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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File No. 000-21375
ONTRACK DATA INTERNATIONAL, INC.
(Exact name of 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, 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
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Number of shares of Common Stock, $.01 par value, outstanding as of
July 31, 1998 9,965,488
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ONTRACK DATA INTERNATIONAL, INC.
INDEX
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PAGE
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated 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 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONTRACK DATA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
( IN THOUSANDS, EXCEPT SHARE AMOUNTS )
<TABLE>
June 30, 1998 December 31, 1997
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(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,304 $ 17,315
Short-term investments 11,235 14,861
Accounts receivable, net 3,394 3,321
Prepaid expenses and other current assets 2,537 2,042
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Total current assets 30,470 37,539
Marketable securities 11,561 3,506
Furniture and equipment, net 3,959 4,080
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TOTAL ASSETS $ 45,990 $ 45,125
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,066 $ 770
Accrued expenses 2,210 5,024
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Total current liabilities 3,276 5,794
SHAREHOLDERS' EQUITY:
Common stock ( 9,960,488 and 9,910,190 shares issued and
outstanding at June 30, 1998 and December 31, 1997, respectively) 100 99
Additional paid-in capital 31,194 30,880
Accumulated other comprehensive income 37 20
Retained earnings 11,383 8,332
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Total shareholders' equity 42,714 39,331
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,990 $ 45,125
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
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ONTRACK DATA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
( IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS )
(UNAUDITED)
<TABLE>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
REVENUES:
Services $ 7,235 $ 6,079 $ 14,440 $ 12,191
Software 1,831 2,066 3,533 4,024
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TOTAL REVENUES 9,066 8,145 17,973 16,215
COST OF REVENUES:
Services 1,426 981 2,754 1,927
Software 289 391 601 706
----------- ----------- ----------- -----------
TOTAL COST OF REVENUES 1,715 1,372 3,355 2,633
----------- ----------- ----------- -----------
GROSS MARGIN 7,351 6,773 14,618 13,582
OPERATING EXPENSES:
Research and development 1,607 1,466 3,262 2,953
Sales and marketing 2,190 1,915 4,142 3,713
General and administrative 1,718 1,816 3,378 3,626
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 5,515 5,197 10,782 10,292
----------- ----------- ----------- -----------
OPERATING INCOME 1,836 1,576 3,836 3,290
INTEREST AND OTHER INCOME 330 285 651 502
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,166 1,861 4,487 3,792
PROVISION FOR INCOME TAXES 670 614 1,436 1,300
----------- ----------- ----------- -----------
NET INCOME $ 1,496 $ 1,247 $ 3,051 $ 2,492
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
BASIC NET INCOME PER SHARE $ 0.15 $ 0.13 $ 0.31 $ 0.25
DILUTED NET INCOME PER SHARE $ 0.15 $ 0.12 $ 0.30 $ 0.25
WEIGHTED AVERAGE SHARES USED IN computation of:
BASIC NET INCOME PER SHARE 9,946,943 9,800,351 9,932,013 9,794,872
DILUTED NET INCOME PER SHARE 10,100,061 10,129,467 10,114,112 10,111,130
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
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ONTRACK DATA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( IN THOUSANDS )
(UNAUDITED)
<TABLE>
SIX MONTHS
ENDED JUNE 30,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 3,051 $ 2,492
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 1,091 863
Changes in operating assets and liabilities:
Accounts receivable (74) 52
Prepaid expenses and other assets (494) (31)
Accounts payable and accrued expenses (2,518) (680)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,056 2,696
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (970) (885)
Net purchase of marketable securities (4,429) (2,272)
Other - 80
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NET CASH USED IN INVESTING ACTIVITIES (5,399) (3,077)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee
stock purchase plan 332 179
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NET CASH PROVIDED BY FINANCING ACTIVITIES 332 179
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NET DECREASE IN CASH AND CASH EQUIVALENTS (4,011) (202)
Cash and cash equivalents, beginning of period 17,315 22,684
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CASH AND CASH EQUIVALENTS, END OF PERIOD $13,304 $22,482
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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; San Jose, California; Washington, DC.; New
York, New York; London, England; Stuttgart, Germany and Paris, France.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission.Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted as
permitted by such rules and regulations.These financial statements and
related notes should be read in conjunction with the financial statements
and notes thereto included in the Company's audited consolidated financial
statements for the year ended December 31, 1997 contained in the Company's
Annual Report on Form 10-K for 1997.
In the opinion of management, the interim financial statements reflect
adjustments, consisting of normal recurring accruals, which are necessary
to present fairly the Company's financial position, results of operations
and cash flow for the periods indicated.The results of operations of the
six months ended June 30, 1998 are not necessarily indicative of the
results for the full year.
