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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 1997
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.
(Exact Name of Registrant as Specified 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 937-1107
REGISTRANT'S INTERNET ADDRESS: www.ontrack.com
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT: COMMON
STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is contained in herein, and will not 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-K or any amendment to this
Form 10-K. / /
As of March 17, 1998, assuming as market value the price of $16.50 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 $75,318,062 million.
As of March 17, 1998, the Company had outstanding 9,928,716 shares of Common
Stock, $.01 par value.
Portions of the 1997 Annual Report to Shareholders and the Proxy Statement
for the Company's Annual Meeting of Shareholders to be held May 21, 1998 are
incorporated by reference into Parts II and III, respectively, of this Form
10-K, to the extent described in such Parts.
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TABLE OF CONTENTS
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PART I
Item 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . 3
Item 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . 10
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . . 10
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 11
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 11
Item 7. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . 11
Item 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . . 11
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT . . . . . . . . . . . . . . . . . . . . 11
Item 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . 11
Item 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . . . . 12
Item 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . 12
Item 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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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 ten years, Ontrack has performed over
46,000 data recoveries for Fortune 500 corporations, governmental agencies,
educational and financial institutions, as well as small businesses and
individuals. The Company also develops and markets a number of commercial
software products, principally Disk Manager-Registered Trademark-, a hard
disk drive installation software utility which the Company originally
developed in 1985. The Company's data recovery services revenues represented
approximately 76% of total revenues in 1997, 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. 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. Much of the stored data 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, including wear, aging, physical abuse, vandalism or
environmental hazards. Software failures involve corruption of the software
file structure that makes the data accessible, including user errors,
improper or incompatible software installation or computer viruses. In both
types of failures, the data often still exists on the storage media but
cannot be retrieved by the user.
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. 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. 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.
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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 46,000 data recoveries, the Company has developed numerous Data
Recovery Tools, including proprietary software 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 80 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 51 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 enhance its position as the world's leading
data recovery services provider. The Company's strategy includes the
following key elements:
EDUCATE THE MARKET. The Company believes that most computer users do
not know that their data may be recoverable when they experience a data loss.
The Company intends to educate the market that data recovery is possible and
that Ontrack is the world's leading provider of data recovery services.
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.
BROADEN SERVICE OFFERINGS. The Company intends to leverage its data
recovery and software development experience to provide new data service
offerings. For example, Ontrack has developed a new
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process for remote data recovery that permits its data recovery engineers to
diagnose data losses and, in many cases, perform the data recovery over a
modem line. The Company believes that remote data recovery can open new
markets and broaden awareness of the Company's services.
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. Strategic partners would include
third party computer maintenance and support providers who would offer the
Company's data recovery services as part of their service offerings, hard
disk drive and other storage media manufacturers, and referral sources, 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 San Jose, California in the third quarter of 1997 and plans at
least one new domestic office and one new European office during 1998.
ENHANCE COMMERCIAL SOFTWARE PRODUCTS. The Company will continue to
upgrade DISK MANAGER, a leading disk installation utility for the past 12
years. 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.
DATA RECOVERY AND RELATED SERVICES
Ontrack provides data recovery services to address a wide variety of
data loss situations. These services accounted for 76% of the Company's
revenues for 1997. The Company is able to recover data from nearly all types
of storage media and operating system.
Customers worldwide can call one of Ontrack's 38 experienced customer
service representatives to report a data loss. The customer service
representative discusses the data loss situation with the customer, describes
the Company's service options and quotes an estimated cost range of the
requested services. The customer generally ships the hard disk drive or
other storage media by overnight courier to one of the Company's facilities.
However, remote data recovery and onsite service options are available. 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. If the
specified data cannot be recovered, Ontrack returns the storage media and
diagnostic fee to the customer. If the specified data is recoverable, the
sales representative quotes a specific price. In accordance with the
Company's guidelines, the sales representative determines pricing on a
case-by-case basis considering such factors as the capacity of the 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. If the customer elects to proceed, the Company
performs the recovery, stores the recovered data on the medium of the
customer's choice, returns the data along with the customer's original
equipment and invoices the customer.
