<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File No. 000-21375
ONTRACK DATA INTERNATIONAL, INC.
(Exact name of small 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, EDEN 55346
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 No X
----- -----
Number of shares of Common Stock, $.01 par value, outstanding as of
November 27,1996 9,785,924
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
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ONTRACK DATA INTERNATIONAL, INC.
INDEX
PART 1. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of
September 30, 1996 (unaudited) and
December 31, 1995 3
Consolidated Condensed Statements of Income (unaudited)
for the three months and nine months ended September 30, 1996
and 1995 4
Consolidated Condensed Statements of Cash Flows
(unaudited) for the nine months ended September 30, 1996
and 1995 5
Notes to consolidated condensed financial statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
( IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS )
<TABLE>
<CAPTION>
September 30, 1996
--------------------------
ASSETS December 31, 1995 Actual Pro-Forma
----------------- ----------- -----------
(Unaudited) (Unaudited)
(Note 2)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $2,028 $3,401 $3,401
Accounts receivable, net 1,410 2,426 2,426
Prepaid expenses and other current assets 1,000 895 895
--------- --------- ---------
Total Current Assets 4,438 6,722 6,722
Furniture and equipment, net 2,162 3,473 3,473
Other assets 261 231 231
--------- --------- ---------
TOTAL ASSETS $6,861 $10,426 $10,426
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $64 $68 $68
Accounts payable 563 939 939
Accrued expenses 915 1,929 1,929
--------- --------- ---------
Total current liabilities 1,542 2,936 2,936
Long-term debt, less current portion 211 161 161
--------- --------- ---------
TOTAL LIABILITIES 1,753 3,097 3,097
Convertible redeemable preferred stock 5,231 5,461 -
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock ( 6,000,000 shares issued and outstanding at
December 31, 1995, 6,102,674 actual at September 30, 1996 60 61 76
and 7,602,674 pro-forma).
Additional paid-in capital - 264 5,710
Cumulative translation adjustment 34 30 30
Retained earnings (accumulated deficit) (217) 1,513 1,513
--------- --------- ---------
Total shareholders' equity (deficit) (123) 1,868 7,329
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $6,861 $10,426 $10,426
--------- --------- ---------
--------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
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ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
( IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS )
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Services $3,185 $5,067 $8,303 $13,171
Software 1,380 1,604 3,448 5,402
---------- ---------- ---------- ----------
TOTAL REVENUES 4,565 6,671 11,751 18,573
COST OF REVENUES:
Services 517 666 1,390 1,861
Software 274 433 815 1,366
---------- ---------- ---------- ----------
TOTAL COST OF REVENUES 791 1,099 2,205 3,227
---------- ---------- ---------- ----------
GROSS MARGIN 3,774 5,572 9,546 15,346
OPERATING EXPENSES:
Research and development 849 1,365 2,130 3,575
Sales and marketing 1,253 1,755 3,011 4,948
General and administrative 748 1,444 1,899 3,750
---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 2,850 4,564 7,040 12,273
---------- ---------- ---------- ----------
OPERATING INCOME 924 1,008 2,506 3,073
INTEREST AND OTHER INCOME 37 32 94 84
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 961 1,040 2,600 3,157
PROVISION FOR INCOME TAXES 378 395 1,008 1,200
---------- ---------- ---------- ----------
NET INCOME $583 $645 $1,592 $1,957
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PRO FORMA NET INCOME PER SHARE $0.07 $0.08 $0.20 $0.25
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE 7,794,457 7,794,457 7,794,457 7,794,457
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
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ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
( IN THOUSANDS )
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1995 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $1,592 $1,957
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 483 939
Changes in operating assets and liabilities
Accounts receivable (4) (1,016)
Prepaid expenses and other current assets (403) 105
Accounts payable 375 376
Accrued expenses 1,013 1,015
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,056 3,376
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (1,193) (2,254)
Other assets - 30
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,193) (2,224)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principle payments on long-term debt (43) (47)
Proceeds from exercise of stock options - 264
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (43) 217
EFFECT OF EXCHANGE RATES ON CASH (7) 4
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,813 1,373
Cash and cash equivalents, beginning of period 2,024 2,028
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,837 $3,401
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
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ONTRACK DATA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
ONTRACK Data International, Inc. (the "Company") provides data recovery
services, 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, DC.; London, England and Stuttgart,
Germany.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited September 30, 1995 and 1996 financial statements, included
herein, have been prepared by the Company. The information furnished in
the unaudited financial statements includes all adjustments, consisting
only of normal recurring accruals, which are, in the opinion of management,
necessary for a fair presentation of such financial statements.
