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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from ________ to _______
COMMISSION FILE NO. 0-21375
ONTRACK DATA INTERNATIONAL, INC.
(Name of Small Business Issuer in its charter)
MINNESOTA 41-1521650
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6321 BURY DRIVE
EDEN PRAIRIE, MN 55346
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(Address of principal executive offices and zip code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 937-1107
ISSUER'S INTERNET ADDRESS: WWW.ONTRACK.COM
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK,
$.01 PAR VALUE
Check whether the issuer: (1) 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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Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
Issuer's revenues for the year ended December 31, 1996 were $26,763,000.
As of March 14, 1997, assuming as market value the price of $17 3/16 per share,
the average between the high and low sale prices on the Nasdaq National Market,
the aggregate market value of shares held by nonaffiliates was approximately
$54.4 million.
As of March 14, 1997, the Company had outstanding 9,789,240 shares of Common
Stock, $.01 par value.
Portions of the 1996 Annual Report to Shareholders and the Proxy Statement for
the Company's Annual Meeting of Shareholders to be held May 21, 1997, are
incorporated by reference into Parts II and III, respectively, of this Form
10-KSB, to the extent described in such Parts.
Transitional Small Business Disclosure Format: Yes No X
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TABLE OF CONTENTS
Page No.
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PART I
Item 1. DESCRIPTION OF BUSINESS 3
Item 2. DESCRIPTION OF PROPERTY 14
Item 3. LEGAL PROCEEDINGS 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 15
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 15
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 15
Item 7. FINANCIAL STATEMENTS 15
Item 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 15
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT 15
Item 10. EXECUTIVE COMPENSATION 16
Item 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 16
Item 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 16
Item 13. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 18
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Ontrack is a leading provider of data recovery services to a broad range of
customers experiencing a loss of valuable computer data. Ontrack has the
ability to recover data stored in nearly all types of storage media and
operating systems, regardless of the sophistication or age of the storage media
or the system. During the past nine years, Ontrack has performed over 34,000
data recoveries for Fortune 500 corporations, governmental agencies, educational
and financial institutions, as well as small businesses and individuals. The
Company first developed expertise in data file structures, operating systems,
and storage media technologies in 1985 through the development of DISK MANAGER,
a hard disk drive installation software utility which the Company continues to
market. The Company also develops and markets a number of other commercial
software products. The Company's data recovery services revenues represented
approximately 73% of total revenues in 1996, with software revenues representing
the balance.
BACKGROUND OF DATA RECOVERY BUSINESS
The amount of data stored in hard disk drives, floppy disks, CD-ROMs,
magnetic tape and other types of storage media has been growing rapidly over the
past several years. The growth in stored data has been fueled in part by the
rapid expansion of the installed base of personal computers, midrange computers,
servers and mainframes. Dataquest Incorporated has estimated that the number of
installed personal computers will have grown worldwide from approximately 125
million units in 1993 to approximately 271 million units by the end of 1997. In
addition, the increased use of multimedia, sophisticated operating systems and
complex software applications has helped drive the average storage capacity per
desktop computer shipped from approximately 80 megabytes in 1991 to over 2,000
megabytes in 1997.
With this proliferation of storage capacity has come an increased
dependence on fast and reliable access to stored data in both the office and the
home. The expanding corporate use of local and wide area networks has resulted
in data being dispersed across an increasing number of hardware platforms within
an organization. Consequently, many organizations rely on their personnel being
able to continually access and manipulate computer files, such as sales backlog
reports, project specifications or accounting records, to effectively perform
daily tasks. Similarly, individuals and small businesses are now frequently
storing and accessing information which may have been previously handwritten or
stored in paper files, such as financial records and important correspondence.
Much of the information stored in this manner is essential, and sometimes
mission-critical, to the user or the user's organization.
Data can often become inaccessible to the user as a result of a wide
variety of either hardware or software failures. Hardware failures involve
physical damage to the mechanism that retrieves the data or to the storage media
itself, while software failures involve corruption of the software file
structure that makes the data accessible. In both types of failures, the data
often still exists on the storage media but cannot be retrieved by the user.
Common hardware and software failures that lead to the loss of data include:
USER ERRORS - such as accidental deletion of files or mistakes in
attempting to retrieve lost data which may lead to even more severe data
loss.
WEAR, AGING OR PHYSICAL ABUSE - can cause failure of mechanical and
electrical components or damage to the storage media.
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IMPROPER OR INCOMPATIBLE SOFTWARE INSTALLATION - such as failure to back up
the system prior to performing software upgrades or the introduction of
incompatible software into an existing system, which may corrupt the data
file structure.
SABOTAGE, COMPUTER VIRUSES OR VANDALISM - can delete, overwrite or corrupt
data files, or damage the retrieval mechanism or storage media.
ENVIRONMENTAL HAZARDS - such as extreme temperatures, power surges, fires,
floods and earthquakes, which can affect either the data retrieval
mechanism in the computer system or the storage media.
In an effort to prevent data loss, users may pursue one or more protective
measures. The most common method is to automatically or manually back up data
on a routine basis for onsite or offsite storage. However, one of the major
challenges with backing up data is ensuring that all backup procedures are
followed rigorously. Additionally, even in those cases where it is possible to
restore the backup data, the restoration process can be more expensive and time
consuming than the data recovery process. In addition, the data created since
the most recent backup will not be contained on the backup copy. Other methods
of protecting data include securing access to computer equipment, implementing
anti-virus procedures, and developing disaster recovery plans for floods, fires
and other natural disasters. Although these methods may be helpful in reducing
the likelihood of data loss in certain instances, they have not been able to
prevent a wide variety of data loss situations from occurring and may not
represent a cost-effective alternative.
When users experience data loss, they generally seek assistance from the
nearest perceived computer expert, which may include an MIS department or other
corporate personnel, a local computer store or a third party computer
maintenance provider. In many cases, these people do not have the specialized
training, software or equipment necessary to recover lost data, and their
attempts to recover the data can actually exacerbate the data loss and hinder
the data recovery. In-house experts or third party providers may rely
exclusively on commercially available data recovery software. Although such
software can be quite useful in certain data recovery situations, if used in
inappropriate situations it may compound the data loss. If these recovery
efforts are unsuccessful, users are often informed or conclude that the data
loss is "terminal" and that the data is not recoverable. In many cases,
however, the lost data can be recovered by a properly trained and equipped data
recovery specialist.
The data recovery services market is currently served by a large number of
relatively small, independent businesses. The Company believes that competitive
factors in the data recovery business are name recognition, the effectiveness of
the data recovery services, the ability to operate within a large number of
operating environments with a variety of storage media, the timeliness of the
services, the number of emergency and custom services provided and cost.
THE ONTRACK SOLUTION
Ontrack provides data recovery services to address a wide variety of data
loss situations. Ontrack has the ability to recover data stored in nearly all
types of storage media and operating systems, regardless of the sophistication
or age of the storage media or the operating system. The Company believes that
it is a leading provider of data recovery services and that it has developed the
following competitive advantages:
PROPRIETARY DATA RECOVERY TOOLS. By virtue of its years of experience and
over 34,000 data recoveries, the Company has developed numerous Data Recovery
Tools, including proprietary software
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programs, specialized devices, fixtures and other equipment. These programs
and devices facilitate the data recovery process, which enable data recovery
in a broad range of situations and may reduce the time required to complete a
data recovery project.
SKILLED STAFF OF DATA RECOVERY ENGINEERS AND SOFTWARE DEVELOPERS. Although
Ontrack's Data Recovery Tools substantially automate the diagnosis and recovery
process, the Company's staff of 51 highly trained data recovery engineers plays
a critical role in determining the appropriate course of action during the data
recovery process. The data recovery engineers work closely with Ontrack's staff
of 32 software developers to develop customized data recovery solutions and new
Data Recovery Tools.
ADVANCED DIAGNOSTIC CAPABILITIES. The Company's Data Recovery Tools and
the skills of its data recovery engineers enable the Company to quickly
determine the nature and cause of the data loss, whether the customer's
specified data is recoverable, and the procedures and equipment needed for the
recovery. The diagnostic capabilities also permit Ontrack to identify quickly
and accurately the data losses which cannot be remedied, minimizing unnecessary
costs and delays.
RESPONSIVE AND TIMELY CUSTOMER SUPPORT. Realizing that most customers
experiencing data loss are time-sensitive, the Company's diagnostic procedures
permit its experienced sales representatives to quickly present the customer
with an accurate assessment of the problem and a price quotation before
proceeding with the recovery. The Company offers its customers a variety of
service options, including around-the-clock emergency service, on-site visits
and priority service.
STRATEGY
Ontrack's objective is to be the leading data recovery services provider
worldwide, and to develop new computer data-related products and services. The
Company's strategy includes the following key elements:
MAINTAIN TECHNOLOGICAL ADVANTAGE. The Company intends to continue its
substantial investment in research and development to adapt and expand its Data
Recovery Tools to constant changes in technology. This investment is intended
to continually improve the speed and efficiency of the Company's data recovery
services as well as expand the situations in which the Company can successfully
recover data.
ENHANCE COMMERCIAL SOFTWARE PRODUCTS. The Company will continue to upgrade
DISK MANAGER, a leading disk installation utility for the past 11 years, and
selectively develop and promote additional commercial software products, such as
DISCWIZARD. The software business has not only been profitable for the Company,
but has also played a key role in expanding the Company's knowledge base for the
development of data recovery solutions.