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
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have been developed internally over the past 12 years and include numerous
proprietary software programs and specialized devices, fixtures and other
equipment. 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.
The Company has developed proprietary technology whereby certain
non-hardware related data losses can be recovered remotely through a modem
line. The process, Remote Data Recovery-TM- ("RDR") works in conjunction with
Ontrack Data Advisor-TM-, a freeware diagnostic software product which the
Company developed. Data Advisor analyzes file systems and structures, system
memory and the hard drive's ability to read stored data. When a data loss
occurs, Data Advisor can be used to diagnose the problem quickly and provide
the computer user with a recommendation on how to proceed.
The Company began performing remote data recoveries on a limited basis
in January, 1998. The service is currently available to users of DOS,
Windows, Windows 95, Windows N/T and OS/2.
By leveraging its expertise in the data recovery field, Ontrack has also
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, 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.
COMMERCIAL SOFTWARE PRODUCTS
The Company's commercial software products represented 24% of the
Company's total revenues for 1997. The Company's principal software product
is DISK MANAGER, accounting for 87% of software revenues in 1997.
DISK MANAGER is a hard disk drive installation and partitioning utility
for personal computers. 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.
Through an agreement with Cybec Pty. Ltd., the Company has the exclusive
rights to distribute Cybec's Vet anti-virus software in North America,
Germany and France. The Company also has the non-exclusive distribution
rights for Vet through the rest of the world, except in Australia, New
Zealand, Malaysia, Singapore, Taiwan and the Benelux countries. The
agreement expires December 31, 1998.
RESEARCH AND DEVELOPMENT
The Company's staff of 51 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
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tools and procedures. As part of its ongoing development efforts, the
Company has devoted significant resources to developing Data Advisor. See
"Data Recovery and Related Services" above. The Company began performing
remote data recoveries in late December and plans to expand its engineering
capabilities in this area in 1998.
BRANCH OFFICES AND EXPANSION STRATEGY
The Company opened its branch offices in London, Los Angeles,
Washington, D.C., Stuttgart, Germany and San Jose, California in 1991, 1992,
1995, 1996 and 1997, 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.
The Company intends to open an office in Secaucus, New Jersey in the
second quarter of 1998. The Company also intends to open another office in
Europe in 1998 and additional branch offices in the United States and in
foreign countries 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 with six to eight
employees, including two to three data recovery engineers, within the first
year of operation. The pace at which the Company 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
sales and marketing resources to obtain relationships with other computer
service companies which would offer the Company's data recovery services to
their customers as part of their service offerings. In addition, the Company
has begun to market other services, such as computer evidence services, to
legal organizations.
The Company markets Disk Manager 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. In
addition, the Company advertises its services and products through direct
mail, periodicals, trade journals and its Web site and participates in
selected industry trade shows.
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
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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 1995, 1996 or 1997.
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, its Data Recovery Tools and
its remote data recovery capabilities provides it with a significant
competitive advantage.
The computer software industry is highly competitive and characterized
by significant and rapid technological advances. The Company currently sells
the vast majority of its Disk Manager software 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.
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 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.
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.
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. There can be no assurance that protective measures taken
by Ontrack will provide Ontrack with adequate protection of its proprietary
information or with adequate remedies in the event of unauthorized use or
disclosure.
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
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might be infringed by current or future processes employed by Ontrack or
Ontrack products and provide the basis for an infringement action against
Ontrack.
EMPLOYEES
As of March 5, 1998, the Company had a total of 291 full time employees,
including 95 in data recovery engineering, 51 in software development, 66 in
sales and marketing, 19 in customer support and 60 in administration and
finance. None of the Company's employees are represented by a labor union or
are 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:
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Name Age Position
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Michael W. Rogers 42 Chairman and Chief Executive Officer
John E. Pence 51 President and Director
Gary S. Stevens 41 Senior Vice President, Engineering and Director
Thomas P. Skiba 42 Vice President and Chief Financial Officer
John M. Bujan 53 General Counsel and Secretary
Tanna L. Moore 43 Vice President, Sales and Marketing
Stuart J. Hanley 37 Vice President, Worldwide Operations
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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 held several software engineering
positions.