PRO FORMA BALANCE SHEET (UNAUDITED)
As a result of the public offering of common stock by the Company on
October 21, 1996, all of the Convertible Redeemable Preferred Stock
outstanding at the closing date was converted into shares of common stock.
The unaudited pro forma balance sheet as of September 30, 1996, has been
adjusted to reflect the conversion of outstanding Convertible Redeemable
Preferred Stock at September 30, 1996 into 1,500,000 shares of common
stock.
UNAUDITED PRO FORMA NET INCOME PER SHARE
Unaudited pro forma net income per share is based on the unaudited pro
forma weighted average number of shares of common stock and common
equivalent shares outstanding for the period. The unaudited pro forma
weighted average number of shares includes the conversion of the Company's
Convertible Redeemable Preferred Stock into 1,500,000 shares of common
stock effective January 1, 1995. Because of the significant impact of the
conversion on the Company's capital structure and earnings per share,
historical earnings per share has been excluded from the financial
statements. Pursuant to certain Securities and Exchange Commission (SEC)
Staff Accounting Bulletins, options granted with exercise prices below the
initial public offering (IPO) price during the 12-month period preceding
the date of the initial filing of the Registration Statement have been
included in the calculation of net income per share, using the treasury
stock method based on the IPO price, as if the options were outstanding for
all prior periods presented.
6
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3. SHAREHOLDERS' EQUITY
On August 6, 1996, the Company's Board of Directors authorized a 2-for-1
stock split of the issued and outstanding common stock of the Company, in
the form of a 100% stock dividend, effective August 19, 1996. All
references to common stock amounts, shares and per share data included in
the financial statements and related notes have been adjusted to give
retroactive effect to such split.
Effective October 1, 1996, the Company's Articles of Incorporation were
amended to increase the authorized capital stock to 1,000,000 shares of
$.01 par value Preferred Stock and 25,000,000 shares of Common Stock. All
applicable share data included in the financial statements has been
adjusted to give retroactive effect to such authorization.
4. SUBSEQUENT EVENTS
On October 21, 1996, the Company made a public offering of 2,700,000 shares
of common stock, including 2,000,000 shares sold by the Company and 700,000
shares sold by selling shareholders at a price of $12.00 per share. On
October 30, 1996 the Company's underwriters exercised their over-allotment
option and purchased an additional 405,000 shares, 180,000 of which were
issued by the Company and 225,000 of which were sold by selling
shareholders. Total net proceeds to the Company, after deducting estimated
expenses of $450,000, were $23,878,800.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
TOTAL REVENUES
Total revenues for the third quarter of 1996 increased 46.1% compared to the
third quarter of 1995. For the nine months ended September 30, 1996, total
revenues increased 58.1% compared to the first nine months of 1995.
SERVICES:
Service revenues for the third quarter of 1996 increased 59.1% compared to the
third quarter of 1995. For the nine months ended September 30, 1996, services
revenues increased 58.6% compared to the first nine months of 1995. The
increases in both periods were due principally to an increase in the number of
data recovery jobs performed.