BROADEN SERVICE OFFERINGS. The Company intends to leverage its data
recovery and software development experience to provide new data service
offerings. For example, Ontrack is developing a new process for remote data
recovery that would permit its data recovery engineers to diagnose data losses
and, in many cases, recover the lost data through an electronic data link such
as a modem. The Company also intends to continue to develop its computer
evidence services business, which includes assisting customers in obtaining
evidence from computer systems in criminal and civil cases and testifying as
expert witnesses on computer data-related issues.
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DEVELOP AND STRENGTHEN STRATEGIC RELATIONSHIPS. The Company will continue
to develop and strengthen strategic relationships with organizations that
provide distribution channels for the Company's services and products as well as
access to advanced technology. The Company intends to develop a base of
recurring revenues through new relationships with third party computer
maintenance and support providers who would offer the Company's data recovery
services as part of their service offerings. Additionally, the Company will
continue to develop strategic relationships with hard disk drive and other
storage media manufacturers to enhance its knowledge of storage media technology
and expand the markets for its OEM commercial software products. The Company
also seeks to develop and foster relationships with referral sources for its
data recovery services, such as software companies, retailers, disaster recovery
consultants and other third party service providers.
EXPAND GEOGRAPHICAL PRESENCE. The Company intends to open additional
offices, possibly through strategic acquisitions, domestically and abroad. This
expansion will increase its proximity to potential customers and enhance
awareness of the Company's services in these new markets. The Company opened an
office in Stuttgart, Germany in the fourth quarter of 1996 and plans to open at
least one additional domestic office during 1997.
DATA RECOVERY AND RELATED SERVICES
Ontrack provides data recovery services to address a wide variety of data
loss situations. These services accounted for 73% of the Company's revenues for
1996. The Company is able to recover data from nearly all types of storage
media, including hard disk drives, floppy diskettes, removable or optical
drives, mini cartridges, 4mm and 8mm tapes, 9 track reel-to-reel and others.
Ontrack also has the ability to recover data within virtually any operating
environment, including Banyan Vines, DEC VMS, DOS, Macintosh, Netware, OS/2,
OS400, Sun, Unix, Wang, Windows, Windows 95, Windows NT, XENIX and others.
DATA RECOVERY PROCESS. Customers worldwide can call one of Ontrack's 26
experienced sales representatives to report a data loss. Upon receiving a call,
the sales representative discusses the data loss situation with the customer to
determine the type of failure being experienced as well as the storage device,
media type and operating system being used. The sales representative then
offers to the customer the Company's data recovery service options, including
standard service, priority service, weekend service, around-the-clock emergency
service, and on-site service. The sales representative quotes an estimated cost
range of the requested services and sends a complete set of handling and
shipping instructions and a service agreement to the customer. The customer
generally ships the hard disk drive or other storage media by overnight courier
to one of the Company's facilities and pays a diagnostic fee (generally $200 in
the United States for standard service).
Generally within 24 hours of the arrival of the storage media, the
Company's data recovery engineers perform a thorough diagnostic evaluation to
determine the nature and cause of the data loss, the quantity of data that can
be recovered, and the prescribed course of data recovery. Upon completion of
the diagnosis the sales representative will inform the customer of the results
of the diagnosis. If the data recovery engineer determines that the customer's
specified data cannot be recovered, Ontrack returns the storage media and
diagnostic fee to the customer. If the customer's specified data is
recoverable, the sales representative quotes a specific price that covers all
aspects of the service and establishes the maximum cost for the data recovery.
In accordance with the Company's guidelines, the sales representative
determines the pricing of data recovery services on a case-by-case basis.
Specific factors influencing pricing include the capacity of the
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user's storage device, service options requested, estimated difficulty of the
recovery, type of operating system used, and requirements for use of the
Company's proprietary software tools, clean bench facilities and other
proprietary equipment. The Company estimates that the cost to a customer for
a data recovery can range from as low as $600 to in excess of $100,000. For
example, a data recovery involving 1.2 gigabytes of storage capacity in a
Windows 95 environment with standard service would typically involve a fee in
the range of $600 to $1,400.
If the customer elects to proceed with the data recovery, the Company
performs the recovery and stores the recovered data on the medium of the
customer's choice. The data is returned along with the customer's original
equipment and the customer is invoiced.
The customer's data is treated in a confidential manner, according to any
special handling requirements of the customer. Such requirements may be
particularly rigorous in the case of law enforcement and other government
agencies. The Company was recognized for its protection of sensitive
information as a recipient of the 1995 James S. Cogswell Outstanding Industrial
Security Achievement Award from the United States Department of Defense ("DoD"),
which is awarded to only the top one-half of one percent of all contractors
providing services to the DoD.
DATA RECOVERY TOOLS AND TECHNIQUES. The Company's software developers have
developed and refined the Data Recovery Tools based on Ontrack's extensive
experience in data recovery and file system software development, as well as the
data storage technology it derives from relationships with data storage
manufacturers. The Data Recovery Tools, which have been developed internally
over the past 11 years and include numerous proprietary software programs and
specialized devices, fixtures and other equipment, (i) facilitate the diagnosis
and characterization of data loss, (ii) enable recoveries in situations where
data is often deemed unrecoverable by others, and (iii) automate certain
portions of the recovery process which allows a single data recovery engineer to
perform several recoveries simultaneously. Ontrack maintains an extensive
database of data loss situations it encounters and regularly analyzes this
information to determine its priorities for developing new or enhanced Data
Recovery Tools, some of which have gone through several generations of
development.
Although Ontrack's Data Recovery Tools automate the diagnosis and recovery
process to a large extent, the Company believes its technical engineers who
perform the recoveries serve an equally important role by making critical
decisions regarding the appropriate course of action during the data recovery
process. The Company's data recovery services are performed by its team of 51
data recovery engineers, who have been trained in the Company's diagnosis and
recovery procedures. In order to preserve the integrity and safety of the
customer's original data, the data recovery engineer makes a copy of all
information stored on the customer's media. Generally, data recovery operations
are performed on the Company's network of computers, which can store and rapidly
process high volumes of data. Hardware-related diagnosis and recovery
operations are often performed using the Company's Class 100 rated clean
benches. As a result of its safeguards and its close relationships with
manufacturers of storage devices, Ontrack is authorized to open hard disk drives
of a number of major data storage manufacturers without voiding the
manufacturer's warranty.
OTHER RELATED SERVICES. By leveraging its expertise in the data recovery
field, Ontrack has expanded its services into other areas such as computer
evidence services for both civil and criminal cases. These services assist
customers in obtaining evidence from computer systems, such as files that other
parties attempted to delete or overwrite, as well as in confirming that certain
files were created, modified, deleted,
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copied or destroyed. Company employees also testify as expert witnesses on
computer data-related issues. Ontrack charges for these services generally
on an hourly basis.
The Company also provides training and consulting services for the
protection of data as well as media conversion services. Further, the Company
provides data destruction services, in which the storage media is rendered
incapable of re-use, and drive sanitation services, in which all data is removed
from the storage media but the media may be re-used.
The Company's revenues from these business areas have not been significant
to date.
COMMERCIAL SOFTWARE PRODUCTS
The Company's commercial software products represented 27% of the Company's
total revenues for 1996. The Company produces or markets the following
commercial software products for hard disk drive installation, data recovery and
data protection:
<TABLE>
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NAME DESCRIPTION DISTRIBUTION CHANNEL YEAR INTRODUCED
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<S> <C> <C> <C>
DISK MANAGER Hard disk drive installation OEM; limited retail sales 1985
and partitioning utility
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ONTRACK DATA Data protection and recovery Retail sales; corporate site
RECOVERY FOR for Novell NetWare servers licenses 1994
NETWARE
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ONTRACK VIRUSSCAN Anti-virus protection OEM; retail sales 1995
(1) and NETSHIELD
(1)
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DISCWIZARD(2) Customized Windows-based OEM license to Seagate 1996
installation utility developed
by Ontrack for Seagate
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Trademark of McAfee Associates.
(2) Trademark of Seagate Technology, Inc.
DISK MANAGER is a hard disk drive installation and partitioning utility
for personal computers. This product represented 84.7% of Ontrack's software
revenues in 1996. DISK MANAGER optimizes storage capacity on a wide range of
hard disk drives and facilitates the process of installing replacement or
upgrade drives by linking operating system software with the drives. Since
DISK MANAGER was developed in 1985, the Company has developed new versions of
the program for computers using MS-DOS, Windows, Windows 95, Windows NT, OS/2
and Macintosh operating systems. DISK MANAGER is generally sold on an OEM
basis through hard disk drive manufacturers. By bundling the program with
their hard disk drives, these OEMs are able to reduce their customer's need
for technical support and increase the probability of a successful
installation.
The Company also produces ONTRACK DATA RECOVERY FOR NETWARE, an
off-the-shelf data recovery and data protection software product that
recovers data from Novell NetWare file servers. This product is designed for
specific recovery situations and is not designed to replace the Company's
data recovery
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services. The Company also markets VIRUSSCAN and NETSHIELD, anti-virus
protection programs developed by McAfee Associates.
The Company has recently developed DISCWIZARD, a customized
Windows-based hard disk drive installation utility which serves as a
graphical user interface installation manual for use by the individual who is
installing a hard disk drive. DISCWIZARD was named by Seagate and has been
licensed to Seagate on an exclusive basis through June 30, 1997. The product
was first shipped by the Company to Seagate in September, 1996.
RESEARCH AND DEVELOPMENT
The Company's staff of 32 software developers continually develop and
update the Company's Data Recovery Tools and commercial software products.
