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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 September 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
--- ----
Number of shares of Common Stock, $.01 par value, outstanding as of
October 31, 1998 9,682,125
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ONTRACK DATA INTERNATIONAL, INC.
INDEX
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<S> <C> <C>
PART 1. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
(unaudited):
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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 8-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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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>
<CAPTION>
ASSETS September 30, December 31,
1998 1997
------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $18,757 $17,315
Short-term investments 7,005 14,861
Accounts receivable, net 3,454 3,321
Prepaid expenses and other current assets 2,209 2,042
------------ -----------
Total current assets 31,425 37,539
Marketable securities 8,589 3,506
Furniture and equipment, net 4,295 4,080
------------ -----------
TOTAL ASSETS $44,309 $45,125
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 960 $ 770
Accrued expenses 1,463 5,024
------------ -----------
Total current liabilities 2,423 5,794
SHAREHOLDERS' EQUITY:
Common stock ( 9,701,625 and 9,910,190 shares issued and
outstanding at September 30, 1998 and December 31, 1997, respectively) 97 99
Additional paid-in capital 29,082 30,880
Accumulated other comprehensive income 21 20
Retained earnings 12,686 8,332
------------ -----------
Total shareholders' equity 41,886 39,331
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $44,309 $45,125
------------ -----------
------------ -----------
</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>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Services $ 7,601 $ 7,197 $ 22,041 $ 19,388
Software 1,470 1,795 5,003 5,819
----------- ----------- ----------- -----------
TOTAL REVENUES 9,071 8,992 27,044 25,207
COST OF REVENUES:
Services 1,626 1,140 4,380 3,067
Software 304 352 905 1,058
----------- ----------- ----------- -----------
TOTAL COST OF REVENUES 1,930 1,492 5,285 4,125
----------- ----------- ----------- -----------
GROSS MARGIN 7,141 7,500 21,759 21,082
OPERATING EXPENSES:
Research and development 1,738 1,857 5,000 4,810
Sales and marketing 2,282 1,988 6,424 5,701
General and administrative 1,775 1,765 5,152 5,391
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 5,795 5,610 16,576 15,902
----------- ----------- ----------- -----------
OPERATING INCOME 1,346 1,890 5,183 5,180
INTEREST AND OTHER INCOME 569 282 1,220 784
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,915 2,172 6,403 5,964
PROVISION FOR INCOME TAXES 613 716 2,049 2,017
----------- ----------- ----------- -----------
NET INCOME $ 1,302 $ 1,456 $ 4,354 $ 3,947
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
BASIC NET INCOME PER SHARE $ 0.13 $ 0.15 $ 0.44 $ 0.40
DILUTED NET INCOME PER SHARE $ 0.13 $ 0.14 $ 0.43 $ 0.39
WEIGHTED AVERAGE SHARES USED IN COMPUTATION OF:
BASIC NET INCOME PER SHARE 9,894,394 9,810,772 9,919,335 9,799,592
DILUTED NET INCOME PER SHARE 10,006,938 10,223,914 10,072,004 10,145,163
</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>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 4,354 $ 3,947
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 1,671 1,387
Changes in operating assets and liabilities:
Accounts receivable (134) (792)
Prepaid expenses and other assets (166) 23
Accounts payable and accrued expenses (3,371) 371
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,354 4,936
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (1,886) (1,583)
Net sale (purchase) of short-term investments and
marketable securities 2,773 (6,224)
Other -- 21
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 887 (7,786)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (2,232) --
Proceeds from exercise of stock options and employee
stock purchase plan 433 292
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,799) 292
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,442 (2,558)
Cash and cash equivalents, beginning of period 17,315 22,684
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,757 $ 20,126
-------- --------
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
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ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
nine months ended September 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 nine months ended September 30,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
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<S> <C> <C>
Net income $ 4,354 $ 3,947
Foreign currency translation adjustment 1 (35)
-------- --------
Comprehensive income $ 4,355 $ 3,912
-------- --------
-------- --------
</TABLE>
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, 1998 AND 1997
TOTAL REVENUES
Total revenues for the third quarter of 1998 increased 0.9% compared to the
third quarter of 1997. For the nine months ended September 30, 1998, total
revenue increased 7.3% compared to the first nine months of 1997. Of the
Company's third quarter and the first nine months' 1998 revenues,
approximately 19.3% and 18.7%, respectively, are attributable to the
Company's European operations, compared to 19.6% and 17.3% in the third
quarter and first nine months of 1997.