SOFTWARE:
Software revenues for the third quarter of 1996 increased 16.2% compared to the
third quarter of 1995. For the first nine months of 1996, software revenues
increased 56.7% compared to the first nine months of 1995. The increases for
the quarter and nine months are due principally to a continued increase in the
Company's OEM Disk Manager product sales. Also contributing to the increase in
the quarter were the release of the Japanese version of Ontrack Data Recovery
for Netware, and the release of DiscWizard by Seagate Technology, Inc.
DiscWizard is a customized Windows-based hard disk drive installation utility
which is being licensed exclusively to Seagate.
GROSS MARGINS
SERVICES:
Gross margins on services revenues as a percentage of services revenues for the
third quarter and nine months ended September 30, 1996 were approximately 86.9%
and 85.9%, respectively, compared to 83.8% and 83.3% for the comparable periods
of 1995. The improved gross margin percentages in 1996 were due principally to
a decline in the amount of engineering labor per data recovery job, resulting
from increased automation in the data recovery process as a result of the
Company's research and development activities.
SOFTWARE:
Gross margins on software revenues as a percentage of software sales for the
third quarter and nine months ended September 30, 1996 were 73.0% and 74.7%,
respectively, compared to 80.1% and 76.4% for the comparable periods of 1995.
The decrease in gross margin percentages in 1996 were due to lower margins on
non-royalty OEM sales caused by lower prices charged to the OEMs as well as
lower royalty rates on certain OEM sales due to customers earning unit volume
discounts.
8
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OPERATING EXPENSES
RESEARCH AND DEVELOPMENT:
Research and development expenses for the third quarter of 1996 increased 60.8%
compared to the third quarter of 1995 and increased 67.8% in the first nine
months of 1996 compared to the same period of 1995. These increases are due in
part to the addition of software developers and data recovery engineers who
perform research and development activities, as well as increased expenditures
in the 1996 period on development of a new process to provide diagnostic and
data recovery services on a remote basis. As a percentage of revenues, research
and development expenses were 20.4% and 19.2% of revenues for the third quarter
and nine months ended September 30, 1996, respectively, compared to 18.6% and
18.1% of revenues for the comparable periods of 1995. Research and development
expenses, and such expenses as a percentage of revenues, may fluctuate in the
future as the Company identifies and responds to such market opportunities as
remote data recovery services, or as necessary to respond to new technologies
that pose challenges in the data recovery business.
SALES AND MARKETING:
Sales and marketing expenses increased 40.1% for the third quarter of 1996
compared to the third quarter of 1995. For the nine months ended September 30,
1996, sales and marketing expenses increased 64.3% compared to the first nine
months of 1995. As a percentage of revenues, sales and marketing expenses were
26.3% and 26.6% for the third quarter and nine months ended September 30, 1996,
respectively, compared to 27.4% and 25.6% for the comparable periods of 1995.
The increases in sales and marketing dollars are due principally to the
compensation and advertising costs associated with generating increased revenue
as well as costs associated with hiring additional personnel who are devoted to
expanding the Company's strategic relationships with storage media
manufacturers, third party maintenance providers and other revenue referral
sources.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the third quarter and nine months ended
September 30, 1996 increased 93.0% and 97.5% over the comparable 1995 periods.
The increases are principally due to increased compensation and related costs
resulting from new personnel at manager and executive levels who were added in
the second quarter of 1996 to support the Company's growth strategy, and to
start-up costs being incurred in the third quarter as the Company prepared for
the opening of the Stuttgart, Germany office.
PROVISION FOR INCOME TAXES:
For the three and nine month periods ended September 30, 1996, the Company
provided for taxes at its anticipated effective rate for the year of 38%.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operations was $3.4 million and $3.1 million for the nine
months ended September 30, 1996 and 1995, respectively. The increase in cash
generated from operations was due principally to increased earnings.
Cash used in investment activities was primarily for furniture and equipment.
Additions to furniture and equipment were $1.2 million and $2.3 million in the
nine months ended September 30, 1995 and 1996, respectively. The increase in
capital expenditures was caused by the Company's growth, including opening new
offices and purchasing equipment for its expanded staff. The Company expects
capital expenditures to increase over the next several years as it expands its
current facilities and opens facilities in new domestic and international
locations.
