<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 June 30, 1997
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 X No
-------- --------
Number of shares of Common Stock, $.01 par value, outstanding as of
August 1, 1997 9,808,566
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
June 30, 1997 (unaudited) and December 31, 1996 3
Consolidated Condensed Statements of Income (unaudited)
for the three months and six months ended June 30, 1997
and 1996 4
Consolidated Condensed Statements of Cash Flows
(unaudited) for the six months ended June 30, 1997
and 1996 5
Notes to consolidated condensed 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 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 AMOUNTS )
<TABLE>
<CAPTION>
ASSETS June 30, 1997 December 31, 1996
----------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 22,482 $ 22,684
Accounts receivable, net 2,447 2,499
Prepaid expenses and other current assets 1,549 1,244
----------------- -----------------
Total current assets 26,478 26,427
Marketable securities 8,129 5,857
Furniture and equipment, net 3,756 3,733
Other assets 537 618
----------------- -----------------
TOTAL ASSETS $ 38,900 $ 36,635
----------------- -----------------
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $867 $579
Accrued expenses 2,861 3,508
----------------- -----------------
Total current liabilities 3,728 4,087
Long-term debt 106 142
----------------- -----------------
TOTAL LIABILITIES 3,834 4,229
SHAREHOLDERS' EQUITY:
Common stock ( 9,808,566 and 9,789,240 shares issued and
outstanding at June 30, 1997 and December 31, 1996, respectively 98 98
Additional paid-in capital 29,779 29,599
Cumulative translation adjustment 22 33
Retained earnings 5,167 2,676
----------------- -----------------
Total shareholders' equity 35,066 32,406
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 38,900 $ 36,635
----------------- -----------------
----------------- -----------------
</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 June 30, Six Months Ended June 30,
--------------------------------- ---------------------------
1997 1996 1997 1996
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Services $ 6,079 $ 3,764 $ 12,191 $ 8,103
Software 2,066 2,624 4,024 3,798
-------------- -------------- ------------ ------------
TOTAL REVENUES 8,145 6,388 16,215 11,901
COST OF REVENUES:
Services 981 626 1,927 1,195
Software 391 614 706 933
-------------- -------------- ------------ ------------
TOTAL COST OF REVENUES 1,372 1,240 2,633 2,128
-------------- -------------- ------------ ------------
GROSS MARGIN 6,773 5,148 13,582 9,773
OPERATING EXPENSES:
Research and development 1,466 1,165 2,953 2,210
Sales and marketing 1,915 1,674 3,713 3,193
General and administrative 1,816 1,434 3,626 2,306
-------------- -------------- ------------ ------------
TOTAL OPERATING EXPENSES 5,197 4,273 10,292 7,709
-------------- -------------- ------------ ------------
OPERATING INCOME 1,576 875 3,290 2,064
INTEREST AND OTHER INCOME 285 38 502 52
-------------- -------------- ------------ ------------
INCOME BEFORE INCOME TAXES 1,861 913 3,792 2,116
PROVISION FOR INCOME TAXES 614 346 1,300 804
-------------- -------------- ------------ ------------
NET INCOME $ 1,247 $ 567 $ 2,492 $ 1,312
-------------- -------------- ------------ ------------
-------------- -------------- ------------ ------------
NET INCOME PER SHARE ( PRO-FORMA NET
INCOME PER SHARE FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 1996) $ 0.12 $ 0.07 $ 0.25 $ 0.17
-------------- -------------- ------------ ------------
-------------- -------------- ------------ ------------
WEIGHTED AVERAGE SHARES USED IN
COMPUTATION OF NET INCOME PER SHARE 10,129,467 7,794,457 10,111,130 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>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 2,492 $ 1,312
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 863 577
Changes in operating assets and liabilities:
Accounts receivable 52 (746)
Prepaid expenses and other assets (31) 136
Accounts payable and accrued expenses (646) 707
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,730 1,986
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (885) (1,228)
Purchase of marketable securities (2,272)
Other 80 29
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (3,077) (1,199)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (34) (31)
Proceeds from exercise of stock options and employee
stock purchase plan 179 265
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 145 234
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (202) 1,021
Cash and cash equivalents, beginning of period 22,684 2,028
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,482 $ 3,049
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
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ONTRACK DATA INTERNATIONAL, INC.
