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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, 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
incorporation or organization) Identification No.)
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
---- ----
Number of shares of Common Stock, $.01 par value, outstanding as of
November 3, 1997 9,831,387
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, 1997 (unaudited) and December 31, 1996 3
Consolidated Condensed Statements of Income (unaudited)
for the three months and nine months ended September 30,
1997 and 1996 4
Consolidated Condensed Statements of Cash Flows
(unaudited) for the nine months ended September 30, 1997
and 1996 5
Notes to consolidated condensed financial statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
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
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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>
September 30, 1997 December 31, 1996
------------------ -----------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 20,126 $ 22,684
Short-term investments 5,658 -
Accounts receivable, net 3,292 2,499
Prepaid expenses and other current assets 1,394 1,244
--------- ---------
Total current assets 30,470 26,427
Marketable securities 6,423 5,857
Furniture and equipment, net 3,928 3,733
Other assets 423 618
--------- ---------
TOTAL ASSETS $ 41,244 $ 36,635
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 743 $ 579
Accrued expenses 3,805 3,508
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Total current liabilities 4,548 4,087
Long-term debt 87 142
--------- ---------
TOTAL LIABILITIES 4,635 4,229
SHAREHOLDERS' EQUITY:
Common stock ( 9,819,487 and 9,789,240 shares
issued and outstanding at September 30, 1997
and December 31, 1996, respectively) 98 98
Additional paid-in capital 29,891 29,599
Cumulative translation adjustment (3) 33
Retained earnings 6,623 2,676
--------- ---------
Total shareholders' equity 36,609 32,406
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 41,244 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- --------- --------
<S> <C> <C> <C> <C>
REVENUES:
Services $ 7,197 $ 5,067 $ 19,388 $ 13,171
Software 1,795 1,604 5,819 5,402
---------- --------- ---------- ---------
TOTAL REVENUES 8,992 6,671 25,207 18,573
COST OF REVENUES:
Services 1,140 666 3,067 1,861
Software 352 433 1,058 1,366
---------- --------- ---------- ---------
TOTAL COST OF REVENUES 1,492 1,099 4,125 3,227
---------- --------- ---------- ---------
GROSS MARGIN 7,500 5,572 21,082 15,346
OPERATING EXPENSES:
Research and development 1,857 1,365 4,810 3,575
Sales and marketing 1,988 1,755 5,701 4,948
General and administrative 1,765 1,444 5,391 3,750
---------- --------- ---------- ---------
TOTAL OPERATING EXPENSES 5,610 4,564 15,902 12,273
---------- --------- ---------- ---------
OPERATING INCOME 1,890 1,008 5,180 3,073
INTEREST AND OTHER INCOME 282 32 784 84
---------- --------- ---------- ---------
INCOME BEFORE INCOME TAXES 2,172 1,040 5,964 3,157
PROVISION FOR INCOME TAXES 716 395 2,017 1,200
---------- --------- ---------- ---------
NET INCOME $ 1,456 $ 645 $ 3,947 $ 1,957
---------- --------- ---------- ---------
---------- --------- ---------- ---------
NET INCOME PER SHARE ( PRO-FORMA NET
INCOME PER SHARE FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996) $ 0.14 $ 0.08 $ 0.39 $ 0.25
---------- --------- ---------- ---------
---------- --------- ---------- ---------
WEIGHTED AVERAGE SHARES USED IN
COMPUTATION OF NET INCOME PER SHARE 10,223,914 7,794,457 10,145,163 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)
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 3,947 $ 1,957
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 1,387 939
Changes in operating assets and liabilities:
Accounts receivable (792) (1,016)
Prepaid expenses and other assets 23 105
Accounts payable and accrued expenses 422 1,395
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,987 3,380
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (1,583) (2,254)
Net purchase of marketable securities (6,224) -
Other 21 30
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (7,786) (2,224)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (51) (47)
Proceeds from exercise of stock options and employee
stock purchase plan 292 264
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 241 217
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,558) 1,373
Cash and cash equivalents, beginning of period 22,684 2,028
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,126 $ 3,401
-------- --------
-------- --------
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 September 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 third quarter and nine months ended
September 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 third quarter and nine months
ended September 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 September 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.
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4. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement No.
128, 'Earnings Per Share.' The Company is required to adopt the new
standard in the fourth quarter of 1997; earlier adoption is not
permitted. The Company expects that earnings per share computed under
the new standard will approximate earnings per share currently reported.
Financial Accounting Standard No. 130, 'Reporting Comprehensive Income,'
and Financial Accounting Standard No. 131, 'Disclosure About Segments of
an Enterprise and Related Information,' which are effective for financial
statements for both interim and annual periods beginning after December
15, 1997 will be adopted, as required, in 1998.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
TOTAL REVENUES
Total revenues for the third quarter of 1997 increased 34.8% compared to the
third quarter of 1996. For the nine months ended September 30, 1997, total
revenue increased 35.7% compared to the first nine months of 1996. Of the
Company's third quarter and the first nine months' 1997 revenues, approximately
19.6% and 17.3%, respectively, were attributable to the Company's European
operations, compared to 12.7% and 13.8% in the third quarter and first nine
months of 1996.