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 held various
management positions.
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.
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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.
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.
TANNA L. MOORE has served as Vice President, Sales and
Marketing since June, 1997. From January 1997 to June 1997 she was a
consulting director at Core Group, a firm that provides strategic consulting
services to the financial and high technology industries. From July 1996 to
January 1997 Ms. Moore was an independent consultant. From May 1991 through
July 1996 Ms. Moore held various Vice President positions at Ceridian
Corporation, a public company focused on providing information services.
STUART J. HANLEY has served as Vice President, Worldwide Operations
since November 1997. Mr. Hanley has been employed by the Company in various
capacities since 1987.
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 approximately
47,900 square-foot facilities under leases which expire in January 1999. The
Company also leases approximately 7,200 square feet of space in Los Angeles
under a lease expiring in July 2001; approximately 7,800 square feet of space
in Washington, D.C. under a lease expiring in May 2003; approximately 4,600
square feet of space in San Jose, California, under a lease expiring in
September 1999; and approximately 5,100 square feet of space in Secaucus, New
Jersey under a lease expiring in May 2003.
The Company also leases space for its office in London, with
approximately 5,600 square feet of space under a lease that expires in
November 2000 and another 5,200 square feet of space under a lease that
expires in 2008. Approximately 8,600 square feet of space is leased for its
office in Stuttgart under a lease which expires in October 2001.
The Minneapolis, Washington, D.C., Secaucus and Stuttgart leases each
have a three-to-five year option for extension.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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, 1997,
and the Company's dividend policy is incorporated herein by reference from
the 1997 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 1997 Annual Report
to Shareholders.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Balance Sheets of the Company as of December 31, 1997
and 1996, and the related Consolidated Statements of Income, Shareholders'
Equity and Cash Flows for each of the three years ended December 31, 1997,
the Notes to the Consolidated Financial Statements and the Report of Price
Waterhouse LLP, independent accountants, is contained in the Company's 1997
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 1998 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-K.
ITEM 10. EXECUTIVE COMPENSATION
The information set forth in the 1998 Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the 1998 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 1998 Proxy Statement under the caption
"Certain Transactions" is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
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Exhibit
Number Description
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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 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
12
<PAGE>
10.12 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).
10.13 Form of License Agreement with OEM Customers (incorporated by
reference to Exhibit 10.16 to the Form SB-2).
13.1 1997 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 with respect to financial statements at
December 31, 1997.
27.2 Financial Data Schedule with respect to financial statements at
September 30 and December 31, 1996.
27.3 Financial Data Schedule with respect to financial statements at March
31, June 30 and September 30, 1997.
</TABLE>
(b) REPORTS ON FORM 8-K. None.
13
<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 30, 1998.
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-K 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 30, 1998.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/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
14
<PAGE>
/s/ Roger D. Shober Director
- -------------------------
Roger D. Shober
/s/ Robert M. White Director
- -------------------------
Robert M. White, Ph.D.
/s/ Richard J. Runbeck Director
- -------------------------
Richard J. Runbeck
/s/ Jacqueline C. Morby Director
- -------------------------
Jacqueline C. Morby
</TABLE>
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME DATA: 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Service revenues $ 26,689 $ 19,654 $ 12,048 $ 8,000 $ 5,453
Software revenues 8,560 7,109 5,097 3,734 2,018
Total revenues 35,249 26,763 17,145 11,734 7,471
Gross margin 29,491 22,241 14,079 9,468 5,999
Operating expenses 22,091 17,609 10,614 7,920 5,459
Operating income 7,400 4,632 3,465 1,548 540
Net income 5,656 3,124 2,205 1,505 353
Net income per share - diluted $ 0.56 $ 0.38 $ 0.28 $ 0.19 $ 0.05
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term investments $ 32,176 $ 22,684 $ 2,028 $ 2,024 $ 830
Working capital 31,745 22,198 2,896 2,090 920
Total assets 45,125 36,635 6,861 4,521 2,659
Total liabilities 5,794 4,229 1,753 1,570 1,175
Convertible Redeemable Preferred Stock - - 5,231 4,924 4,618
Total shareholders' equity (deficit) $ 39,331 $ 32,406 $ (123) $ (1,973) $(3,134)
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
ONTRACK is the world's leading provider of data recovery services to a broad
range of customers experiencing a loss of valuable computer data. The
Company also markets DISK MANAGER, a hard disk drive installation software
utility and other software products.