NET INCOME PER SHARE
Basic net income per share includes no dilution and is computed by dividing
net income available to common stockholders by the weighted average number
of common shares outstanding for the period.Diluted net income per share
reflects the potential dilution of securities that could share in the
earnings of the Company.The difference between the Company's basic and
diluted net income per share data as presented is due to the dilutive
impact from stock options whose exercise price was below the average common
stock price for the respective period presented.
6
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3. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS No. 130") effective January 1,
1998.SFAS No. 130 requires that items defined as other comprehensive
income, such as foreign currency translation adjustments, be separately
classified in the financial statements and that the accumulated balance of
the other comprehensive income be reported separately from retained
earnings and additional paid-in-capital in the equity section of the
balance sheet.The components of comprehensive income for the six months
ended June 30, 1998 and 1997 are as follows:
<TABLE>
Six months
ended June 30,
1998 1997
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Comprehensive income:
Net income $3,051 $2,492
Other comprehensive income:
Foreign currency translation adjustment 17 (10)
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Comprehensive income $3,068 $2,482
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7
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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, 1998 AND 1997
TOTAL REVENUES
Total revenues for the second quarter of 1998 increased 11.3% compared to the
second quarter of 1997.For the six months ended June 30, 1998, total revenue
increased 10.8% compared to the first six months of 1997.Of the Company's second
quarter and the first six months' 1998 revenues, approximately 17.9% and 18.4%,
respectively, are attributable to the Company's European operations, compared to
16.1% in both the second quarter and first six months of 1997.
SERVICES:
Service revenues for the second quarter of 1998 increased 19.0% compared to the
second quarter of 1997.For the six months ended June 30, 1998, service revenue
increased 18.4% compared to the first six months of 1997.The increases are due
principally to the increase in the number of data recovery jobs performed in the
United States and Europe, and to a lesser degree, increases in the Company's
Computer Evidence Services business.
SOFTWARE:
Software revenues are principally derived from sales through original equipment
manufacturers (OEM's) for the bundling of Disk Manager software with the OEM's
storage media products. The market for such 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.
Software revenues for the second quarter of 1998 decreased 11.4% compared to the
second quarter of 1997.For the six months ended June 30, 1998, software revenues
decreased 12.2% compared to the first six months of 1997.The decreases in
software revenues are attributed to lower volumes of shipments of storage media
products by the Company's customers which include Disk Manager.
GROSS MARGINS
SERVICES:
Gross margins on service revenues as a percentage of service revenues for the
second quarter and six months ended June 30, 1998 were approximately 80.3% and
80.9%, respectively, compared to 83.9% and 84.2% for the comparable periods of
1997.The decreases are principally due to increased engineering personnel.The
Company views the addition of qualified data recovery engineers as critical to
its ability to grow the data recovery business.
8
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SOFTWARE:
Gross margins on software revenues as a percentage of software revenues for the
second quarter and six months ending June 30, 1998 were approximately 84.2% and
83.0%, respectively, compared to 81.1% and 82.5% for the comparable periods of
1997.Software gross margins are impacted by the mix of royalty revenues, which
have minimal cost to the Company, and non royalty sales of the Company's
products.The increase in margins in both periods is due to the change in this
mix of software revenues.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT:
Research and development expenses for the second quarter of 1998 increased 9.6%
compared to the second quarter of 1997 and increased 10.5% in the first six
months of 1998 compared to the same period of 1997.The increases were due
principally to higher salaries resulting from an increase in the number of
software developers and data recovery engineers who perform research and
development activities as well as to an increase in equipment purchased for
research and development purposes.Offsetting these increases were reductions in
the amount of incentive compensation earned in the quarter and six months.These
reductions were the result of the Company not achieving certain of its financial
goals during the quarter and six months.Research and development expenses as a
percentage of revenues were 17.7% and 18.1% for the quarter and six months ended
June 30, 1998, respectively, compared to 18.0% and 18.2% of revenues for the
comparable period of 1997.
SALES AND MARKETING:
Sales and marketing expenses for the second quarter of 1998 increased 14.4%
compared to the second quarter of 1997 and increased 11.6% in the first six
months of 1998 compared to the same period of 1997.As a percentage of revenues,
sales and marketing expenses were 24.2% and 23.0% for the second quarter and six
months ended June 30, 1998, respectively, compared to 23.5% and 22.9% for the
comparable periods of 1997.The increased percentages are due toincreased
expenditures on advertising, public relations and improvement of the Company's
website, offset by lower incentive compensation earned by sales and marketing
personnel in the quarter and six months.The lower incentive compensation is a
result of the Company not achieving certain of its financial goals during the
quarter and six months.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the second quarter of 1998 decreased
5.4% compared to the second quarter of 1997 and decreased 6.8% in the first six
months of 1998 compared to the same period of 1997.As a percentage of revenues,
general and administrative expenses were 18.9% and 18.8% for the second quarter
and six months ended June 30, 1998, respectively, compared to 22.3% and 22.4%
for the comparable periods of 1997.The decline in 1998's second quarter and
first six months' general and administrative expenses and in such expenses as
9
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a percentage of revenues is due principally to a reduction in the amount of
incentive compensation earned in the quarter and six months.These reductions
were a result of the Company not achieving certain of its financial goals during
the quarter and six months.Also contributing to the reduced percentage is the
increase in revenues for the periods, as many general and administrative costs
do not vary directly with revenues.