SERVICES:
Service revenues for the third quarter of 1998 increased 5.6% compared to the
third quarter of 1997. For the nine months ended September 30, 1998, service
revenue increased 13.7% compared to the first nine months of 1997. The
increases are due to slight increases in the number of data recovery jobs
performed and in the average revenue per data recovery job.
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 third quarter of 1998 decreased 18.1% compared to
the third quarter of 1997. For the nine months ended September 30, 1998,
software revenues decreased 14.0% compared to the first nine months of 1997.
The decreases in software revenues are attributed to pricing pressure with
Disk Manager from the Company's main customers, the hard drive manufacturers.
The company expects this pricing pressure to continue.
GROSS MARGINS
SERVICES:
Gross margins on service revenues as a percentage of service revenues for the
third quarter and nine months ended September 30, 1998 were approximately 78.6%
and 80.1%, respectively, compared to 84.2% for both comparable periods of 1997.
The decreases are due to the addition of data recovery and software development
engineers. 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 third quarter and nine months ending September 30, 1998 were
approximately 79.3% and 81.9%, respectively, compared to 80.4% and 81.8% 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 decrease in margin percentage in
the third quarter is due to lower OEM royalty revenues.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT:
Research and development expenses for the third quarter of 1998 decreased
6.4% compared to the third quarter of 1997 and increased 4.0% in the first
nine months of 1998 compared to the same period of 1997. As a percentage of
revenues, research and development expenses were 19.2% and 18.5% for the
quarter and nine months ended September 30, 1998, respectively, compared to
20.7% and 19.1% of revenues for the comparable period of 1997. The reduction
in research and development expenses as a percentage of revenues is due
principally to reductions in the amount of incentive compensation earned.
These reductions were the result of the Company not achieving certain of its
financial goals during the quarter and nine months.
SALES AND MARKETING:
Sales and marketing expenses for the third quarter of 1998 increased 14.8%
compared to the third quarter of 1997 and increased 12.7% in the first nine
months of 1998 compared to the same period of 1997. As a percentage of
revenues, sales and marketing expenses were 25.2% and 23.8% for the third
quarter and nine months ended September 30, 1998, respectively, compared to
22.1% and 22.6% for the comparable periods of 1997. The increased percentages
are due to increased salaries, additional marketing programs and additional
marketing costs in Europe.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the third quarter of 1998 increased
0.6% compared to the third quarter of 1997 and decreased 4.4% in the first
nine months of 1998 compared to the same period of 1997. As a percentage of
revenues, general and administrative expenses were 19.6% and 19.1% for the
third quarter and nine months ended September 30, 1998, respectively,
compared to 19.6% and 21.4% for the comparable periods of 1997. The decline
in general and administrative expenses for the first nine months of 1998, and
in such expenses as a percentage of revenues, is due to a reduction in the
amount of incentive compensation earned. These reductions were a result of
the Company not achieving certain of its financial goals during the period.
9
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INTEREST AND OTHER INCOME
The increases in interest and other income for the quarter and nine months
are a result of higher interest earnings plus exchange gains due to an
increase in the value of the British Pound and the German Mark against the US
Dollar.
PROVISION FOR INCOME TAXES
For the nine months ended September 30, 1998, the Company provided for taxes at
an effective rate of 32.0%. The effective rate is lower than the statutory rate
because of the impact of tax exempt interest income earned on investments and
the impact of research and development credits.
NET INCOME PER SHARE
The changes in basic and diluted net income per share for the quarter and nine
months ended September 30, 1998 and 1997 are due to changes in net income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operations was $2.4 million and $4.9 million for the nine
months ended September 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, $8.6 million of which are classified as long-term, with the
remaining proceeds classified as cash and cash equivalents or short-term
investments.
