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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 March 31, 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, 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, 1998 9,937,976
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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, 1998 (unaudited) and December 31, 1997 3
Consolidated Condensed Statements of Income (unaudited)
for the three months ended March 31, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows
(unaudited) for the three months ended March 31, 1998
and 1997 5
Consolidated Statement of Shareholders' Equity for the
period ended March 31, 1998 (unaudited) 6
Notes to consolidated condensed financial statements 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 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 March 31, December 31,
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 21,974 $ 17,315
Short-term investments 6,093 14,861
Accounts receivable, net 2,878 3,321
Prepaid expenses and other current assets 2,112 2,042
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Total current assets 33,057 37,539
Marketable securities 7,694 3,506
Furniture and equipment, net 4,077 4,080
Other assets 70 -
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TOTAL ASSETS $ 44,898 $ 45,125
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 784 $ 770
Accrued expenses 3,006 5,024
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Total current liabilities 3,790 5,794
SHAREHOLDERS' EQUITY:
Common stock ( 9,936,976 and 9,910,190
shares issued and outstanding at
March 31, 1998 and
December 31, 1997, respectively) 99 99
Additional paid-in capital 31,079 30,880
Accumulated other comprehensive income 43 20
Retained earnings 9,887 8,332
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Total shareholders' equity 41,108 39,331
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 44,898 $ 45,125
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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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,
--------------------------------
1998 1997
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<S> <C> <C>
REVENUES:
Services $ 7,205 $ 6,112
Software 1,702 1,958
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TOTAL REVENUES 8,907 8,070
COST OF REVENUES:
Services 1,328 946
Software 312 315
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TOTAL COST OF REVENUES 1,640 1,261
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GROSS MARGIN 7,267 6,809
OPERATING EXPENSES:
Research and development 1,655 1,488
Sales and marketing 1,952 1,799
General and administrative 1,660 1,809
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TOTAL OPERATING EXPENSES 5,267 5,096
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Operating income 2,000 1,713
Interest and other income 321 218
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Income before income taxes 2,321 1,931
Provision for income taxes 766 686
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Net income $ 1,555 $ 1,245
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Basic net income per share $ 0.16 $ 0.13
Diluted net income per share $ 0.15 $ 0.12
Weighted average shares used in computation of:
basic net income per share 9,916,917 9,789,331
diluted net income per share 10,165,457 10,096,057
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
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ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
( IN THOUSANDS )
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 1,555 $ 1,245
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 548 425
Changes in operating assets and liabilities:
Accounts receivable 443 (347)
Prepaid expenses and other assets (69) (15)
Accounts payable and accrued expenses (1,991) (619)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 486 689
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (546) (404)
Net sale (purchase) of marketable securities 4,580 (2,442)
Other (70) 29
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NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 3,964 (2,817)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee
stock purchase plan 209 98
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NET CASH PROVIDED BY FINANCING ACTIVITIES 209 98
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,659 (2,030)
Cash and cash equivalents, beginning of period 17,315 22,684
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,974 $ 20,654
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
---------- ------------ ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1996 $ 98 $ 29,599 $ 2,676 $ 33 $ 32,406
Net income 5,656 5,656
Translation adjustment (13) (13)
---------
Comprehensive Income 5,643
Exercise of stock options 1 338 339
Tax benefit from exercise of nonqualified
stock options 628 628
Stock purchased through Employee
Stock Purchase Plan 315 315
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BALANCES AT DECEMBER 31, 1997 99 30,880 8,332 20 39,331
Net income 1,555 1,555
Translation adjustment 23 23
---------
Comprehensive Income 1,578
Exercise of stock options 67 67
Tax benefit from exercise of nonqualified
stock options 18 18
Stock purchased through Employee 114 114
Stock Purchase Plan
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BALANCES AT MARCH 31, 1998 (UNAUDITED) $ 99 $ 31,079 $ 9,887 $ 43 $ 41,108
---------- ------------ ------------- ------------- ---------
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
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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 unaudited March 31, 1998 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. 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-K for the year ended December 31, 1997.
NET INCOME PER SHARE
Basic earnings per share includes no dilution and is computed by dividing
net earnings available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings 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 earnings 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.
3. NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted Financial Accounting Standard Statement (SFAS)
No. 130, "Reporting Comprehensive Income." This statement establishes
rules for reporting comprehensive income and its components. Comprehensive
income for the Company, consists of net income and foreign currency
translation adjustments and is presented in the Consolidated Statement of
Shareholders' Equity. The adoption of SFAS No. 130 had no impact on total
shareholders' equity. Certain reclassifications to prior year financial
statements have been made in order to conform to the SFAS No. 130
requirements.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF FIRST QUARTER ENDED MARCH 31, 1998 AND 1997
TOTAL REVENUES
Total revenues for the first quarter of 1998 increased 10.4% compared to the
first quarter of 1997. Of the Company's first quarter 1998 revenues,
approximately 18.9% were attributable to the Company's European operations,
compared to 16.1% in the first quarter of 1997.