In addition, in the performance of data recovery services, the Company's data
recovery engineers collaborate with the software developers in creating new
tools and procedures. Since 1995, the Company has also funded research at
Carnegie Mellon University relating to data recovery processes. The Company
believes Carnegie Mellon University is a leading research institution for
computer science and storage management.
As part of its ongoing development efforts, the Company has devoted
significant resources to developing a new process that would permit its data
recovery engineers to provide diagnostic and data recovery services on a
remote basis. This process would reduce the time and cost associated with
many data recoveries and thus permit the Company to serve customers who are
unwilling or unable to send their storage media to the Company's facilities.
The Company believes that the ability to serve customers through an electronic
data link, such as a modem, would further distinguish the Company from other
data recovery service providers. The Company has filed an application for a
process patent concerning certain remote data recovery operations.
Implementation and testing of the software for these operations is underway.
BRANCH OFFICES AND EXPANSION STRATEGY
The Company opened its branch offices in London, Los Angeles,
Washington, D.C. and Stuttgart, Germany in 1991, 1992, 1995 and 1996,
respectively. Each of the Company's facilities has stand alone data recovery
capabilities, although the Company may send unique and overflow work to its
main office in Minneapolis.
In 1994, the Company granted to Y-E Data an exclusive license to use the
Company's proprietary processes to perform data recovery, data conversion and
consulting services in Japan. Y-E Data is a subsidiary of Yaskawa Electric,
Inc., a major technology company. Under the terms of the agreement with Y-E
Data, Y-E Data must pay monthly royalties to the Company based on the gross
service revenues earned by Y-E Data and the Company retains complete
ownership of its intellectual property. Both Ontrack and Y-E Data may
terminate the agreement immediately upon a material breach by the other party
and Ontrack may also terminate the agreement on 90 days' notice if it is not
satisfied with Y-E Data's performance and Y-E Data does not satisfactorily
address Ontrack's concerns within that period.
The Company intends to open one additional office in the United States
in 1997 and additional branch offices over time. This expansion will
increase its proximity to potential customers, some of whom prefer or are
required to use a local data recovery company. A new branch office is
generally staffed initially with six to eight employees, including two to
three data recovery engineers. The pace at which the Company
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is able to open additional branch offices is limited by the availability of
qualified engineers, as well as the time required to provide necessary
training. The Company may also open new offices through strategic acquisitions
domestically and abroad.
SALES, MARKETING AND CUSTOMER SUPPORT
The Company has historically generated a large proportion of its data
recovery services revenue as a result of general name recognition, referrals
from prior customers and disk drive manufacturers and advertising. The Company
has a dedicated program to promote customer referrals. In order to establish a
recurring revenue base, the Company also recently has dedicated marketing
resources to obtain contracts with third party maintenance companies which would
offer the Company's data recovery services as part of their service offerings.
In addition, the Company has begun to market other services, such as computer
evidence services, to law enforcement agencies and legal organizations.
The Company markets its commercial software products through its sales
force, which is focused on maintaining and expanding relationships with hard
disk drive manufacturers and other corporate partners for sales on an OEM
basis. The Company's commercial software products are also sold on a retail
basis through distributors. The Company has focused on building customer
awareness of its services by including promotional material with its commercial
software products. In addition, the Company advertises its services and
products through direct mail, periodicals and trade journals and participates
in selected industry trade shows.
As of February 28, 1997, the Company's direct sales force consisted of 39
people at the Company's offices in Minneapolis, Los Angeles, Washington, D.C.,
London and Stuttgart, of which 26 were sales representatives who have primary
responsibility for fielding incoming calls and 13 were dedicated to developing
new sales opportunities. In addition, the Company employed 17 customer support
personnel and 12 marketing personnel.
CUSTOMERS
The Company provides data recovery services to a broad range of customers,
including Fortune 500 companies, governmental agencies, educational and
financial institutions, as well as small businesses and individuals. The
Company's software products are sold principally on an OEM basis to hard disk
drive manufacturers. Historically sales of software products to individual
OEMs have varied from period to period and there can be no assurance that
such deviations will not continue.
No single customer accounted for 10% or more of the Company's revenues in
1994, 1995 or 1996.
COMPETITION
The data recovery market is currently served by a large number of
relatively small, independent service providers. Competition among these firms
is intense and barriers to entry are low for competitors seeking to offer data
recovery services. The Company believes that the primary competitive factors in
the data recovery business are name recognition, the effectiveness of the data
recovery services, the ability to operate within a large number of operating
environments with a variety of storage media, the timeliness of the services,
the number of emergency and custom services provided, and cost. The Company
believes that its experience with data storage, its substantial investment in
personnel and its Data Recovery Tools
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represent competitive advantages. However, potential customers seeking to
select a data recovery firm, generally within a short time frame, may find it
difficult to differentiate among competing firms. In addition, there can be
no assurance that large hardware and software providers with substantial
experience in electronic data storage will not seek to enter the data
recovery business. Such firms may have greater economic resources and name
recognition than the Company, and any such entry may have a material adverse
effect on the Company's financial condition and results of operations.
The Company also faces indirect competition in the data recovery business
from certain sources that computer users are likely to call when first seeking
data recovery assistance, including internal MIS departments, retail stores,
computer resellers, and customer service centers of computer manufacturers and
software publishers. Some potential customers may also seek to recover data
using off-the-shelf software utility programs. In some instances these initial
efforts may compound an otherwise resolvable problem and render the data
unrecoverable even by Ontrack. Moreover, many people seeking to recover
seemingly lost data are not even aware that independent data recovery firms are
an option.
The computer software industry is highly competitive and characterized by
significant and rapid technological advances. The Company markets a number of
commercial software products for hard disk drive installation, data recovery and
data protection, and faces substantial competition in the development and
marketing of these products. The Company currently sells the vast majority of
its commercial software products to hard disk drive manufacturers on an OEM
basis, and there is no assurance that any such relationships will continue.
Developers of competing software may offer their products to the OEMs at prices
lower than those of the Company's products. This price competition may cause
the Company to lose OEM customers or may force the Company to lower its prices,
which may have a material adverse effect on software revenues and margins. In
addition, as higher capacity drives and improved operating systems are designed
and marketed, Ontrack must continue to develop and market enhanced versions of
its products to complement the new technologies.
Ontrack's future success in the software industry is dependent on its
ability to continue to provide its OEM customers and computer users with
competitively priced products which add valuable assistance in the installation
of hard disk drives, data protection and data recovery. In addition, there can
be no assurance that OEMs who have more resources and stronger name recognition
than the Company will not develop their own products that compete with the
Company.
PROPRIETARY TECHNOLOGY
The Company currently relies on a combination of copyright, trademark and
trade secret laws, non-disclosure agreements and other methods to protect its
proprietary technology. In addition, the Company has applied for a United
States patent relating to systems and methods for allowing remote diagnosis and
data recovery through an electronic data link such as a modem. There can be no
assurance that any meaningful patent protection will result from this patent
application and/or that systems or methods disclosed in the patent application
do not infringe any third party patents or copyrights.
There can be no assurance that any future patents acquired by Ontrack will
be of sufficient scope or strength to provide meaningful protection of its
products and technologies. The coverage sought in a patent application can be
denied or significantly reduced before the patent is issued. In addition, there
can be no assurance that any future Ontrack patents will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
it with proprietary protection or commercial advantage. Should
11
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attempts be made to challenge, invalidate or circumvent future patents
acquired by the Company in the United States Patent and Trademark Office
and/or courts of competent jurisdiction in the United States or abroad,
Ontrack may have to participate in legal or quasi-legal proceedings therein,
to maintain, defend or enforce its rights in these future patents. Any legal
proceedings to maintain, defend or enforce future patent rights acquired by
Ontrack can be lengthy and costly, with no guarantee of success. There also
can be no assurance that Ontrack will file additional patent applications or
that patents will issue from Ontrack's pending patent application. In
addition, the Company's proprietary technology involves the use of
copyrightable material such as computer software. Existing copyright laws
afford only limited protection, and it may be possible for unauthorized third
parties to copy the Company's products and processes or to reverse engineer
or obtain and use information that the Company regards as proprietary.
Intellectual property litigation is complex and expensive, and the outcome
of such litigation is difficult to predict. Any future litigation, regardless
of outcome, may result in substantial expense to the Company and significant
diversion of the efforts of its technical and management personnel. An adverse
determination in any such proceeding may subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from such
parties, if licenses to such rights could be obtained, or require Ontrack to
cease using such technology. There can be no assurance that if such licenses
were obtainable, they would be obtainable at costs reasonable to Ontrack. If
forced to cease using such technology, there can be no assurance that Ontrack
would be able to develop or obtain alternate technology. An adverse
determination in a judicial or administrative proceeding, changes in patent or
copyright laws or failure to obtain necessary licenses may prevent Ontrack from
manufacturing, using or selling certain of its products or processes, which may
have a material adverse effect on the Company's financial condition and results
of operations.
There also can be no assurance that any party does not presently have, or
might not in the future acquire, additional patent rights, copyrights or other
intellectual property rights in the United States which might be infringed by
current or future processes employed by Ontrack or Ontrack products and provide
the basis for an infringement action against Ontrack.
Ontrack also relies on proprietary processes and techniques, materials
expertise and trade secrets applicable to the computer data recovery industry.
Ontrack believes that these proprietary rights may provide it with a competitive
advantage as important, if not more important, to Ontrack as patent protection.