NOTES TO UNAUDITED 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; San Jose, California; Washington, DC.; London,
England and Stuttgart, Germany.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited June 30, 1997 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. These
financial statements should be read in conjunction with the most recent
audited financial statements and notes thereto included in the Company's
Form 10-KSB for the year ended December 31, 1996.
NET INCOME PER SHARE
Net income per share for the second quarter and six months ended June 30,
1997 is based on weighted average number of shares of common stock and
common equivalent shares outstanding for the period using the treasury
stock method.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share for the second quarter and six months ended
June 30, 1996 is based on the pro forma weighted average number of shares
of common stock and common equivalent shares outstanding for the period
using the treasury stock method. The 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,
1996. 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 June 30, 1996 income statements.
3. INITIAL PUBLIC OFFERING
The Company completed an initial public offering of shares of its common
stock in October, 1996 at a price of $12.00 per share. Net proceeds to the
Company from the offering were $23,849,000.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
TOTAL REVENUES
Total revenues for the second quarter of 1997 increased 27.5% compared to the
second quarter of 1996. For the six months ended June 30, 1997, total revenue
increased 36.2% compared to the first six months of 1996. Of the Company's
second quarter and the first six months' 1997 revenues, approximately 16.1% and
16.1%, respectively, were attributable to the Company's European operations,
compared to 13.1% and 14.5% in the second quarter and first six months of 1996.
SERVICES:
Service revenues for the second quarter of 1997 increased 61.5% compared to the
second quarter of 1996. For the six months ended June 30, 1997, service revenue
increased 50.5% compared to the first six months of 1996. The increases were
due principally to two factors: (1) an increase in the number of data recovery
jobs performed in the United States; and (2) additional revenue generated by the
Company's Stuttgart, Germany office which was opened in November, 1996.
SOFTWARE:
Software revenues for the second quarter of 1997 decreased 21.3% compared to the
second quarter of 1996. For the six months ended June 30, 1997, software
revenues increased 6.0% compared to the first six months of 1996.
Software revenues are derived from sales through original equipment
manufacturers (OEM's) for the bundling of Disk Manager software with the OEM's
storage media products. Accordingly, software revenues on a quarterly basis are
difficult to predict and can fluctuate based on the timing of the OEM's customer
shipments. In the first two quarters of 1997, software revenues have been
relatively stable, approximating $2.0 million each quarter. In the first two
quarters of 1996, software revenues were more volatile, totaling $1.2 million in
the first quarter and $2.6 million in the second quarter. Because of the
volatility in the market for storage media products, the Company does not expect
software revenues for the second half of 1997 to continue at the current levels.
GROSS MARGINS
SERVICES:
Gross margins on service revenues as a percentage of service revenues for the
second quarter and six months ended June 30, 1997 were approximately 83.9% and
84.2%, respectively, compared to 83.4% and 85.3% for the comparable periods of
1996.
7
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SOFTWARE:
Gross margins on software revenues as a percentage of software sales for the
second quarter and six months ending June 30, 1997 were approximately 81.1% and
82.5%, respectively, compared to 76.6% and 75.4% for the comparable periods of
1996. The increased margin percentage in 1997 was due to a higher percentage of
total software revenues from royalty arrangements vs. non-royalty software sales
as the royalty sales involve minimal costs to the Company. Future gross margins
in the software business will continue to be impacted by the mix of royalty
sales and non-royalty sales.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT:
Research and development expenses for the second quarter of 1997 increased 25.8%
compared to the second quarter of 1996 and increased 33.6% in the first six
months of 1997 compared to the same period of 1996. The increase is due to the
addition of software developers and data recovery engineers who perform research
and development activities, as well as increased expenditures directed towards
the development of a new process to provide data recovery services on a remote
basis. Research and development expenses as a percentage of revenues were 18.0%
and 18.2% for the second quarter and six months ending June 30, 1997,
respectively, compared to 18.2% and 18.6% of revenues for the comparable periods
of 1996. 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 for the second quarter of 1997 increased 14.4%
compared to the second quarter of 1996 and increased 16.3% in the first six
months of 1997 compared to the same period of 1996. As a percentage of
revenues, sales and marketing expenses were 23.5% and 22.9% for the second
quarter and six months ended June 30, 1997, respectively, compared to 26.2% and
26.8% for the comparable periods of 1996. The 1997 decreases in sales and
marketing expenses as a percentage of revenues are due principally to less
travel and entertainment expenses being incurred by the sales and marketing
personnel.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the second quarter of 1997 increased
26.6% compared to the second quarter of 1996 and increased 57.2% in the first
six months of 1997 compared to the same period of 1996. As a percentage of
revenues, general and administrative expenses were 22.3% and 22.4% for the
second quarter and six months ended June 30, 1997, respectively, compared to
22.4% and 19.4% for the comparable periods of 1996. The increases in general
and administrative dollars and as a percent of revenue for the first six months
of 1997 from the same
8
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periods in 1996 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. Also
contributing to the increase were costs related to the Stuttgart, Germany
office, which was not opened until November, 1996.
