<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 March 31, 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
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Number of shares of Common Stock, $.01 par value, outstanding as of
April 30, 1997 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
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Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of
March 31, 1997 (unaudited) and
December 31, 1996 3
Consolidated Condensed Statements of Income (unaudited)
for the three months ended March 31, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows
(unaudited) for the three months ended March 31, 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 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS March 31, 1997 December 31, 1996
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(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 20,654 $ 22,684
Accounts receivable, net 2,846 2,499
Prepaid expenses and other current assets 1,257 1,244
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Total current assets 24,757 26,427
Furniture and equipment, net 3,712 3,733
Other assets 589 618
Marketable securities 8,299 5,857
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TOTAL ASSETS $ 37,357 $ 36,635
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 71 $ 69
Accounts payable 714 579
Accrued expenses 2,702 3,439
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Total current liabilities 3,487 4,087
Long-term debt, less current portion 125 142
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TOTAL LIABILITIES 3,612 4,229
SHAREHOLDERS' EQUITY:
Common stock ( 9,797,455 and 9,789,240 shares issued and
outstanding at March 31, 1997 and December 31, 1996, respectively) 98 98
Additional paid-in capital 29,697 29,599
Cumulative translation adjustment (2) 33
Retained earnings 3,952 2,676
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Total shareholders' equity 33,745 32,406
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,357 $ 36,635
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</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 MARCH 31,
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1997 1996
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<S> <C> <C>
REVENUES:
Services $ 6,112 $ 4,339
Software 1,958 1,174
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TOTAL REVENUES 8,070 5,513
COST OF REVENUES:
Services 946 569
Software 315 319
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TOTAL COST OF REVENUES 1,261 888
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GROSS MARGIN 6,809 4,625
OPERATING EXPENSES:
Research and development 1,488 1,045
Sales and marketing 1,799 1,519
General and administrative 1,809 872
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TOTAL OPERATING EXPENSES 5,096 3,436
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OPERATING INCOME 1,713 1,189
INTEREST AND OTHER INCOME 218 14
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INCOME BEFORE INCOME TAXES 1,931 1,203
PROVISION FOR INCOME TAXES 686 458
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NET INCOME $ 1,245 $ 745
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NET INCOME PER SHARE (PRO-FORMA NET INCOME
PER SHARE FOR THREE MONTHS ENDED MARCH 31, 1996) $ 0.12 $ 0.10
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WEIGHTED AVERAGE SHARES USED IN
COMPUTATION OF NET INCOME PER SHARE 10,096,057 7,794,457
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</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>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 1,245 $ 745
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 425 250
Changes in operating assets and liabilities:
Accounts receivable (347) (329)
Prepaid expenses and other assets (15) (107)
Accounts payable and accrued expenses (602) 945
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NET CASH PROVIDED BY OPERATING ACTIVITIES 706 1,504
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment (404) (757)
Purchases of marketable securities (2,442) -
Other 29 -
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NET CASH USED IN INVESTING ACTIVITIES (2,817) (757)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (17) (23)
Proceeds from exercise of stock options and employee
stock purchase plan 98 48
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NET CASH PROVIDED BY FINANCING ACTIVITIES 81 25
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,030) 772
Cash and cash equivalents, beginning of period 22,684 2,028
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,654 $2,800
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</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; Washington, DC.; London, England and Stuttgart,
Germany.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited March 31, 1996 and 1997 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.
NET INCOME PER SHARE
Net income per share for the quarter ended March 31, 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 quarter ended March 31, 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 March 31, 1996 income statement.
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 THREE MONTHS ENDED MARCH 31, 1996 AND 1997
TOTAL REVENUES
Total revenues for the first quarter of 1997 increased 46.4% compared to the
first quarter of 1996. Of the Company's first quarter 1997 revenues,
approximately 16.1% were attributable to the Company's European operations,
compared to 16.1% in the first quarter of 1996.
SERVICES:
Service revenues for the first quarter of 1997 increased 40.9% compared to
the first quarter of 1996. The increase was due principally to three
factors: (1) an increase in the number of data recovery jobs performed in the
United States; (2) additional revenue generated by the Company's Stuttgart,
Germany office which was opened in November, 1996, and (3) an increase in
revenue from the Company's Computer Evidence Services which was launched in
mid-1996.
