342 52,090
------- -------
$64,015 $62,132
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
4
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ONTRAK SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended September 30,
---------------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flow from operating activities
Net income $ 1,138 $ 916
Adjustments to reconcile net income to
net cash used for operating activities:
Depreciation and amortization 660 221
Changes in assets and liabilities:
Accounts receivable (2,152) (1,730)
Inventory (612) (1,362)
Prepaid expenses and other current assets 181 723
Accounts payable 761 (449)
Accrued liabilities (59) (1,168)
------- -------
Net cash used for operating activities (83) (2,849)
------- -------
Cash used in investing activities:
Redemption of short-term investments 1,160 --
Investment in property and equipment (2,143) (544)
------- -------
Net cash used for investing activities (983) (544)
Cash flows from financing activities:
Repayments under long-term obligations (71) (227)
Net proceeds from issuance of
Common Stock in initial public offering -- 41,404
Proceeds from issuance of Common Stock 402 --
Redemption of Mandatorily Redeemable
Preferred Stock -- (3,450)
------- -------
Net cash provided by financing activities 331 37,727
------- -------
Net increase (decrease) in cash and cash equivalents (735) 34,334
Cash and cash equivalents:
Beginning of period 24,217 1,767
------- -------
End of period $23,482 $36,101
------- -------
------- -------
Supplemental disclosure of non-cash investing and
financing activities:
Conversion of Mandatorily Redeemable Preferred
Stock into Common Stock $ --- $ 3,072
------- -------
------- -------
Book value of assets exchanged for Common Stock $ 288 $ --
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
5
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ONTRAK SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The unaudited condensed consolidated financial information of OnTrak
Systems, Inc. (the "Company") furnished herein reflects all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to fairly state the Company's and its subsidiaries'
consolidated financial position, the results of their operations, and their
cash flows for the periods presented. These financial statements do not
contain all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. This Quarterly
Report on Form 10-Q should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1996. The consolidated
results of operations for the quarter ended September 30, 1996 are not
necessarily indicative of the results to be expected for any subsequent
quarter or for the entire year ending June 30, 1997.
(2) COMPONENTS OF INVENTORY
SEPT. 30, 1996 JUNE 30, 1996
-------------- -------------
Inventory: (in thousands)
Raw materials $3,050 $3,338
Work-in-process 3,918 3,481
Finished goods 397 73
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$7,365 $6,892
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(3) SPLIT OFF OF TELEPARTS SUBSIDIARY
In September 1996, the Company entered into an agreement to distribute all
of the shares of Teleparts International, Inc., its former wholly-owned
subsidiary, to the Company's former CEO in exchange for 30,000 shares of the
Company's common stock. The book value of the net assets of Teleparts at the
date of distribution was approximately $288,000 and the fair market value of
the 30,000 shares of the Company's common stock was approximately $420,000.
Because of the significant ownership in the Company by the former CEO
(approximately 9%, prior to the redemption), the transaction was recorded at
the book value of the assets exchanged and no gain was recorded.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed
in this Form 10-Q include forward-looking statements which are subject to a
number of risks and uncertainties that could cause the actual results to
differ materially from the statements made. These include, but are not
limited to, the matters discussed below and under "Item 7 - Future
Performance and Risk Factors" in the Company's Annual Report on Form 10-K for
the year ended June 30, 1996. These forward-looking statements represent the
Company's judgment as of the date of the filing of this 10-Q report. The
Company disclaims, however, any intent or obligation to update these
forward-looking statements.
OVERVIEW
The Company was incorporated in 1985 to provide third party sales of spare
parts for certain silicon wafer processing and semiconductor manufacturing
equipment. In 1990, the Company changed its focus and began developing a
wafer cleaning system. Sales of the Company's cleaning systems have
increased as new wafer processing requirements, such as CMP, have driven the
need for improved cleaning processes. As of June 30, 1996, the Company had
shipped over 300 cleaning systems to customers worldwide.
The Company has been undergoing a period of rapid growth. The Company has
significantly increased its operations to support increased revenues,
including the hiring of additional personnel, and has made substantial
investments in research, development and engineering to support product
development. The Company's expansion has resulted in significantly higher
operating expenses and the Company expects that its operating expenses will
continue to increase significantly.