Service revenues are derived principally from the performance of data
recovery services. 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 of DISK MANAGER through hard disk drive
original equipment manufacturers (OEMs), which are difficult to predict.
International revenues primarily consist of data recovery services 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 in
Japan to Y-E Data. Total international revenues were 20%, 17% and 14% of
consolidated revenues for the years ended December 31, 1997, 1996 and 1995,
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
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain components of the Company's
consolidated statements of income as a percent of total revenue for the period
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenues:
Services 75.7% 73.4% 70.3%
Software 24.3 26.6 29.7
----- ----- -----
Total revenues 100.0 100.0 100.0
- - -
Cost of Revenues:
Services (1) 16.5 14.3 15.5
Software (2) 15.7 24.2 23.4
Total cost of revenues 16.3 16.9 17.9
----- ----- -----
Gross Margin 83.7 83.1 82.1
Operating expenses:
Research and development 19.7 18.9 18.7
Sales and marketing 22.5 26.4 25.7
General and administrative 20.5 20.5 17.5
----- ----- -----
Total operating expenses 62.7 65.8 61.9
----- ----- -----
Operating income 21.0 17.3 20.2
Net income 16.0% 11.7% 12.9%
----- ----- -----
----- ----- -----
</TABLE>
(1) Shown as a percentage of service revenues.
(2) Shown as a percentage of software revenues.
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
TOTAL REVENUES
The Company's total revenues increased 31.3% to $35.2 million in 1997 from
$26.8 million in 1996.
SERVICES:
Service revenues increased 35.5% to $26.7 million in 1997 from $19.7 million
in 1996. The increase was due to more data recovery jobs being performed on
a worldwide basis. The increase in jobs was a result of an increased
awareness by computer users of the Company's services as well as the addition
of new data recovery facilities that opened in Stuttgart, Germany in
November, 1996 and San Jose, California in September, 1997.
SOFTWARE:
Software revenues increased 21.1% to $8.6 million in 1997 from $7.1 million
in 1996. DISK MANAGER is the Company's principal software product and
comprised 86.7% and 84.7% of software revenue in 1997 and 1996, respectively.
The increase in DISK MANAGER revenue was attributed to higher volumes of
shipments of hard disk drives by the Company's customers which include copies
of DISK MANAGER. These volume increases were partially offset by lower per
unit prices for DISK MANAGER charged by the Company.
GROSS MARGINS
SERVICES:
Gross margins on service revenues as a percentage of service revenues were
approximately 83.5% in 1997 compared to 85.7% in 1996. The decrease in gross
margin percentage in 1997 was principally due to costs relating to the new
offices in Germany and San Jose as well as the addition of additional
engineering personnel. The Company views the addition of qualified engineers
as critical to its growth strategy in order to support growth in the data
recovery business.
SOFTWARE:
Gross margins on software revenues as a percentage of software revenues were
84.3% in 1997 compared to 75.8% in 1996. The improved gross margin
percentage was attributed to the increase in royalty revenue as a percent of
total software revenues which involve minimal costs to the Company. Future
gross margins in the software business will continue to be impacted by the
mix of royalty and non-royalty revenues.