STOCK REPURCHASE PROGRAM
On August 10, 1998 the Company announced that its Board of Directors had
approved a stock repurchase plan, which authorized the Company to repurchase up
to 500,000 shares, or approximately 5%, of its outstanding common stock. As of
September 30, 1998, 280,500 shares had been repurchased under this program at a
total cost of $2.2 million.
YEAR 2000 COMPLIANCE
The "Year 2000" problem concerns the inability of existing information systems
to properly recognize and process date-sensitive information beyond January 1,
2000. If not corrected, these systems could fail or create erroneous
information.
The Company has undertaken various initiatives to evaluate and respond to the
potential impact of the Year 2000 issue on its computer and other operating
systems. A Year 2000 committee has formulated a plan to address the Year 2000
issue. Under this plan, Company personnel have identified business systems that
are critical to the Company's business operations that require testing. The
Company has completed testing and remediation of its software products and the
10
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software and hardware used in product development. The Company is in the
process of testing its internal systems, the hardware and software tools it
uses in its data recovery business and the systems in its satellite offices.
The Company expects this testing and any necessary remediation to be
completed by December 31, 1998, except for certain systems that are being
updated during the first two quarters of 1999 for reasons other than Year
2000 compliance. These systems are expected to be tested and remediated by
June 1999. The Company also expects its non-information technology systems to
be compliant after it moves into its new leased office space, anticipated for
the third quarter of 1999.
The Company is also communicating and working with its significant vendors,
customers and other business partners to minimize Year 2000 risks and protect
the Company and its customers from potential service interruptions. However,
the Company could be adversely affected by the failure of third parties to
become Year 2000 compliant, including the risk of operational outages due to
disruptions in communications or electrical service. Although the Company
believes the effect of such disruptions would be localized and temporary,
there is no assurance that these or other Year 2000 risks will not have a
material financial impact in any future period.
The Company believes that its expenses for the Year 2000 compliance through
September 30, 1998 are not material, and total expenses for compliance are not
expected to exceed $100,000.
Statements in this section which are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, including statements
regarding the timetable for Year 2000 compliance, the Company's costs, the
success of the Company's and others' efforts to achieve compliance, and the
effects of the Year 2000 issue on the Company's future financial condition
and results of operations. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results and those presently anticipated or projected, including,
(i) the inherent uncertainty of the costs and timing of achieving compliance
for the systems used in the Company's operations worldwide, (ii) the Company'
reliance on the efforts of vendors, customers, government agencies, utilities
and other third parties to achieve adequate compliance and avoid disruption
of its business in early 2000, and (iii) the uncertainty of the ultimate
costs and consequences of any unanticipated disruption in the Company's
business resulting form the failure of one of its applications or of a third
party's system. The forgoing list is not exhaustive, and the Company
disclaims any obligation subsequently to revise any forward-looking
statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated
events.
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
11
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31, 1997, for cautionary statements on important factors to consider in
evaluating the forward-looking statements included in this Form 10-Q.
12
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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
13
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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 12, 1998 By:
/s/ Michael W. Rogers
------------------------------------
Michael W. Rogers
Chairman and Chief Executive Officer
Date: November 12, 1998 By:
/s/ Thomas P. Skiba
------------------------------------
Thomas P. Skiba
Vice President & Chief Financial Officer
14
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 18,757
<SECURITIES> 7,005
<RECEIVABLES> 3,948
<ALLOWANCES> 494
<INVENTORY> 93
<CURRENT-ASSETS> 31,425
<PP&E> 11,703
<DEPRECIATION> 7,408
<TOTAL-ASSETS> 44,309
<CURRENT-LIABILITIES> 2,423
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 41,789
<TOTAL-LIABILITY-AND-EQUITY> 44,309
<SALES> 5,003
<TOTAL-REVENUES> 27,044
<CGS> 905
<TOTAL-COSTS> 5,285
<OTHER-EXPENSES> 16,576
<LOSS-PROVISION> (38)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,403
<INCOME-TAX> 2,049
<INCOME-CONTINUING> 4,354
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,354
<EPS-PRIMARY> .44
<EPS-DILUTED> .43
</TABLE>