In October, the Company completed an initial public offering which resulted in
net proceeds to the Company of $23,878,800. The net proceeds to the Company
from this offering will be used for working capital and general corporate
purposes. A portion of the net proceeds may also be used to open additional
offices, or for investments in or acquisitions of complementary businesses,
products or technologies, although the Company does not have any present
commitments, agreements or understandings for any such investments or
acquisitions. The Company expects that these proceeds along with cash generated
from its operations will be adequate to meet its capital needs for the
foreseeable future.
FORWARD-LOOKING STATEMENTS
Information included in this Form 10-QSB which uses forward-looking terminology
such as "may," "will," "expect," "plan," "intend," "anticipate," "estimate," or
"continue" or other variations thereon constitutes forward-looking information.
The factors set forth below and other risk factors included in the Company's
Prospectus dated October 21, 1996 constitute cautionary statements identifying
important factors with respect to such forward looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements: (i) the computer
industry is characterized by rapid technological changes and frequent
introductions of new enhanced products and the Company must constantly adapt its
data recovery techniques, its data recovery hardware and software tools and its
commercial software products to keep pace with these technological changes; (ii)
future technological developments in computer operating systems, automatic data
backup systems and other data protection techniques have the potential to
eliminate or reduce the risk of data loss; (iii) the Company has experienced,
and expects to continue experiencing, rapid growth and there can be no assurance
that the Company will manage its growth effectively; and (iv) the Company
depends to a large degree on its ability to attract and retain technical
personnel, and on the efforts and abilities of its three founders and other
management personnel.
10
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ONTRACK DATA INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
On October 25, 1996, the Company's 3,000 shares of
outstanding Convertible Redeemable Preferred Stock were
converted into an aggregate of 1,500,000 shares of
Common Stock and the Company's Articles of
Incorporation were amended and restated to eliminate
all references to Convertible Redeemable Preferred
Stock.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to an Action in Writing Taken in Lieu of a
Meeting effective September 20, 1996, the shareholders
and Board of Directors of the Company unanimously
approved the following items:
A. Amended the Company's Articles of Incorporation to
(i) increase the number of authorized shares of
Common stock from 10,000,000 shares to 25,000,000
shares and (ii) authorize the issuance of
1,000,000 shares of undesignated preferred stock.
B. Amended and restated the Company's Articles of
Incorporation to eliminate all references to the
Company's Convertible Redeemable Preferred Stock,
which Amended and Restated Articles were to be
effective upon the first closing of the Company's
initial public offering.
C. Adopted the Company's 1996 Stock Incentive Plan
and the Company's Employee Stock Purchase Plan.
11
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D. Adopted the Company's Amended and Restated Bylaws.
E. Ratified all prior acts made by the officers and
directors of the Company on behalf of the Company.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None
12
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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: November 27, 1996 By: /s/ Michael W. Rogers
-----------------------------------
Michael W. Rogers
Chairman and Chief Executive
Officer
Date: November 27, 1996 By: /s/ Thomas P. Skiba
-----------------------------------
Thomas P. Skiba
Vice President & Chief Financial
Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS OF AND FOR
THE PERIOD OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,401
<SECURITIES> 0
<RECEIVABLES> 2,426
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,722
<PP&E> 7,044
<DEPRECIATION> (3,571)
<TOTAL-ASSETS> 10,426
<CURRENT-LIABILITIES> 2,936
<BONDS> 0
0
0
<COMMON> 76
<OTHER-SE> 7,253
<TOTAL-LIABILITY-AND-EQUITY> 10,426
<SALES> 18,573
<TOTAL-REVENUES> 18,573
<CGS> 3,227
<TOTAL-COSTS> 3,227
<OTHER-EXPENSES> 12,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,157
<INCOME-TAX> 1,200
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,957
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0
</TABLE>