Ontrack seeks to maintain the confidentiality of this proprietary information by
requiring employees who work with proprietary information to sign
confidentiality agreements and by limiting the access of outside parties to such
proprietary information. There can be no assurance, however, that these
measures will provide Ontrack with adequate protection of its proprietary
information or with adequate remedies in the event of unauthorized use or
disclosure. In addition, there can be no assurance that Ontrack's competitor
will not independently develop or otherwise gain access to processes, techniques
or trade secrets that are similar or superior to Ontrack's. Finally, as with
patent rights, legal action to enforce trade secret rights may be lengthy and
costly, with no guarantee of success.
The Company believes that, due to the rapid pace of technological
innovation for data recovery services and operating system software, the
Company's ability to maintain its leadership position may be dependent more upon
the skills of its software development personnel than upon the legal protections
afforded its existing technology.
12
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EMPLOYEES
As of February 28, 1997, the Company had a total of 231 full time
employees, including 67 in data recovery engineering, 40 in software
development, 51 in sales and marketing, 17 in customer support and 56 in
administration and finance. None of the Company's employees is represented
by a labor union or is subject to a collective bargaining agreement. The
Company has never experienced a work stoppage and believes its employee
relations are good.
The success of the Company depends in large part upon the ability of the
Company to recruit and retain qualified employees, particularly highly skilled
engineers. The competition for such personnel is intense. There can be no
assurance that the Company will be successful in retaining or recruiting key
personnel.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Michael W. Rogers 41 Chairman and Chief Executive Officer
John E. Pence 50 President and Director
Gary S. Stevens 40 Senior Vice President, Engineering and Director
Thomas P. Skiba 41 Vice President and Chief Financial Officer
Marshall A. Warwaruk 51 Vice President of Business Development
John M. Bujan 52 General Counsel and Secretary
MICHAEL W. ROGERS has served as Chief Executive Officer of the Company
since 1986 and as Chairman since 1989. Additionally, Mr. Rogers has served as a
Director of the Company since 1985 and from 1989 to May 1996 as Chief Financial
Officer. From 1980 to 1985, Mr. Rogers was employed by Control Data Corporation
("CDC"), where he served as a Senior Developer of diagnostic software routines
and as a Senior Electrical Engineer and an Electrical Engineer for software and
hardware development. From 1978 to 1980, he was an Associate Engineer with
Westinghouse Bettis Atomic Power Laboratory, a subsidiary of Westinghouse
Electric Corporation.
JOHN E. PENCE has served as President and as a Director of the Company
since 1985. From 1971 to 1985, he was employed by CDC, where he served as
Department Head for the Program Management Office for CDC's mini-micro
peripheral development (1984 to 1985), managed the Technical Support
organization for worldwide support of CDC's plug compatible peripheral business
(1981 to 1984) and served in various other capacities related to software
development and computer programming (1971 to 1981).
13
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GARY S. STEVENS has served as Senior Vice President, Engineering and as a
Director of the Company since 1985. From 1979 to 1985, Mr. Stevens was a
designer and diagnostic programmer of disk subsystems for CDC.
THOMAS P. SKIBA has served as Vice President and Chief Financial Officer of
the Company since May 1996. From 1992 to April 1996, Mr. Skiba was Chief
Financial Officer of IVI Publishing, Inc., a publicly-held electronic publisher
of health and medical information. From 1977 to 1992, he was employed by Ernst
& Young LLP, most recently as a Senior Manager in the audit group.
MARSHALL A. WARWARUK has served as Vice President of Business Development
of the Company since February 1995. From 1989 to 1994, Mr. Warwaruk was
employed by the information management and application development tools
department of Sterling Software, Inc., a software company, where he served as
Director of Business Development (1993 to 1994), Vice President of Sales and
Marketing (1992 to 1993), Vice President of Business Development (1991 to 1992)
and Vice President of the Zanthe Systems Division (1989 to 1991). Prior to that
time, Mr. Warwaruk served as Executive Vice President of Zanthe Information
Inc., a developer of database management software tools, from 1987 to 1986 and
as President of Simware, Inc., a data communications software company, from 1985
to 1987.
JOHN M. BUJAN has served as General Counsel and Secretary to the Company
since March 1996. From 1981 to March 1996, Mr. Bujan was the principal of John
M. Bujan, P.A., an Edina, Minnesota law firm concentrating in business and
commercial matters and computer software licensing. From 1985 through March
1996, John M. Bujan, P.A. provided legal services to the Company. From 1975 to
1981, he was an associate attorney with Gustafson & Adams, P.A., an Edina,
Minnesota law firm.
ELECTION. The Company's officers are elected by the Board of Directors.
The officers serve until their successors are elected or until their earlier
resignation, removal or death.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains its headquarters in Minneapolis in an approximately
40,900 square-foot facility under a lease that expires in January 1999. The
Company also leases approximately 7,200 square feet of space in Los Angeles,
under a lease expiring in July 2001, and approximately 3,700 square feet of
space in Washington, D.C. under a lease that expires in September 2000. The
Minneapolis and Washington, D.C. leases each have a three-to-five year option
for extension. The Company also leases approximately 5,600 square feet of space
for its office in London under a lease that expires in November 2000 and leases
approximately 1,750 square feet of space for its office in Stuttgart under a
lease which expires in October 2001.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are subject to various
legal actions and proceedings in the normal course of business, some of which
may involve substantial claims for compensatory damages. In some cases, these
actions and proceedings relate in whole or in part to activities of banks prior
to their acquisition and may be covered by agreements of former owners of these
banks to indemnify the Company. Although litigation is subject to many
uncertainties and the ultimate exposure with respect to current matters cannot
be ascertained, management does not believe that the final outcome will have a
material adverse effect on the financial condition of the Company.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information as to the principal market on which the Company's common stock
is traded, market price information for the common stock of the Company, the
approximate number of holders of record as of December 31, 1996, and the
Company's dividend policy is incorporated herein by reference from the 1996
Annual Report to Shareholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference from the 1996 Annual Report to
Shareholders.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Balance Sheets of the Company as of December 31, 1996 and
1995, and the related Consolidated Statements of Income, Shareholders' Equity
and Cash Flows for each of the three years ended December 31, 1996, the Notes to
the Consolidated Financial Statements and the Report of Price Waterhouse LLP,
independent accountants, is contained in the Company's 1996 Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information set forth in the Company's 1997 Proxy Statement under the
captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" is incorporated herein by reference. Information
regarding the executive officers of the Company is included under separate
caption in Part I of this Form 10-KSB.
15
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The information set forth in the 1997 Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the 1997 Proxy Statement under the caption
"Security Ownership of Principal Shareholders and Management" is incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the 1997 Proxy Statement under the caption
"Certain Transactions" is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation, as amended (incorporated by reference
to Exhibit 3.1 of the Company's Registration Statement on Form SB-2
(File No. 333-05470C) as declared effective by the Commission on
October 21, 1996 (the "Form SB-2")).
3.2 Amended Bylaws (incorporated by reference to Exhibit 3.2 to the
Form SB-2).
10.1 1996 Stock Incentive Plan (incorporated by reference to Exhibit 10.1
to the Form SB-2).
10.2 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.2 to the Form SB-2).
10.3 Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.3 to the Form SB-2).
10.4 Software License Agreement dated June 25, 1996 between the Company
and Seagate Technology (incorporated by reference to Exhibit 10.4
to the Form SB-2), as amended by the Seagate Technology letter
dated November 21, 1996.
10.5 License Agreement dated November 17, 1994 between the Company and
Y-E Data, Inc. (incorporated by reference to Exhibit 10.5 to the
Form SB-2).
10.6 Lease for Minneapolis, Minnesota offices between the Company and
Metropolitan Life Insurance Company dated November 2, 1988, as
amended by Amendment to Lease dated August 28, 1989, Amendment #2
dated January 8, 1990, Amendment to Lease dated December 5, 1991,
Amendment to Lease dated December 14, 1993, Second Amendment to
Lease dated November 22, 1994 and Third Amendment to Lease dated
as of January 30, 1996 (incorporated by reference to Exhibit 10.6
to the Form SB-2).
10.7 Stock Transfer Agreement dated July 16, 1996 by and among Michael
W. Rogers, Gary S. Stevens, John E. Pence, Rogers Family L.P.,
Stevens Family L.P. and Pence Family L.P. (incorporated by reference
to Exhibit 10.7 to the Form SB-2).
10.8 Employment Agreement dated August 6, 1996 between the Company and
Michael W. Rogers. (incorporated by reference to Exhibit 10.8 to the
Form SB-2).
10.9 Employment Agreement dated August 6, 1996 between the Company and
Gary S. Stevens (incorporated by reference to Exhibit 10.9 to the
Form SB-2).
16
<PAGE>
10.10 Employment Agreement dated August 6, 1996 between the Company and
John E. Pence (incorporated by reference to Exhibit 10.10 to the
Form SB-2).
10.11 Letter Agreement dated April 11, 1996 between the Company and
Thomas P. Skiba (incorporated by reference to Exhibit 10.11 to
the Form SB-2).
10.12 Letter Agreement dated February 28, 1996 between the Company and
John M. Bujan (incorporated by reference to Exhibit 10.12 to the
Form SB-2).
10.13 Letter Agreement dated January 10, 1995 between the Company and
Marshall A. Warwaruk (incorporated by reference to Exhibit 10.13
to the Form SB-2).
10.14 Stock Purchase Agreement dated March 4, 1991 by and among the
Company, John E. Pence, Gary S. Stevens, Michael W. Rogers and
the Investors (as defined therein) (incorporated by reference
to Exhibit 10.14 to the Form SB-2).