The Company's CMP polishing system, the Aurora, is currently under
development. This development has resulted in a significant increase in
research, development, and engineering expenses and a corresponding decrease
in operating margins. There can be no assurance that the Company will not
experience difficulties or delays in developing the polishing system, that
such efforts will be successful or that the polishing system will satisfy
customer requirements or achieve market acceptance.
The Company's operating results have varied significantly, particularly on a
quarterly basis, as a result of a number of factors, including general
economic conditions affecting industry demand for semiconductor and
semiconductor equipment products; the timing and market acceptance of new
product introductions by the Company and its competitors; and the timing of
significant orders from and shipments to large customers. The Company's
operating results may fluctuate in the future as a result of these and other
factors, including continued acceptance of the Company's products, the
Company's success in developing and introducing new products, its product and
customer mix, the level of competition which it experiences, and its success
in completing development of and marketing its CMP polishing system under
development. The Company derives a substantial portion of its revenues from
the sale of a relatively small number of systems which range in purchase
price from approximately $150,000 to $525,000. As a result, a small
reduction in the number of systems shipped in a quarter could have a material
adverse effect on the Company's revenues and results of operations for that
quarter.
The Company's gross margins have been and will continue to be affected by a
variety of factors, including the mix and average selling prices of systems,
the mix of customers, the costs associated with new system introductions and
enhancements, and the customization of systems. In addition, sales to
international distributors in Europe and Japan are at discounted prices which
reduce gross margins. Gross margins for initial shipments of new products
are typically lower than those for mature products until volume manufacturing
is achieved due to the inefficiencies associated with the start-up of
manufacturing operations.
The Company's international sales are denominated in U.S. dollars, and an
increase or decrease in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less or more price competitive
in those markets and therefore affect sales to international customers.
During fiscal 1996 and 1995, approximately 32% and 27% of the Company's
revenues were attributable to sales for installation in semiconductor
fabrication facilities outside the United States.
7
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The market price of the Company's Common Stock has fluctuated since its
initial public offering in July 1995 and is subject to material fluctuation
in the future in response to a variety of factors, including: quarter to
quarter variations in operating results; announcements of developments
related to the Company's business; fluctuations in the Company's order
levels; general conditions in the semiconductor industry or the worldwide
economy; announcements of technological innovations; new products or product
enhancements by the Company or its competitors; developments relating to
patents or other intellectual property rights or disputes; and developments
in the Company's relationships with its customers, distributors and
suppliers. In addition, in recent years the stock market in general, and the
market for shares of small capitalization stocks in particular, has
experienced extreme price fluctuations which have often been unrelated to the
operating performance of affected companies. Such fluctuations could
adversely affect the market price of the Company's Common Stock.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues are derived primarily from system sales. Net
revenues for the quarter ended September 30, 1996 were $16.5 million, an
increase of 57% compared to net revenues of $10.5 million for the prior
year's comparable period. The increase was primarily due to higher unit sales
of the Company's post-CMP cleaning systems. System shipments for the quarter
ended September 30, 1996 increased by 36% over the comparable period in the
prior year.
International sales accounted for 39% of net revenues in the quarter ended
September 30, 1996, as compared to 36% for the prior year's comparable
period. The increase in the percentage of international sales was primarily
attributable to increased system shipments to customers in the Pacific Rim.
Sales to customers in the Pacific Rim increased to $3.0 million during the
quarter ended September 30, 1996, as compared to $1.0 million for the prior
year's comparable period. It is expected that the percentage of
international sales will continue to increase during the current year as
compared to the year ended June 30, 1996.
GROSS MARGIN. Gross margin was 52% in each of the quarters ended September
30, 1996 and 1995. The factors which affected gross margins were not
significantly different between the two periods.
RESEARCH, DEVELOPMENT, AND ENGINEERING. Research, development, and
engineering expenses increased to $4.6 million, or 28% of net revenues, for
the quarter ended September 30, 1996, from $2.5 million, or 24% of net
revenues, for the prior year's comparable period. The increase was primarily
attributable to the Company's continued development of a CMP polishing
system. It is anticipated that research, development, and engineering
expenses will remain at a relatively high percentage of revenues until the
polishing system is in commercial production.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative
expenses increased to $2.7 million, or 16% of net revenues, for the quarter
ended September 30, 1996, from $1.9 million, or 18% of net revenues, for the
prior year's comparable period. The increase in absolute dollars is
primarily due to increased selling and marketing activities as the Company
expands its sales and marketing organization. However, these expenses
decreased as a percentage of net revenues due to a higher growth in sales.