INTEREST AND OTHER INCOME
The increase in interest and other income is a result of higher cash and
marketable securities balances, primarily due to cash flow generated from the
Company's operations.
PROVISION FOR INCOME TAXES:
For the six months ended June 30, 1998, the Company provided for taxes at an
effective rate of 32.0% which is slightly lower than the Company's effective tax
rate in the last three quarters of 1997 and the first quarter of 1998.The
effective rate is lower than the statutory rate because of the impact of tax
exempt interest income earned on its investments.
NET INCOME PER SHARE
Basic net income per share for the second quarter and six months ended June 30,
1998 increased by $0.02and $0.06, respectively, compared to the same periods of
1997.Diluted net income per share for the same periods increased by $.03 and
$.05, respectively.The increases were due to higher net income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operations was $1.2 million and $2.7 million for the quarter
ended June 30, 1998 and 1997, respectively.Cash provided by and used in
investment activities was primarily for the purchase of marketable securities
and furniture and equipment additions.
The Company has invested its cash principally in tax exempt government
securities, $11.6 million of which are classified as long-term, with the
remaining proceeds classified as cash and cash equivalents or short-term
investments.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of federal
securities laws.These statements include statements regarding intent, belief, or
current expectations of the company and its management.These forward-looking
statements are not guarantees of the future performance and involve a number of
risks and uncertainties that may cause the Company's actual results to differ
materially from the results discussed in these statements.Please refer to the
Management's Discussion and Analysis section of the 1997 Annual Report to
Shareholders, incorporated by reference into the Company's Form 10-K report for
the year ended December 31, 1997, for cautionary statements on important factors
to consider in evaluating the forward-looking statements included in this Form
10-Q.
10
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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, 1998.The stockholders took the following actions:
(a). The stockholders elected six 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:
<TABLE>
VOTES
VOTES FOR WITHHELD
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Michael W. Rogers 8,097,484 23,064
John E. Pence 8,097,484 23,064
Gary S. Stevens 8,097,484 23,064
Roger D. Shober 8,097,484 23,064
Robert M. White, Ph.D. 8,097,484 23,064
Richard J. Runbeck 8,097,484 23,064
</TABLE>
(b). The stockholders ratified the appointment of
Pricewaterhouse Coopers LLP as the Company's
independent auditors for fiscal 1998.8,113,669 votes
were cast for the resolution; 749 votes were cast
against the resolution; and shares representing
6,130 votes abstained.
11
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Item 5. OTHER INFORMATION
The deadline for submission of shareholder proposals pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934, as amended,
for inclusion in the Company's proxy statement for its 1999
Annual Meeting of Shareholders is December 16, 1998.Additionally,
under the Company's Bylaws, to be timely a shareholder proposal
must be received by the Company not more than 60 days nor more
than 90 days prior to the 1999 Annual Meeting, which is expected
to be held on or about May 27, 1999.If the Company receives
notice of a shareholder proposal that is not timely under this
provision of the Bylaws, such proposal will be considered
untimely pursuant to Rules 14a-4 and 14a-5(e) and the persons
named in proxies solicited by the Board of Directors of the
Company for its 1999 Annual Meeting of Shareholders may exercise
discretionary voting power with respect to such proposal;
further, the proposal may be excluded from consideration at the
meeting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibit 27.1 Financial Data Schedule
(b). Reports on Form 8-K
Form 8-K was filed on July 15, 1998 relating to the change
in the Company's independent accountants from
Pricewaterhouse Coopers LLP to Grant Thornton LLP.
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: August 11, 1998 By:
-------------------------------------
Michael W. Rogers
Chairman and Chief Executive Officer
Date: August 11, 1998 By:
-------------------------------------
Thomas P. Skiba
Vice President & Chief Financial Officer
13
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<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,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,304
<SECURITIES> 11,235
<RECEIVABLES> 3,979
<ALLOWANCES> 585
<INVENTORY> 88
<CURRENT-ASSETS> 30,470
<PP&E> 10,751
<DEPRECIATION> 6,792
<TOTAL-ASSETS> 45,990
<CURRENT-LIABILITIES> 3,276
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 42,614
<TOTAL-LIABILITY-AND-EQUITY> 45,990
<SALES> 3,533
<TOTAL-REVENUES> 17,973
<CGS> 601
<TOTAL-COSTS> 3,355
<OTHER-EXPENSES> 10,782
<LOSS-PROVISION> 33
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,487
<INCOME-TAX> 1,436
<INCOME-CONTINUING> 3,051
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,051
<EPS-PRIMARY> .31
<EPS-DILUTED> .30
</TABLE>