10.15 Commercial Note, Revolving Loan Agreement, Security Agreement and
Arbitration Agreement, each dated as of July 31, 1996, between
the Company and Norwest Bank Minnesota, N.A. (incorporated by
reference to Exhibit 10.15 to the Form SB-2).
10.16 Form of License Agreement with OEM Customers (incorporated by
reference to Exhibit 10.16 to the Form SB-2).
11.1 Computation of pro forma net income per share
13.1 1996 Annual Report to Shareholders
21.1 Subsidiaries of the Company
23.1 Consent of Price Waterhouse LLP
24.1 Power of Attorney, included in the Signature Page
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K. None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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 on March 17, 1997.
ONTRACK DATA INTERNATIONAL, INC.
By /s/ Michael W. Rogers
--------------------------------
Michael W. Rogers, Chairman and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Michael W. Rogers and Thomas P. Skiba, and each of them, his or her true and
lawful attorney-in-fact and agent, with full power of substitution, to sign
on his or her behalf, individually and in each capacity stated below, all
amendments and post-effective amendments to this Annual Report on Form 10-KSB
and to file the same, with all exhibits thereto and any other documents in
connection therewith, with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
and to all intents and purposes as each might or could do in person, hereby
ratifying and confirming each act that said attorneys-in-fact and agents may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant,
in the capacities indicated, on March 17, 1997.
Signature Title
- --------- -----
/s/ Michael W. Rogers Chairman and Chief Executive
- ---------------------- Officer (principal executive officer)
Michael W. Rogers
/s/ John E. Pence President and Director
- ----------------------
John E. Pence
/s/ Thomas P. Skiba Vice President and Chief Financial Officer
- ---------------------- (principal financial and accounting officer)
Thomas P. Skiba
/s/ Gary S. Stevens Senior Vice President, Engineering and Director
- ----------------------
Gary S. Stevens
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/s/ Roger D. Shober Director
- ----------------------
Roger D. Shober
/s/ Robert M. White Director
- ----------------------
Robert M. White, Ph.D.
/s/ Jacqueline C. Morby Director
- ----------------------
Jacqueline C. Morby
/s/ Richard J. Runbeck Director
- ----------------------
Richard J. Runbeck
19
<PAGE>
EXHIBIT 10.4
November 21, 1996
Mr. John Pence
President
Ontrack Data International, Inc.
6321 Bury Drive, Suite 15-21
Eden Prairie, MN 55346
Re: Software License Agreement for Seagate Technology dated June 25, 1996
Dear Mr. Pence:
Pursuant to Section 1 of the above-referenced Agreement, this is to notify
ONTRACK that Seagate is hereby exercising its right to extend for an additional
six (6) month period its exclusive licensing rights for the PRODUCT as defined
in the Agreement. Seagate understands that its right to exercise is subject to
the conditions specified in the Agreement.
Sincerely,
/s/ Thomas F. Mulvaney
Sr. V.P. and General Counsel
<PAGE>
EXHIBIT 11.1
ONTRACK DATA INTERNATIONAL
COMPUTATION OF PRO FORMA NET INCOME PER SHARE (1)
1996 1995 1994
---------- ---------- ----------
Weighted average common shares
outstanding (2) 7,995,341 6,000,000 6,000,000
Common stock equivalents:
Assumes conversion of Convertible
Redeemable Preferred Stock (3) -- 1,500,000 1,500,000
Weighted average options outstanding
under Treasury Stock method 223,840 -- --
Cheap stock (4)
Options outstanding prior to IPO -- 289,194 289,194
Options exercised -- 102,674 102,674
Less: treasury stock repurchase of
cheap stock attributed to options -- (97,411) (97,411)
---------- ---------- ----------
Weighted average common and common
stock equivalent shares outstanding 8,219,181 7,794,457 7,794,457
---------- ---------- ----------
---------- ---------- ----------
Net income $3,123,527 $2,205,294 $1,505,294
---------- ---------- ----------
---------- ---------- ----------
Pro forma net income per share $ 0.38 $ 0.28 $ 0.19
---------- ---------- ----------
---------- ---------- ----------
(1) This exhibit should be read in conjunction with the "Significant Accounting
Policies - Pro Forma Net Income Per Share" in Note 2 of the Notes to the
Consolidated Financial Statements.
(2) Weighted average shares outstanding for 1996 include 1,500,000 shares of
common stock assumed outstanding at the beginning of the period and
actually outstanding since October 21, 1996. See (3) below.
(3) Assumes the conversion of the Company's Convertible Redeemable Preferred
Stock into 1,500,000 shares of common stock effective January 1, 1994
(earliest period presented). 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.
(4) Cheap stock includes stock options granted or exercised subsequent to
August 20, 1995 pursuant to SAB Topic 4-D (applicable for periods prior to
IPO).
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Ontrack is a leading provider of data recovery services to a broad range of
customers experiencing a loss of valuable computer data. During the past ten
years, Ontrack has performed over 34,000 data recoveries for Fortune 500
corporations, governmental agencies, educational and financial institutions, as
well as small businesses and individuals. The Company first developed expertise
in data file structures, operating systems, and storage media technologies in
1985 through the development of DISK MANAGER, a hard disk drive installation
software utility which the Company continues to market.
In 1987, the Company made a strategic decision to build a data recovery services
business to address the needs of the growing number of computer users unable to
access their computer data due to a wide variety of computer failures resulting
from: (i) user errors; (ii) wear, aging and physical abuse; (iii) improper or
incompatible software installation; (iv) sabotage, computer viruses or
vandalism; and (v) environmental conditions. Although computer users often
pursue protective measures to prevent data loss, including backing up the data,
implementing anti-virus procedures and developing disaster recovery plans, these
measures have not eliminated data loss situations. Aided by the proliferation
of computers and the corresponding increased dependence on fast and reliable
access to stored data, the Company has experienced an increased demand for its
data recovery services in recent years.
Service revenues are derived principally from the performance of data recovery
services and royalties from the license of the Company's data recovery
technology in Japan to Y-E Data, a subsidiary of Yaskawa Electric, Inc., a major
technology company. The principal factors affecting service revenues are the
number and type of data recovery jobs the Company performs during a period. The
Company's data recovery revenues are dependent on the occurrence of numerous
isolated data loss events and on potential customers' decisions to use the
Company's services in the case of a data loss. The Company has had a history of
continued growth in the number of jobs performed on a year to year basis,
however fluctuations may occur in any given quarter. In addition, the amount of
revenue per job can fluctuate depending on the mix of jobs performed in any
given period and the pricing for specific jobs, which is based on the requested
level of service and other factors. Software revenues are derived principally
from sales through OEMs, which are difficult to predict. The Company does not
expect software revenues to continue at the volume experienced in 1996, because
such revenues were higher than historical levels as described below under
"Comparison of Years Ended December 31, 1994, 1995 and 1996".
International revenues include data recovery services and software sales from
the Company's wholly owned subsidiaries in London, England and Stuttgart,
Germany and royalties from the license of the Company's data recovery technology
to Y-E Data. Total international revenues were 12%, 14% and 17% of consolidated
revenues for the years ended December 31, 1994, 1995 and 1996, respectively.
The Company's revenues from its London, England and Stuttgart, Germany
subsidiaries are denominated in foreign currencies, and royalties from its Y-E
Data arrangement are calculated based on sales in Japanese yen and paid monthly
in U.S. dollars.
6
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain components of the Company's consolidated
statement of income as a percent of total revenue for the period indicated.
For the Years Ended
December 31
-----------------------------
1996 1995 1994
------ ------ ------
Revenues
Services 73.4% 70.3% 68.2%
Software 26.6 29.7 31.8
----- ----- -----
Total revenues 100.0 100.0 100.0
Cost of Revenue
Services (1) 14.3 15.5 17.1
Software (2) 24.2 23.4 24.1
Total cost of revenues 16.9 17.9 19.3
----- ----- -----
Gross Margin 83.1 82.1 80.7
Operating expenses:
Research and development 18.9 18.7 23.7
Sales and marketing 26.4 25.7 26.2
General and administrative 20.5 17.5 17.6
----- ----- -----
Total operating expenses 65.8 61.9 67.5
----- ----- -----
Operating income 17.3 20.2 13.2
Net income 11.7 12.9 12.8
(1) Shown as a percentage of services revenues.
(2) Shown as a percentage of software revenues.
7
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
REVENUES
The Company's total revenues increased 46.2% from $11.7 million in 1994 to
$17.1 million in 1995 and then increased 56.7% to $26.8 million in 1996.
SERVICES. Service revenues increased 50.0% from $8.0 million in 1994 to
$12.0 million in 1995 and then increased 64.2% to $19.7 million in 1996. The
increases in both periods were due principally to an increase in the number of
data recovery jobs performed. Other factors include the addition of offices in
Washington, D.C. in mid-1995 and in Stuttgart, Germany in November, 1996.
SOFTWARE. Software revenues increased 37.8% from $3.7 million in 1994 to
$5.1 million in 1995 and then increased 39.2% to $7.1 million in 1996. The
increases were due principally to higher sales of Disk Manager to existing and
new hard disk drive original equipment manufacturers (OEM's) through royalty
arrangements. Also contributing to the increase in 1996 was the release of
DiscWizard by Seagate Technology, Inc. DiscWizard is a customized Windows-based
hard disk drive installation utility developed by the Company which is being
licensed exclusively to Seagate.