INCOME TAXES. The Company's effective tax rate for the quarter ended
September 30, 1996 was 33%, as compared to 35% for the comparable period in
the prior year. The decrease was primarily attributable to the
reinstatement of the federal research and development credit and variations
in the Company's worldwide sales mix.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended September 30, 1996, cash and cash equivalents
decreased by $0.7 million, from $24.2 million at June 30, 1996 to $23.5
million at September 30, 1996. This decrease consisted primarily of $1.0
million used for investing activities, offset by $0.3 million provided by
financing activities. The cash used for investing activities of $1.0 million
represents the investment of $2.1 million in property, plant, and equipment
during the period, offset by the net redemption of short-term investments of
approximately $1.1 million.
Changes in operating assets and liabilities consisted primarily of increases
of $2.2 million in accounts receivable and $0.6 million in inventory, which
reflects the Company's increased manufacturing activities and sales levels.
The Company expects future inventory levels to fluctuate with anticipated
sales levels and believes that because of the relatively long manufacturing
cycle of its systems, its investment in inventory will continue to represent
a significant portion of working capital. As a result of such investment in
inventories, the Company may be subject to an increased risk of inventory
obsolescence, which could have a material adverse effect on the Company's
operating results.
At September 30, 1996, the Company had working capital of $45.7 million, with
its primary source of liquidity provided by $34.7 million in cash and
short-term investments. Additionally, the Company has a $10.0 million
working capital line of credit agreement that expires in November 1996, which
the Company intends to renew for an additional one year period. The Company
has no outstanding borrowings under the line of credit. The Company believes
that its existing cash and cash equivalents, anticipated cash flow from
operations, and funds available under the line of credit agreement will be
sufficient to meet the Company's cash requirements during the next twelve
months. However, after that period, depending upon its rate of growth and
profitability, the Company may require additional equity or debt financing to
meet its working capital and fixed asset requirements. There can be no
assurance that additional financing will be available when required or, if
available, will be on terms satisfactory to the Company.
9
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In April 1996, Homayoun Talieh, who was the Company's Vice President, CMP
Systems Division through September 1995, filed a demand for arbitration
pursuant to an employment agreement between the Company and Mr. Talieh.
Mr. Talieh seeks unspecified damages allegedly based on his employment contract
and upon allegations that he was wrongfully terminated. The initial
arbitration hearing was held in October 1996, and a second hearing has been
scheduled for November 1996. The Company intends to defend the action
vigorously, and believes that the outcome of the arbitration will not have a
material adverse effect on its financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
- None
(b) Reports on Form 8-K:
- Report dated September 18, 1996 - to announce the split off of
Teleparts International, Inc.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ONTRAK SYSTEMS, INC.
Date: November 8, 1996 By: /s/ Patrick C. O'Connor
-------------------------------
Patrick C. O'Connor
Title: Vice President-Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF ONTRAK SYSTEMS, INC. FOR THE
QUARTER ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 23,482
<SECURITIES> 11,212
<RECEIVABLES> 11,405
<ALLOWANCES> 400
<INVENTORY> 7,365
<CURRENT-ASSETS> 55,239
<PP&E> 11,236
<DEPRECIATION> 2,460
<TOTAL-ASSETS> 64,015
<CURRENT-LIABILITIES> 9,571
<BONDS> 0
0
0
<COMMON> 46,780
<OTHER-SE> 6,562
<TOTAL-LIABILITY-AND-EQUITY> 64,015
<SALES> 16,487
<TOTAL-REVENUES> 16,487
<CGS> 7,893
<TOTAL-COSTS> 15,180
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 1,697
<INCOME-TAX> 559
<INCOME-CONTINUING> 1,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,138
<EPS-PRIMARY> $0.14
<EPS-DILUTED> 0
</TABLE>