<PAGE>
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT:
Research and development expenses increased 35.3% to $6.9 million in 1997
from $5.1 million in 1996. The increase was due to the addition of software
developers and data recovery engineers who perform research and development
activities. Also contributing to the increase was completion in 1997 of the
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 19.7% in 1997 and 18.9% in 1996. Research and development
expenses, and such expenses as a percentage of revenues, may fluctuate in the
future as the Company identifies and responds to such market opportunities as
remote data recovery services, or as necessary to respond to new technologies
that pose challenges in the data recovery and software businesses.
SALES AND MARKETING:
Sales and marketing expenses increased 11.3% to $7.9 million in 1997 from
$7.1 million in 1996. As a percentage of revenues, sales and marketing
expenses were 22.5% in 1997 and 26.4% in 1996. The decrease in percentage was
due principally to 1996 being a year of investing heavily in additional sales
and marketing personnel to support the anticipated growth in service revenue.
Additional investments were not made to the same extent in 1997. The
decreased percentage was also partially due to the 21.1% increase in software
revenue. Software revenue is reliant principally on shipments of hard drives
by the Company's customers and is not directly influenced by the Company's
sales and marketing activities.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses increased 30.9% to $7.2 million in 1997
from $5.5 million in 1996. As a percent of revenues, general and
administrative expenses were 20.5% in both 1997 and 1996. The increase in
dollars spent was due in part to costs incurred in connection with the
opening of the Company's new offices in Stuttgart, Germany and San Jose,
California as well as the cost of being a public company for a full year in
1997.
INTEREST AND OTHER INCOME
Interest and other income increased to $1.1 million in 1997 from $0.3 million
in 1996. The increase was due to increased cash and marketable securities
balances, resulting from the Company's initial public offering completed in
October, 1996 and from cash flows generated from its operations.
<PAGE>
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 33.6% in 1997 compared to 36.6% in 1996.
The decrease in the rate for 1997 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
1997 was approximately 42%.
DILUTED NET INCOME PER SHARE
Diluted net income per share increased 47.4% to $0.56 in 1997 from $0.38 in
1996. The increase was due to higher net income, partially offset by
increases in weighted average shares outstanding resulting from the Company's
initial public offering in October, 1996.
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES
The Company's total revenues increased 56.7% to $26.8 million in 1996 from
$17.1 million in 1995.
SERVICES:
Service revenues increased 64.2% to $19.7 million in 1996 from $12.0 million
in 1995. The increase was due principally to an increase in the number of
data recovery jobs performed. Other factors include the addition of the
Stuttgart, Germany office in November, 1996.
SOFTWARE:
Software revenues increased 39.2% to $7.1 million in 1996 from $5.1 million
in 1995. The increase was attributed 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 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 was being licensed exclusively to Seagate.
GROSS MARGINS
SERVICES:
Gross margins on service revenues as a percentage of service revenues were
85.7% in 1996 compared to 84.4% in 1995. The improved gross margin
percentage was 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:
Gross margins on software revenues as a percentage of software revenues were
75.8% in 1996 compared to 76.6% in 1995. The decrease in gross margin
percentage was due to lower margins on OEM sales due to customers earning
unit volume discounts.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT:
Research and development expenses increased 59.4% to $5.1 million in 1996
from $3.2 million in 1995. The increase was due to the addition of software
developers and data
<PAGE>
recovery engineers who perform research and development activities, as well
as increased expenditures 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 18.9% in 1996 and 18.7% in
1995. Research and development expenses, and such expenses as a percentage
of revenues, may fluctuate in the future as the Company identifies and
responds to such market opportunities as remote data recovery services, or as
necessary to respond to new technologies that pose challenges in the data
recovery and software businesses.
SALES AND MARKETING:
Sales and marketing expenses increased 61.4% to $7.1 million in 1996 from
$4.4 million in 1995. As a percentage of revenues, sales and marketing
expenses were 26.4% in 1996 and 25.7% in 1995. The increase in sales and
marketing dollars were 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 83.3% to $5.5 million in 1996
from $3.0 million in 1995. As a percentage of revenues, general and
administrative expenses were 20.5% in 1996 and 17.5% in 1995. The increase
in general and administrative dollars spent and in such expenses as a percent
of revenues were 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.