GROSS MARGINS
SERVICES. Cost of services consists primarily of employee compensation and
facility and supply costs incurred in providing data recovery services. Gross
margins on services revenues as a percentage of services revenues were
approximately 82.9%, 84.4% and 85.7% for the years ended December 31, 1994, 1995
and 1996, respectively. The improved gross margin percentages in 1995 and 1996
were principally due to a decline in the amount of engineering labor per data
recovery job, resulting from increased automation in the data recovery process
as a result of the Company's research and development activities.
SOFTWARE. Cost of software includes primarily disk replication, packaging
and technical support personnel costs. With the Company's OEM royalty
arrangements, the OEM incurs all replicating and packaging costs and the
Company's costs are limited to that of providing technical support. Costs of
developing new commercial software products and enhancing current software
products are not included, as such costs are expensed as incurred and included
in research and development. Gross margins on software revenues as a percentage
of software sales were 75.9%, 76.6% and 75.8% for the years ended December 31,
1994, 1995, and 1996, respectively. The improved gross margin in 1995 was
attributed to an increase in OEM royalty revenue as a percent of total software
revenues which involve minimal costs to the Company. The decrease in gross
margin percentage in 1996 was due to lower prices on OEM sales due to customers
earning unit volume discounts and from competitive pressures on software
products which are expected to continue to impact gross margins. Future gross
margins in the software business will continue to be impacted by the mix of
royalty sales and non-royalty sales.
8
<PAGE>
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. The Company's research and development
expenses consist of employee and facility costs directed towards the
following: (i) development of new Data Recovery Tools and processes designed
to improve the speed and efficiency of the Company's data recovery services
and to expand the situations in which the Company can successfully recover
data; (ii) training of software developers and data recovery engineers to
perform data recovery on new and different storage media devices; and (iii)
development of new or enhanced commercial software products. Research and
development expenses increased 14.3% from $2.8 million in 1994 to $3.2
million in 1995 and then increased 59.4% to $5.1 million in 1996. These
increases are due to the addition of software developers and data recovery
engineers who perform research and development activities, as well as
increased expenditures in 1996 on development of a new process to provide
diagnostic and data recovery services on a remote basis. As a percentage of
revenue, research and development expenses were 23.7%, 18.7% and 18.9% in
1994, 1995 and 1996 respectively. Research and development expenses, both in
dollars and 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 consist principally
of compensation expenses to sales and marketing personnel, advertising,
promotions and attendance at trade shows. Sales and marketing expenses
increased 41.9% from $3.1 million in 1994 to $4.4 million in 1995 and then
increased 61.4% in 1996 to $7.1 million. As a percentage of revenues, sales and
marketing expenses were 26.2% in 1994, 25.7% in 1995 and 26.4% in 1996. The
increases in sales and marketing dollars are due principally to the compensation
and advertising costs associated with generating increased revenue as well as
costs associated with hiring additional personnel who are devoted to expanding
the Company's strategic relationships with storage media manufacturers, third
party maintenance providers and other revenue referral sources.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 42.9% from $2.1 million in 1994 to $3.0 million in 1995 and then
increased 83.3% in 1996 to $5.5 million. As a percentage of revenues,
general and administrative expenses were 17.6% in 1994, 17.5% in 1995 and
20.5% in 1996. The 1996 increases in general and administrative dollars and
as a percentage of revenues 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. The 1996 increases were also due in part to start-up costs
incurred in connection with the opening of the Company's new office in
Stuttgart, Germany.
9
<PAGE>
OTHER INCOME
Other income in 1994 included $575,000 related to a settlement of a
trade secret dispute concerning an anti-virus software product. The Company
discontinued sales of this product in April 1995 and has commenced
distribution of a different anti-virus product. Excluding this one time
item, other income has grown from $31,000 in 1994 to $136,000 in 1995 and
$292,000 in 1996. The increases are due to increased interest income
resulting from increased cash and marketable securities balances.
PROVISION FOR INCOME TAXES
The Company's effective tax rate in 1994, 1995 and 1996 was 30%, 39% and
37%, respectively. The increase in 1995 over 1994 was due principally to a
reduction in the credit for research and development expenses as this credit was
phased out in 1995. The decrease in the rate in 1996 was due principally to the
cash received from the Company's initial public offering being invested in
tax-exempt securities. Corporate statutory tax rates in England approximated
those in the United States for these periods while the German statutory tax rate
for 1996 was approximately 42%.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1985 through October 1996, the Company has financed
its growth through cash generated from its operations. Net cash flow from
operations was $2.1 million in 1994, $2.1 million in 1995 and $5.5 million in
1996. The 1996 increase in cash generated from operations was due principally
to increased earnings and the timing of payment of certain accrued expenses.
Cash used in investment activities was primarily for purchases of furniture
and equipment. Additions to furniture and equipment were $662,000, $1.8 million
and $2.9 million in the years ended 1994, 1995 and 1996, respectively. The
increase in capital expenditures was caused by the Company's growth, including
opening new offices and purchasing equipment for its expanded staff. The
Company expects capital expenditures to increase over the next several years as
it expands its current facilities and opens facilities in new domestic and
international locations.
In October, the Company completed an initial public offering of its common
stock which resulted in net proceeds to the Company of $23.8 million. The net
proceeds from this offering will be used for general corporate purposes. A
portion of the net proceeds may also be used to open additional offices, or for
investments in or acquisitions of complementary businesses, products or
technologies, although the Company does not have any present commitments,
agreements or understandings for any such investments or acquisitions. Pending
use, the Company has invested the proceeds in tax-exempt government marketable
securities, $5.9 million of which are classified as long-term, with the
remaining proceeds classified as cash and cash equivalents.
10
<PAGE>
The Company expects that these proceeds along with cash generated from its
operations will be adequate to meet its capital needs for the foreseeable
future.
Management expects further dilution of net income per share in 1997 due to
the issuance of 2,180,000 shares of common stock in October 1996 through an
initial public offering. Given that these shares were outstanding for less than
three months in 1996 and that they will be outstanding for all of 1997, 1997
weighted average common shares outstanding will increase to approximately 10.0
million from 8.2 million in 1996, or approximately 22%.
FORWARD-LOOKING STATEMENTS
Information included in this Annual Report which uses forward-looking
terminology such as "may," "will," "expect," "plan," "intend," "anticipate,"
"estimate," or "continue" or other variations thereon constitutes
forward-looking information. The factors set forth below and other risk factors
included in the Company's Prospectus dated October 21, 1996 constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to differ materially from those in such
forward-looking statements: (i) the computer industry is characterized by rapid
technological changes and frequent introductions of new enhanced products and
the Company must constantly adapt its data recovery techniques, its data
recovery hardware and software tools and its commercial software products to
keep pace with these technological changes; (ii) future technological
developments in computer operating systems, automatic data backup systems and
other data protection techniques have the potential to eliminate or reduce the
risk of data loss; (iii) the Company has experienced, and expects to continue
experiencing, rapid growth and there can be no assurance that the Company will
manage its growth effectively; and (iv) the Company depends to a large degree on
its ability to attract and retain technical personnel, and on the efforts and
abilities of its three founders and other management personnel.
11
<PAGE>
COMMON STOCK INFORMATION
The Company became a public company on October 21, 1996 and trades in the
over-the-counter market under the symbol "ONDI." The high and low closing
sale prices, as reported by NASDAQ for the period of October 21, 1996 through
December 31, 1996, were $15 1/8 and $10 7/8, respectively. As of December 31,
1996, the Company had 1,905 shareholders of record.
In 1994 and 1995, as a private company, Ontrack paid dividends totaling
$25,517 and $45,000 respectively. The Company paid no dividends in 1996 and
does not anticipate paying any cash dividends on its common stock in the
foreseeable future. The Company intends to retain any future earnings for
use in business development.
12
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
-----------------
ASSETS 1996 1995
------- ------
CURRENT ASSETS:
Cash and cash equivalents $22,684 $2,028
Accounts receivable, net 2,499 1,410
Prepaid expenses and other current assets 1,244 1,000
------- ------
TOTAL CURRENT ASSETS 26,427 4,438
Furniture and equipment, net 3,733 2,162
Marketable securities 5,857 -
Other assets 618 261
------- ------
TOTAL ASSETS $36,635 $6,861
------- ------
------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 69 $ 64
Accounts payable 579 563
Accrued income taxes 733 153
Accrued expenses 2,706 762
------- ------
TOTAL CURRENT LIABILITIES 4,087 1,542
Long-term debt, less current portion 142 211
------- ------
TOTAL LIABILITIES 4,229 1,753
CONVERTIBLE REDEEMABLE PREFERRED STOCK - 5,231
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock; $.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding - -
Common stock; $.01 par value; 25,000,000 shares
authorized; 9,789,240 and 6,000,000 shares
issued and outstanding at December 31, 1996
and 1995, respectively 98 60
Additional paid-in capital 29,599 -
Cumulative translation adjustment 33 34
Retained earnings (accumulated deficit) 2,676 (217)
------- ------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 32,406 (123)
------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $36,635 $6,861
------- ------
------- ------
See accompanying notes to financial statements.