SERVICES:
Service revenues for the third quarter of 1997 increased 42.0% compared to the
third quarter of 1996. For the nine months ended September 30, 1997, service
revenue increased 47.2% compared to the first nine 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 the United Kingdom and (2)
additional revenue generated by the Company's Stuttgart, Germany office which
was opened in November, 1996.
SOFTWARE:
Software revenues for the third quarter of 1997 increased 11.9% compared to the
third quarter of 1996. For the nine months ended September 30, 1997, software
revenues increased 7.7% compared to the first nine 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. Further, the market for storage media products is
extremely volatile. 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 three quarters of 1997, software revenues have been
relatively stable, approximating $2.0 million in each of the first two quarters
and $1.8 million in the third quarter. In the first three quarters of 1996,
software revenues were more volatile, totaling $1.2 million in the first
quarter, $2.6 million in the second quarter and $1.6 million in the third
quarter.
8
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GROSS MARGINS
SERVICES:
Gross margins on service revenues as a percentage of service revenues for both
the third quarter and nine months ended September 30, 1997 were approximately
84.2% compared to 86.9% and 85.9%, respectively for the comparable periods of
1996. The decrease in gross margin percentages in 1997 was principally due to
increased engineering and facility costs.
SOFTWARE:
Gross margins on software revenues as a percentage of software sales for the
third quarter and nine months ending September 30, 1997 were approximately 80.4%
and 81.8%, respectively, compared to 73.0% and 74.7% 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 third quarter of 1997 increased 36.0%
compared to the third quarter of 1996 and increased 34.5% in the first nine
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 20.7%
and 19.1% or the third quarter and nine months ending September 30, 1997,
respectively, compared to 20.5% and 19.2% 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 third quarter of 1997 increased 13.3%
compared to the third quarter of 1996 and increased 15.2% in the first nine
months of 1997 compared to the same period of 1996. As a percentage of
revenues, sales and marketing expenses were 22.1% and 22.6% for the third
quarter and nine months ended September 30, 1997, respectively, compared to
26.3% and 26.6% for the comparable periods of 1996. The decrease in sales and
marketing expenses as a percentage of revenues is due to a change in the sales
and marketing strategy. The Company has decided to place greater emphasis on
public relations and communication campaigns for the purpose of increasing
awareness of the Company's data recovery capabilities, and less on direct
marketing. While the strategy is being developed, the amount expended on
9
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sales and marketing execution as a percent of revenue has declined in
comparison to 1996. The Company expects expenditures for sales and marketing
to increase in the fourth quarter of 1997 and throughout 1998.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the third quarter of 1997 increased
22.2% compared to the third quarter of 1996 and increased 43.8% in the first
nine months of 1997 compared to the same period of 1996. As a percentage of
revenues, general and administrative expenses were 19.6% and 21.4% for the third
quarter and nine months ended September 30, 1997, respectively, compared to
21.6% and 20.2% for the comparable periods of 1996. The decline in 1997's third
quarter percentage is due principally to the increased revenues for the period,
as many general and administrative costs do not vary directly with revenues.
The increased percentage for 1997's first nine months is due to the additional
infrastructure necessary to support being a public company.
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 and the cash flow generated from its
operations.
PROVISION FOR INCOME TAXES:
For the third quarter and nine months ended September 30, 1997, the Company
provided for taxes at an effective rate of 33.0% and 33.8%, respectively,
compared to 38.0% for both 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 third quarter and nine months ended September 30,
1997 increased 75.0% and 56.0%, 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 $5.0 million and $3.4 million for the nine
months ended September 30, 1997 and 1996, respectively. Cash used in investment
activities was primarily for purchase of furniture and equipment, which totaled
$1.6 and $2.3 million in the nine months ended September 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. The
Company has invested the net
10
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proceeds in tax exempt government securities, $6.4 million of which are
classified as long-term, with the remaining proceeds classified as cash, cash
equivalents, or short-term investments.
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.
11
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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). 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 7, 1997 By: /s/ Michael W. Rogers
----------------------
Michael W. Rogers
Chairman and Chief Executive Officer
Date: November 7, 1997 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
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED, SEPTEMBER
30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 20,126
<SECURITIES> 5,658
<RECEIVABLES> 4,261
<ALLOWANCES> 969
<INVENTORY> 107
<CURRENT-ASSETS> 30,470
<PP&E> 4,101
<DEPRECIATION> 5,173
<TOTAL-ASSETS> 41,244
<CURRENT-LIABILITIES> 4,548
<BONDS> 87
0
0
<COMMON> 98
<OTHER-SE> 36,511
<TOTAL-LIABILITY-AND-EQUITY> 41,244
<SALES> 5,819
<TOTAL-REVENUES> 25,207
<CGS> 1,058
<TOTAL-COSTS> 4,125
<OTHER-EXPENSES> 15,902
<LOSS-PROVISION> 55
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> 5,964
<INCOME-TAX> 2,017
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<NET-INCOME> 3,947
<EPS-PRIMARY> .39
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</TABLE>