INTEREST AND OTHER INCOME
Interest and other income was $292,000 in 1996 and $136,000 in 1995. The
increase in interest income resulted from increased cash and marketable
securities balances resulting from the Company's initial public offering
completed in October, 1996.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 36.6% in 1996 compared to 38.8% in 1995.
The decrease in the rate 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%.
DILUTED NET INCOME PER SHARE
<PAGE>
Diluted net income per share increased 35.7% to $0.38 in 1996 from $0.28 in
1995. The increase was due to higher net income, partially offset by
increases in weighted average shares outstanding resulting from the Company's
initial public offering in October, 1996.
YEAR 2000
The Company has examined the Year 2000 issue and determined that it will not
have a material impact on its business, operations or its financial
condition.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operations were $8.3 million in 1997, $5.4 million in
1996 and $2.1 million in 1995. The increases in cash generated from
operations were due principally to increased earnings.
Cash used in investing activities were primarily for purchases of marketable
securities and furniture and equipment. Additions to furniture and equipment
were $2.3 million in 1997, $2.9 million in 1996 and $1.8 million in 1995. 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, 1996 the Company completed an initial public offering which
resulted in net proceeds to the Company of $23.8 million. The net proceeds
to the Company from this offering are being 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. The Company has invested the proceeds, along with excess funds
generated from operations and investment, in tax-exempt government marketable
securities, $3.5 million of which are classified as long-term as of December
31, 1997, with the remaining proceeds classified as cash and cash equivalents
or short-term investments.
The Company expects that its current cash and marketable securities balances
along with cash generated from its operations will be adequate to meet its
capital needs for the foreseeable future.
<PAGE>
FORWARD-LOOKING STATEMENTS
Information included in this 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 Form 10-K report for the year ended
December 31, 1997 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; (iv) the
Company's software revenues depend on disk drive shipments by OEM's and
trends in the disk drive industry which the Company can not control; and (v)
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.
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
( IN THOUSANDS, EXCEPT PER SHARE AMOUNTS )
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Services $ 26,689 $ 19,654 $ 12,048
Software 8,560 7,109 5,097
---------- ---------- ----------
Total revenues 35,249 26,763 17,145
COST OF REVENUES:
Services 4,415 2,804 1,873
Software 1,343 1,718 1,193
---------- ---------- ----------
Total cost of revenues 5,758 4,522 3,066
---------- ---------- ----------
GROSS MARGIN 29,491 22,241 14,079
OPERATING EXPENSES:
Research and development 6,922 5,052 3,214
Sales and marketing 7,934 7,077 4,400
General and administrative 7,235 5,480 3,000
---------- ---------- ----------
Total operating expenses 22,091 17,609 10,614
---------- ---------- ----------
OPERATING INCOME 7,400 4,632 3,465
Interest and other income 1,115 292 136
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 8,515 4,924 3,601
Provision for income taxes 2,859 1,800 1,396
---------- ---------- ----------
NET INCOME $ 5,656 $ 3,124 $ 2,205
---------- ---------- ----------
---------- ---------- ----------
NET INCOME PER SHARE - BASIC $ 0.58 $ 0.46 $ 0.37
---------- ---------- ----------
---------- ---------- ----------
NET INCOME PER SHARE - DILUTED $ 0.56 $ 0.38 $ 0.28
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
( IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS )
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 17,315 $ 22,684
Short-term investments 14,861 -
Accounts receivable, net 3,321 2,499
Prepaid expenses and other current assets 2,042 1,244
------------- -------------
TOTAL CURRENT ASSETS 37,539 26,427
Furniture and equipment, net 4,080 3,733
Marketable securities 3,506 5,857
Other assets - 618
------------- -------------
TOTAL ASSETS $ 45,125 $ 36,635
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 770 $ 579
Accrued income taxes 1,019 733
Accrued and other expenses 4,005 2,917
------------- -------------
TOTAL CURRENT LIABILITIES 5,794 4,229
SHAREHOLDERS' EQUITY :
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; 9,910,190
and 9,789,240 shares issued and outstanding at December 31, 1997 and
1996, respectively 99 98
Additional paid-in capital 30,880 29,599
Cumulative translation adjustment 20 33
Retained earnings 8,332 2,676
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 39,331 32,406