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
REVENUES:
Services $ 19,654 $ 12,048 $ 8,000
Software 7,109 5,097 3,734
--------- --------- ---------
Total revenues 26,763 17,145 11,734
COST OF REVENUES:
Services 2,804 1,873 1,365
Software 1,718 1,193 901
--------- --------- ---------
Total cost of revenues 4,522 3,066 2,266
--------- --------- ---------
GROSS MARGIN 22,241 14,079 9,468
OPERATING EXPENSES:
Research and development 5,052 3,214 2,779
Sales and marketing 7,077 4,400 3,071
General and administrative 5,480 3,000 2,070
--------- --------- ---------
Total operating expenses 17,609 10,614 7,920
--------- --------- ---------
OPERATING INCOME 4,632 3,465 1,548
Interest income 298 170 52
Interest expense (21) (29) (44)
Litigation settlement and other income (expense) 15 (5) 598
--------- --------- ---------
Total other income (expense) 292 136 606
--------- --------- ---------
INCOME BEFORE INCOME TAXES 4,924 3,601 2,154
PROVISION FOR INCOME TAXES 1,800 1,396 649
--------- --------- ---------
NET INCOME $ 3,124 $ 2,205 $ 1,505
--------- --------- ---------
--------- --------- ---------
PRO FORMA NET INCOME PER SHARE $ 0.38 $ 0.28 $ 0.19
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING
USED IN COMPUTATION OF PRO FORMA NET
INCOME PER SHARE 8,219,181 7,794,457 7,794,457
--------- --------- ---------
--------- --------- ---------
See accompanying notes to financial statements
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,124 $ 2,205 $ 1,505
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,320 711 460
Deferred income taxes (571) (50) 11
Provision for doubtful accounts and returns 409 153 34
Changes in operating assets and liabilities:
Accounts receivable (1,498) (521) (564)
Prepaid expenses and other current assets 167 (621) 77
Accounts payable 16 120 103
Accrued expenses 2,523 119 468
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,490 2,116 2,094
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment (2,892) (1,840) (662)
Purchases of marketable securities (5,857) - -
Other assets (197) (168) (23)
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (8,946) (2,008) (685)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principle payments on long-term debt (64) (59) (190)
Proceeds from Employee Stock Purchase Plan 42 - -
Proceeds from exercise of stock options 285 - -
Dividends paid - (45) (25)
Net proceeds from sale of common stock 23,849 - -
-------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 24,112 (104) (215)
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 20,656 4 1,194
Cash and cash equivalents, beginning of period 2,028 2,024 830
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $22,684 $ 2,028 $ 2,024
-------- -------- --------
-------- -------- --------
Income taxes paid $ 1,550 $ 1,710 $ 302
-------- -------- --------
-------- -------- --------
Interest paid $ 21 $ 29 $ 44
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
RETAINED
ADDITIONAL CUMULATIVE EARNINGS
COMMON PAID-IN TRANSLATION (ACCUMULATED
STOCK CAPITAL ADJUSTMENTS DEFICIT) TOTAL
------ ---------- ----------- ------------ -----
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $ 60 $ - $ 50 $ (3,244) $ (3,134)
Accrued dividends on Convertible
Redeemable Preferred Stock - - - (306) (306)
Dividends declared - - - (25) (25)
Translation adjustment - - (13) - (13)
Net income - - - 1,505 1,505
-------- -------- -------- -------- --------
Balances at December 31, 1994 60 - 37 (2,070) (1,973)
Accrued dividends on Convertible
Redeemable Preferred Stock - - - (307) (307)
Dividends declared - - - (45) (45)
Translation adjustment - - (3) - (3)
Net income - - - 2,205 2,205
-------- -------- -------- -------- --------
Balances at December 31, 1995 60 - 34 (217) (123)
Accrued dividends on Convertible
Redeemable Preferred Stock (231) (231)
Exercise of stock options 1 284 - - 285
Stock purchased through Employee
Stock Purchase Plan 1 41 - - 42
Conversion of Convertible Redeemable
Preferred Stock into Common Stock 15 5,446 - - 5,461
Issuance of common stock, net of expenses 21 23,828 - - 23,849
Translation adjustment - - (1) - (1)
Net income - - - 3,124 3,124
-------- -------- -------- -------- --------
Balances at December 31, 1996 $ 98 $ 29,599 $ 33 $ 2,676 $ 32,406
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
NOTE 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, D.C.; London, England; and Stuttgart,
Germany.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from data recovery services is recognized upon performance of the
services. Product revenue on software sales is recognized upon shipment and is
stated net of estimated customer returns and allowances. The estimated costs of
future technical support to customers in their use of the Company's software
products are accrued upon shipment of the product.
The allowance for doubtful accounts and returns at December 31, 1996 and
December 31, 1995 was $579 and $170, respectively.
RESEARCH AND DEVELOPMENT
Expenditures for research and software development costs are expensed as
incurred. Such costs are required to be expensed until the point that
technological feasibility and proven marketability of the product under
development are established. Costs otherwise capitalizable after technological
feasibility is achieved have also been expensed because they have been
insignificant.
<PAGE>
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents consist of highly liquid investments with original maturities
of three months or less and are readily convertible to cash. The Company has
adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," and has classified its
investments as available-for-sale in accordance with that standard. Marketable
Securities generally consist of tax exempt government agency securities and are
classified as short term or long term in the balance sheet based on their
maturity date. Marketable Securities are carried at amortized cost and
unrealized holding gains and losses have not been significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, cash equivalents and marketable securities are valued at their carrying
amounts which are reasonable estimates of fair value. The fair value of all
other financial instruments approximates cost as stated.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist primarily of accounts receivable. The Company grants credit to
customers in the ordinary course of business. No single customer or region
represents a significant concentration of credit risk.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which
generally range from 3 to 5 years. Leasehold improvements are amortized over
the term of the lease. Significant additions or improvements extending asset
lives are capitalized, while repairs and maintenance are charged to expense as
incurred.
INCOME TAXES
Income taxes are accounted for on the liability method. Deferred income taxes
result from differences between the financial reporting and income tax basis of
the Company's assets and liabilities and are calculated using current tax rates.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign subsidiaries are translated from foreign
currencies to U.S. dollars at period-end rates of exchange, while the statement
of income is translated at the average exchange rates during the period.
Translation adjustments arising from the translation of net assets located
outside of the United States into U.S. dollars are recorded as a separate
component of shareholders' equity.
<PAGE>
STOCK SPLIT
In 1996, the Company's Board of Directors authorized a 2-for-1 stock split of
the issued and outstanding common stock of the Company, in the form of a 100%
stock dividend. All references to common stock amounts, shares and per share
data included in the financial statements and related notes have been adjusted
to give retroactive effect to such split.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is based on the weighted average number of shares
of common stock and common equivalent shares outstanding for the period. Common
equivalent shares include options using the treasury stock method. The weighted
average number of shares assumes that the conversion of the Company's
Convertible Redeemable Preferred Stock into 1,500,000 shares of common stock
which occurred in October, 1996 was effective on January 1, 1994. Because of
the significant impact of the assumed conversion on the Company's capital
structure and earnings per share, historical earnings per share has been
excluded from the financial statements.
NOTE 3 - FINANCIAL STATEMENT COMPONENTS
Furniture and equipment consists of the following:
December 31
-------------------
1996 1995
------- -------
Computer equipment $ 5,381 $ 3,667
Furniture and office equipment 1,398 856
Leasehold improvements 384 94
Purchased software 544 175
Less: Accumulated depreciation (3,974) (2,630)
------- -------
$ 3,733 $ 2,162
------- -------
------- -------
Accrued expenses consist of the following:
December 31
-------------------
1996 1995
------- -------
Accrued wages and benefits 2,079 391
Other accrued expenses 627 371
------- -------
$ 2,706 $ 762
------- -------
------- -------
<PAGE>
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following:
December 31
------------
1996 1995
---- ----
Note payable - former shareholder, interest at 8.34%
per annum, interest and principal payable in monthly
installments of $7 through October 16, 1999. $211 $275
Less: current portion (69) (64)
---- ----
Long term debt, less current portion $142 $211
---- ----
---- ----
Scheduled principal payments of long-term debt are as follows:
1997 $ 69
1998 75
1999 67
----
$211
----
----
NOTE 5 - LINE OF CREDIT
The Company maintains a line of credit which allows maximum borrowings of $1,000
subject to a borrowing base of 75% of accounts receivable outstanding less than
90 days. The line of credit carries an interest rate of 1% over the prime
lending rate and is secured by all assets of the Company. There were no
borrowings outstanding under the line of credit at December 31, 1996 and 1995.
NOTE 6 - CONVERTIBLE REDEEMABLE PREFERRED STOCK
On March 4, 1991, the Company's shareholders sold 3,000 shares of Convertible
Redeemable Preferred Stock for $3,750. The Convertible Redeemable Preferred
Stock was converted into 1,500,000 shares of common stock in conjunction with
the Company's Initial Public Offering of its common stock (the "IPO") in
October, 1996.
A contingent dividend equal to $.28 per share (based on the original 3,000
shares issued) of Convertible Redeemable Preferred Stock multiplied by the
number of days the stock had been outstanding was accrued and shown as a charge
to retained earnings from issuance through the date of conversion into common
stock. The carrying amount of the Convertible Redeemable Preferred Stock,
including accrued contingent dividends of $1,711, was reclassified to
shareholders' equity upon the company's completion of the IPO in October, 1996.