SOFTWARE:
Software revenues for the first quarter of 1997 increased 66.8% compared to
the first quarter of 1996. The increase was due principally to higher sales
of Disk Manager software to existing hard drive original equipment
manufacturers (OEM's) through royalty arrangements. Also contributing to the
increase were royalty revenues from Seagate Technology Inc.'s ("Seagate")
DiscWizard software product. DiscWizard is a customized Windows-based hard
disk drive installation utility which the Company developed and has been
licensing exclusively to Seagate since the third quarter of 1996. Because
software revenues are derived principally from sales through OEM's, they are
difficult to predict. The Company does not expect software revenues to
continue at the volume experienced in the first quarter of 1997.
GROSS MARGINS
SERVICES:
Gross margins on service revenues as a percentage of service revenues for the
first quarter of 1997 were approximately 84.5%, compared to 86.9% for the
comparable period of 1996. The decrease in gross margin percentages in 1997
was due principally to increased engineering compensation and facility costs.
Since the first quarter of 1996, the Company has opened a new data recovery
facility in Stuttgart, Germany and has been adding additional engineering
staff in its other locations to support the expected growth in its data
recovery service revenue.
7
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SOFTWARE:
Gross margins on software revenues as a percentage of software sales for the
first quarter of 1997 were approximately 83.9%, compared to 72.8% for the
comparable period of 1996. The increased percentage was due to higher OEM
royalty sales which 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 first quarter of 1997 increased
42.3% compared to the first quarter 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 on
development of a new process to provide diagnostic and data recovery services
on a remote basis. Research and development expenses were 18.4% of revenues
for the first quarter of 1997 compared to 19.0% of revenues for the
comparable period 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 increased 18.4% for the first quarter of 1997
compared to the first quarter of 1996. The increase in sales and marketing
dollars is due principally to compensation costs associated with generating
increased revenue. As a percentage of revenues, sales and marketing expenses
were 22.3% for the first quarter of 1997, compared to 27.6% for the
comparable period of 1996. The decreased percentage is due principally to two
factors: (1) the increase in software royalty revenue, which has minimal
related sales and marketing expenses and (2) certain advertising programs
which took place in the first quarter of 1996 are scheduled for later
quarters in 1997.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the first quarter of 1997 increased
107.5% compared to the first quarter of 1996. As a percentage of revenues,
general and administrative expenses were 22.4% for the first quarter of 1997
compared to 15.8% for the comparable period of 1996. The increases in
general and administrative dollars and as a percent of revenue 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
opened in November, 1996.
8
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INTEREST AND OTHER INCOME
The increase in interest and other income is a result of increased cash and
marketable securities balances, primarily due to the Company's initial public
offering completed in October, 1996.
PROVISION FOR INCOME TAXES:
For the first quarter of 1997, the Company provided for taxes at an effective
rate of 35.5% compared to 38.1% in the first quarter of 1996. The decrease
is due principally to the cash received from the Company's initial public
offering being invested in tax exempt securities.
NET INCOME PER SHARE
Net income per share for the first quarter of 1997 increased 20.0% to $0.12
from $0.10 in the first quarter of 1996. The increase is due to a
combination of a 67.1% increase in net income offset by a 29.5% increase in
weighted average shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operations was $706,000 and $1.5 million for the first
quarter of 1997 and 1996, respectively. The decrease was due principally to
a combination of increased first quarter 1997 earnings offset by the timing
of the payment of certain accrued expenses.
Cash used in investment activities was primarily for furniture and equipment.
Additions to furniture and equipment were $404,000 and $757,000 in the first
quarter of 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, $8.3 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
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) Report on Form 8-K
None
10
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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: May 12, 1997 By: /s/ Michael W. Rogers
---------------------------------------
Michael W. Rogers
Chairman and Chief Executive Officer
Date: May 12, 1997 By: /s/ Thomas P. Skiba
---------------------------------------
Thomas P. Skiba
Vice President & Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997, 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> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,077
<SECURITIES> 8,577
<RECEIVABLES> 3,648
<ALLOWANCES> (802)
<INVENTORY> 134
<CURRENT-ASSETS> 24,757
<PP&E> 8,111
<DEPRECIATION> 4,399
<TOTAL-ASSETS> 37,357
<CURRENT-LIABILITIES> 3,487
<BONDS> 125
0
0
<COMMON> 98
<OTHER-SE> 33,648
<TOTAL-LIABILITY-AND-EQUITY> 37,357
<SALES> 1,958
<TOTAL-REVENUES> 8,070
<CGS> 315
<TOTAL-COSTS> 1,261
<OTHER-EXPENSES> 5,096
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 1,931
<INCOME-TAX> 686
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,245
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0
</TABLE>