INTEREST AND OTHER INCOME
The increase in interest and other income is a result of higher cash and
marketable securities balances, primarily due to the Company's initial public
offering completed in October, 1996.
PROVISION FOR INCOME TAXES:
For the second quarter and six months ended June 30, 1997, the Company provided
for taxes at an effective rate of 33.0% and 34.3%, respectively, compared to
37.9% and 38.0% for the comparable periods of 1996. The rate reduction in 1997
is due principally to the cash received from the Company's initial public
offering being invested in tax exempt securities and, to a lesser extent, higher
anticipated credits for research and development expenditures.
NET INCOME PER SHARE
Net income per share for the second quarter and six months ended June 30, 1997
increased 71.4% and 47.1%, respectively, compared to the same periods of 1996.
The increases are due to higher net income, partially offset by increases in
weighted average shares outstanding resulting from the Company's initial public
offering in October, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operations was $2.7 million and $2.0 million for the six
months ended June 30, 1997 and 1996, respectively. Cash used in investment
activities was primarily for purchase of furniture and equipment. Additions to
furniture and equipment were $885,000 and $1.2 million in the six months ended
June 30, 1997 and 1996, respectively.
In October, 1996 the Company completed an initial public offering of its common
stock which resulted in net proceeds to the Company of $23.8 million. Pending
use, the Company has invested the net proceeds in tax exempt government
securities, $ 8.1 million of which are classified as long-term, with the
remaining proceeds classified as cash or cash equivalents.
FORWARD-LOOKING STATEMENTS
Please refer to the Management's Discussion and Analysis section of the 1996
Annual Report to Shareholders, incorporated by reference into the Company's Form
10-KSB report for the year ended December 31, 1996, for cautionary statements on
important factors to consider in evaluating the forward-looking statements
included in this Form 10-QSB.
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
The Annual Meeting of Stockholders was held at Eden Prairie
City Center, 8080 Mitchell Road, Eden Prairie, Minnesota, on
May 21, 1997. The stockholders took the following actions:
(a). The stockholders elected seven 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 9,548,997 2,485
John E. Pence 9,548,997 2,485
Gary S. Stevens 9,548,997 2,485
Roger D. Shober 9,548,997 2,485
Robert M. White, Ph.D. 9,548,997 2,485
Jacqueline C. Morby 9,548,897 2,585
Richard J. Runbeck 9,548,997 2,485
(b). The stockholders ratified the appointment of Price
Waterhouse LLP as the Company's independent auditors for
fiscal 1997. 9,550,217 votes were cast for the
resolution; 300 votes were cast against the resolution;
and shares representing 965 votes abstained.
10
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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
11
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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: August 7, 1997 By: /s/ Michael W. Rogers
____________________________________
Michael W. Rogers
Chairman and Chief Executive Officer
Date: August 7, 1997 By: /s/ Thomas P. Skiba
____________________________________
Thomas P. Skiba
Vice President & Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<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, 1997 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 18,487
<SECURITIES> 3,995
<RECEIVABLES> 3,237
<ALLOWANCES> 790
<INVENTORY> 104
<CURRENT-ASSETS> 26,478
<PP&E> 8,622
<DEPRECIATION> 4,866
<TOTAL-ASSETS> 38,900
<CURRENT-LIABILITIES> 3,728
<BONDS> 106
0
0
<COMMON> 98
<OTHER-SE> 34,968
<TOTAL-LIABILITY-AND-EQUITY> 38,900
<SALES> 4,024
<TOTAL-REVENUES> 16,215
<CGS> 706
<TOTAL-COSTS> 2,633
<OTHER-EXPENSES> 10,292
<LOSS-PROVISION> 35
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 3,792
<INCOME-TAX> 1,300
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,492
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0
</TABLE>