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,125 $ 36,635
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
( IN THOUSANDS )
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
--------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,656 $ 3,124 $ 2,205
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,930 1,320 711
Deferred income taxes (309) (571) (50)
Provision for doubtful accounts and returns 279 409 153
Changes in operating assets and liabilities:
Accounts receivable (1,100) (1,498) (521)
Prepaid expenses and other current assets (305) 167 (621)
Accounts payable 192 16 120
Accrued expenses 1,987 2,459 60
--------- ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,330 5,426 2,057
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment (2,275) (2,892) (1,840)
Purchases of marketable securities and
and short-term investments (12,510) (5,857) -
Other assets 432 (197) (168)
--------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (14,353) (8,946) (2,008)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Employee Stock Purchase Plan 315 42 -
Proceeds from exercise of stock options 339 285 -
Dividends paid - - (45)
Net proceeds from sale of common stock - 23,849 -
--------- ---------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 654 24,176 (45)
--------- ---------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,369) 20,656 4
Cash and cash equivalents, beginning of period 22,684 2,028 2,024
--------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,315 $ 22,684 $ 2,028
--------- ---------- -----------
--------- ---------- -----------
Income taxes paid $ 1,968 $ 1,550 $ 1,710
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL CUMULATIVE EARNINGS
COMMON PAID-IN TRANSLATION (ACCUMULATED
STOCK CAPITAL ADJUSTMENTS DEFICIT) TOTAL
------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
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
Exercise of stock options 1 338 - - 339
Tax benefit from exercise of nonqualified
stock options - 628 628
Stock purchased through Employee
Stock Purchase Plan - 315 - - 315
Translation adjustment - - (13) - (13)
Net income - - - 5,656 5,656
------- -------- --------- --------- --------
Balances at December 31, 1997 $ 99 $ 30,880 $ 20 $ 8,332 $ 39,331
------- -------- --------- --------- --------
------- -------- --------- --------- --------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ONTRACK DATA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and 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; San Jose, 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 shipment or
transmission of the recovered data back to customers. Software revenue is
recognized either upon shipment or upon receipt of OEM royalty reports,
whichever is applicable. Software revenue 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, 1997 and 1996
was $858 and $579, 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>
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. Advertising expenses of
approximately $1,032, $808 and $712 were charged to operations during the
years ended December 31, 1997, 1996 and 1995, respectively.
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 classified its investments as available-for-sale. 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 are 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.
<PAGE>
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.
NET INCOME PER SHARE
The Company has adopted Financial Accounting Standards Board Statement (SFAS)
No. 128, "Earnings Per Share" for the quarter ended December 31, 1997 and all
net earnings per share data presented has been restated and complies with
this Statement. Under the Statement, the presentation of primary earnings
per share is replaced with a dual presentation of basic and diluted earnings
per share. Basic earnings per share includes no dilution and is computed by
dividing net earnings available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution of securities that could share in
the earnings of the Company. The difference between the Company's basic and
diluted earnings per share data as presented is due to the dilutive impact
from stock options whose exercise price was below the average common stock
price for the respective period presented and due to the dilutive impact of
convertible preferred stock as applicable.
FINANCIAL PRESENTATION
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform to the 1997 presentation.
RECENTLY ISSUED ACCOUNTING STANDARD
The American Institute of Certified Public Accountant's has approved a new
Statement of Position (SOP), SOP 97-2 which supersedes Statement of Position
91-1, "Software Revenue Recognition." Management has assessed this new
statement and believes that its adoption will not have a material effect on
the timing of the Company's software revenue recognition or cause changes to
its software revenue recognition policy.