<PAGE>
NOTE 7 - SHAREHOLDERS' EQUITY
STOCK INCENTIVE PLANS
The Company has two fixed stock incentive plans that reserve a total of
1,400,000 shares of common stock for issuance of restricted shares or stock
options to employees, consultants and non-employee directors. The option price
for stock options granted shall not be less than 100% of the fair value of the
Company's common stock on the date of grant. Canceled options are available for
future grant. Generally, options granted to employees vest over a five-year
period and expire six to ten years after the date of grant. Certain options
granted to employees prior to the Company's IPO were immediately exercisable at
the date of grant. There have been no outright grants of common stock under the
plans.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the Company's stock plans. Had compensation cost for
the Company's stock plans been recognized based on the fair value at the grant
date for awards beginning in 1995 consistent with the provisions of SFAS No.
123, the Company's net income and net income per share in 1996 would have been
reduced to the pro forma amounts indicated below:
1996
------
Net income - as reported $3,124
Net income - pro forma $2,949
Net income per share - as reported $0.38
Net income per share - pro forma $0.36
Additional pro forma compensation cost in 1995 for the Company's stock plans for
awards granted in 1995 was immaterial.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants beginning in 1995: dividend yield of 0%; expected
volatility of 57.8%; risk-free interest rate of 6.5%; and expected lives of 7.3
years.
<PAGE>
A summary of the stock option activity is as follows:
Exercise Weighted-
Price Average
Options Per Share Exercise Price
------- --------- --------------
Granted in 1995 275,620 $2.50 - $2.58 $2.56
--------
Outstanding at December 31, 1995 275,620 $2.50 - $2.58 $2.56
Granted 420,128 $3.99 - $12.00 $9.79
Exercised (105,924) $2.58 $2.58
--------
Outstanding at December 31, 1996 589,824 $2.50 - $12.00 $7.71
--------
--------
Weighted average fair value of
options granted during the year $6.71
-----
-----
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted-Avg. Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 12/31/96 Life Price At 12/31/96 Price
- -------- ----------- ------------- --------- ----------- ---------
$2.50 - $2.58 169,696 4.9 years $2.56 169,696 $2.56
$3.99 116,248 5.4 3.99 116,248 3.99
$12.00 303,880 8.5 12.00 5,000 12.00
------- -------
589,824 6.9 7.71 290,944 3.29
------- -------
------- -------
EMPLOYEE STOCK PURCHASE PLAN
On August 6, 1996, the Company's Board of Directors approved the Employee Stock
Purchase Plan (ESPP) which is available to eligible employees. Under terms of
the plan, eligible employees may designate from 1% to 10% of their compensation
to be withheld through payroll deductions for the purchase of common stock at
85% of the lower of the market price on the first or last day of the offering
period. Under the plan, 250,000 shares of common stock have been reserved for
issuance. As of December 31, 1996, 3,316 shares have been issued under the
plan. Fair value disclosures under SFAS No. 123 have not been disclosed for
shares under the ESPP as such values are immaterial.
<PAGE>
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.
NOTE 8 - INCOME TAXES
The provision for income taxes is based on income before income taxes reported
for financial statement purposes. The components of income before income taxes
consist of the following:
Years Ended December 31
----------------------------
1996 1995 1994
------ ------ ------
United States $4,853 $3,420 $2,048
Foreign 71 181 106
------ ------ ------
Income before income taxes $4,924 $3,601 $2,154
------ ------ ------
------ ------ ------
The Company's provision for income taxes consists of the following:
Years Ended December 31
----------------------------
1996 1995 1994
------ ------ ------
Current:
Federal $1,909 $1,292 $ 610
State 160 110 28
Foreign 241 44 -
------ ------ ------
Total current 2,310 1,446 638
Deferred:
Federal (270) (48) 10
State (22) (2) 1
Foreign (218) - -
------ ------ ------
Total deferred (510) (50) 11
------ ------ ------
Total income tax expense $1,800 $1,396 $ 649
------ ------ ------
------ ------ ------
<PAGE>
The Company's effective tax rates differed from the federal statutory tax rate
as follows:
Years Ended December 31
----------------------------
1996 1995 1994
---- ---- ----
Expected tax expense at federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 3.2 3.1 2.9
Other, net (.6) 1.7 (6.8)
---- ---- ----
36.6% 38.8% 30.1%
---- ---- ----
---- ---- ----
Deferred tax assets consist of the following components:
December 31
-------------
1996 1995
-------------
Current:
Allowance for doubtful accounts and returns $205 $57
Accrued expenses 79 39
German tax loss carry forward 218 -
Other, net 7 2
---- ---
$509 $98
---- ---
---- ---
Noncurrent:
Excess of book over tax depreciation $125 $25
Foreign cash movements 60 -
---- ---
$185 $25
---- ---
---- ---
NOTE 9 - BENEFIT PLAN
The Company has a profit sharing plan for employees who have completed one year
of service and attained the age of 21. Contributions to the plan by the Company
are determined by the Board of Directors. The Company recorded profit sharing
expense of approximately $333, $264 and $222 in 1996, 1995, and 1994,
respectively.
The Company's profit sharing plan also incorporates a 401(k) savings plan for
its employees. Eligible employees may elect to contribute up to 15% of their
salaries to the plan, up to limits defined by the Internal Revenue Code. There
are no employer matching contributions. The Company does not offer other
postretirement benefits.
NOTE 10 - OPERATING LEASES
The Company leases office and warehouse facilities under noncancelable operating
leases which expire on various dates through October, 2001. Rental expense
under such leases was $782, $512 and $366 for the years ended December 31,
1996, 1995, and 1994, respectively.
<PAGE>
Future minimum lease payments under all operating leases are as follows:
1997 $ 707
1998 716
1999 402
2000 343
2001 134
------
$2,302
NOTE 11 - SEGMENT INFORMATION AND FOREIGN OPERATIONS
The Company conducts its business within one industry segment: software and
services for the protection of data. European operations include data recovery
services in England by the wholly owned subsidiary, Ontrack Data Recovery Europe
Ltd. and in Germany by the wholly owned subsidiary, Ontrack Data Recovery GmbH.
In November, 1994, the Company signed an agreement with the Japanese
corporation, Y-E Data, whereby the Company licensed its data recovery technology
to Y-E Data. In exchange for the license, Y-E Data pays the Company royalties,
a portion of which are fixed and payable through the end of 1996, and a portion
of which are paid monthly based on the amount of gross data recovery revenues
earned by Y-E Data each month.
Revenues, net income and identifiable assets by geographic area are summarized
as follows:
At or For Years Ended December 31
---------------------------------
1996 1995 1994
------- ------- -------
Revenues from unaffiliated customers:
Domestic operations $22,091 $14,769 $10,377
International operations:
European operations 4,011 1,945 1,024
Japanese operations 661 431 333
------- ------- -------
Total international operations 4,672 2,376 1,357
------- ------- -------
Consolidated $26,763 $17,145 $11,734
------- ------- -------
------- ------- -------
Net income (loss):
Domestic operations $ 2,633 $ 1,680 $ 1,100
European operations (104) 137 106
Japanese operations 595 388 299
------- ------- -------
Consolidated $ 3,124 $ 2,205 $ 1,505
------- ------- -------
------- ------- -------
Identifiable assets:
Domestic operations $34,779 $ 6,079 $ 4,058
European operations 1,856 782 463
------- ------- -------
Consolidated $36,635 $ 6,861 $ 4,521
------- ------- -------
------- ------- -------
Transaction gains and losses recorded in income in 1996, 1995 and 1994 were
immaterial.
<PAGE>
Intercompany revenues are eliminated in consolidation and were immaterial in
1996, 1995 and 1994.
NOTE 12 - LITIGATION SETTLEMENT
The Company received a settlement payment of $575 in November 1994 from an
unrelated third party for allegations of trade secret theft and the dissolution
of an exclusive North American distribution agreement with the Company for an
anti-virus tool kit software product. This settlement amount is reflected in
other income. The Company discontinued sales of this product in April 1995 and
has established a relationship to sell a different anti-virus product in its
place.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
ONTRACK Data International, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity (deficit) and of cash
flows present fairly, in all material respects, the financial position of
ONTRACK Data International, Inc. and its subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Minneapolis, Minnesota
February 6, 1997
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Jurisdiction
Name of Direct Subsidiaries of Organization
- --------------------------- ---------------
Ontrack Data Recovery, Inc. Minnesota
Name of Indirect Subsidiaries
- -----------------------------
(Subsidiaries of Ontrack Data Recovery, Inc.)
Ontrack Data Recovery GmbH Republic of Germany
Ontrack Data Recovery Europe, Ltd. United Kingdom
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-18969) of ONTRACK Data International, Inc.
of our report dated February 6, 1997 appearing in the Annual Report to
Shareholders which is incorporated in this Annual Report on Form 10-KSB.
Price Waterhouse LLP
Minneapolis, Minnesota
March 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 22,684
<SECURITIES> 0
<RECEIVABLES> 3,078
<ALLOWANCES> (579)
<INVENTORY> 132
<CURRENT-ASSETS> 26,427
<PP&E> 7,707
<DEPRECIATION> (3,974)
<TOTAL-ASSETS> 36,635<F1>
<CURRENT-LIABILITIES> 4,087
<BONDS> 142
0
0
<COMMON> 98<F1>
<OTHER-SE> 32,308<F1>
<TOTAL-LIABILITY-AND-EQUITY> 36,635
<SALES> 7,109
<TOTAL-REVENUES> 26,763
<CGS> 1,718
<TOTAL-COSTS> 4,522
<OTHER-EXPENSES> 17,609
<LOSS-PROVISION> 149
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 4,924
<INCOME-TAX> 1,800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,124
<EPS-PRIMARY> .38
<EPS-DILUTED> 0
<FN>
<F1>The Company completed an initial public offering 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.
</FN>
</TABLE>