SERVICES:
Service revenues for the first quarter of 1998 increased 17.9% compared to the
first quarter of 1997. The increase was due principally to the increase in the
number of data recovery jobs performed in the United States and Europe.
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. Further, 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 FIRST QUARTER OF 1998 DECREASED 13.1% COMPARED TO THE
FIRST QUARTER OF 1997. THE DECREASE IN SOFTWARE REVENUES WAS ATTRIBUTED TO
LOWER VOLUMES OF SHIPMENTS OF STORAGE MEDIA PRODUCTS BY THE COMPANY'S CUSTOMERS
WHICH INCLUDE DISK MANAGER.
GROSS MARGINS
SERVICES:
Gross margin on service revenues as a percentage of service revenues for the
first quarter ended March 31, 1998 was approximately 81.6% compared to 84.5% for
the comparable period of 1997. The decrease in gross margin percentage in 1998
was 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.
SOFTWARE:
Gross margin on software revenues as a percentage of software revenues for the
first quarter ending March 31, 1998 was approximately 81.7% compared to 83.9%
for the comparable period of 1997. Software gross margins are impacted by the
mix of royalty revenues, which have
8
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minimal cost to the Company, and non royalty sales of the Company's products.
Royalty revenues were lower in the first quarter of 1998 than in the first
quarter of 1997, thus causing a decline in margin percentage.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT:
Research and development expenses for the first quarter of 1998 increased 11.2%
compared to the first quarter of 1997. The increase was 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.
Somewhat offsetting these increases were reductions in the amount of incentive
compensation earned in the quarter. These reductions were the result of the
Company not achieving certain of its financial goals during the quarter.
Research and development expenses as a percentage of revenues were 18.6% for the
quarter ended March 31, 1998 compared to 18.4% of revenues for the comparable
period of 1997.
SALES AND MARKETING:
Sales and marketing expenses for the first quarter of 1998 increased 8.5%
compared to the first quarter of 1997. As a percentage of revenues, sales and
marketing expenses were 21.9% for the quarter ended March 31, 1998 compared to
22.3% for the comparable period of 1997. The slightly reduced percentage from
the first quarter of 1997 is due to a combination of increased expenditures
resulting from higher salaries due to more sales and marketing personnel,
increased expenditures on advertising and public relations and lower incentive
compensation earned by sales and marketing personnel in the quarter. The lower
incentive compensation is a result of the Company not achieving certain of its
financial goals during the quarter.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses for the first quarter of 1998 decreased 8.2%
compared to the first quarter of 1997. As a percentage of revenues, general and
administrative expenses were 18.6% for the quarter ended March 31, 1998 compared
to 22.4% for the comparable period of 1997. The decline in 1998's first quarter
general and administrative expenses and in such expenses as a percentage of
revenues is due principally to a reduction in the amount of incentive
compensation earned in the quarter. These reductions were a result of the
Company not achieving certain of its financial goals during the quarter. Also
contributing to the reduced percentage is the increase in revenues for the
period, as many general and administrative costs do not vary directly with
revenues.
9
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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 first quarter ended March 31, 1998, the Company provided for taxes at an
effective rate of 33.0% which is comparable to the Company's effective tax rate
in the last three quarters of 1997. The effective rate is lower than the
statutory rate because of anticipated research and development credits and the
impact of tax exempt interest income earned on its investments.
NET INCOME PER SHARE
Basic and diluted net income per share for the first quarter ended March 31,
1998 both increased by $0.03 compared to the same period of 1997. The increases
were due to higher net income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operations was $.5 million and $.7 million for the quarter
ended March 31, 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, $7.7 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 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
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
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: May 7, 1998 By: /s/ Michael W. Rogers
-------------------------------------------
Michael W. Rogers
Chairman and Chief Executive Officer
Date: May 7, 1998 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 THREE MONTHS ENDED MARCH 31,
1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 21,974
<SECURITIES> 6,093
<RECEIVABLES> 3684
<ALLOWANCES> 806
<INVENTORY> 87
<CURRENT-ASSETS> 33,057
<PP&E> 10,332
<DEPRECIATION> 6,255
<TOTAL-ASSETS> 44,898
<CURRENT-LIABILITIES> 3,790
<BONDS> 0
0
0
<COMMON> 99
<OTHER-SE> 41,009
<TOTAL-LIABILITY-AND-EQUITY> 44,898
<SALES> 1,702
<TOTAL-REVENUES> 8,907
<CGS> 312
<TOTAL-COSTS> 1,640
<OTHER-EXPENSES> 5,267
<LOSS-PROVISION> (11)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,321
<INCOME-TAX> 766
<INCOME-CONTINUING> 1,555
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,555
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