<PAGE>
NOTE 3 - FINANCIAL STATEMENT COMPONENTS
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Computer equipment $ 7,145 $ 5,381
Furniture and office equipment 1,434 1,398
Leasehold improvements 503 384
Purchased software 689 544
Less: Accumulated depreciation ( 5,691) (3,974)
-------- --------
$ 4,080 $ 3,733
-------- --------
-------- --------
</TABLE>
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Accrued wages and benefits $ 3,054 $ 2,079
Other accrued expenses 951 838
-------- --------
$ 4,005 $ 2,917
-------- --------
-------- --------
</TABLE>
NOTE 4 - LINE OF CREDIT
The Company maintains a line of credit which allows maximum borrowings of
$1,000 subject to a borrowing base of 80% of accounts receivable outstanding
less than 90 days. The line of credit carries an interest rate of 1/2% 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, 1997
and 1996.
NOTE 5 - 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 85% of the fair value
of the Company's common stock on the date of grant, but generally have been
granted at fair market value at the date of the grant. Canceled options are
available for future grant. Options granted to employees vest over a three
to five year period and expire six to ten years after 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
<PAGE>
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 1997 and 1996 would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income - as reported $5,656 $3,124
Net income - pro forma $4,875 $2,949
Net income per share - diluted, as reported $0.56 $0.38
Net income per share - diluted, pro forma $0.48 $0.36
</TABLE>
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 during 1997: dividend yield of 0%; expected
volatility of 75.0%; risk-free interest rate of 6.0%; and expected lives of
8.4 years.
A summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
Exercise Weighted-
Price Average
Options Per Share Exercise Price
------- --------- --------------
<S> <C> <C> <C>
Granted 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
Granted 265,500 $14.00 - $24.94 $17.38
Canceled (9,100) $12.00 - $20.38 $15.22
Exercised (99,822) $2.50 - $12.00 $2.89
-------
Outstanding at December 31, 1997 746,402 $2.58 - $24.94 $11.69
-------
-------
Weighted average fair value of
options granted during the year ended 1997 $14.35
------
------
</TABLE>
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted-Avg. Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------ ----------- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$2.58 - $3.99 189,322 4.2 years $ 3.41 189,322 $3.41
$12.00 - $15.00 387,580 7.7 12.50 63,416 12.00
$17.50 - $21.25 144,500 9.5 18.34 - -
$22.25 - $24.94 25,000 9.8 23.58 - -
---------- --- ----- --------- ----
746,402 7.22 $11.69 252,738 $5.56
------- -------
------- -------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company has an 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, 1997, 24,444 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.
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.
<PAGE>
NOTE 6 - EARNINGS PER SHARE
Earnings per share for the years ended December 31, 1997, 1996 and 1995 are
calculated as follows:
<TABLE>
<CAPTION>
Net Per Share
Income Shares Amounts
------ ------ -------
<S> <C> <C> <C>
1997
- ----
Basic EPS $ 5,656 9,815,657 $ 0.58
--------
--------
Effect of Stock Options - 289,397
------- -------
Diluted EPS $ 5,656 10,105,054 $ 0.56
------- ---------- --------
------- ---------- --------
1996
- ----
Basic EPS $ 3,124 6,791,231 $ 0.46
--------
--------
Effect of Stock Options - 223,839
Convertible Preferred Stock - 1,204,110
------- ---------
Diluted EPS $ 3,124 8,219,180 $ 0.38
------- --------- --------
------- --------- --------
1995
- ----
Basic EPS $ 2,205 6,000,000 $ 0.37
-------
-------
Effect of Stock Options - 294,457
Convertible Preferred Stock - 1,500,000
------- ---------
Diluted EPS $ 2,205 7,794,457 $ 0.28
------- --------- --------
------- --------- --------
</TABLE>
<PAGE>
NOTE 7 - 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:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
United States $ 8,487 $ 4,853 $ 3,420
Foreign 28 71 181
-------- -------- --------
Income before income taxes $ 8,515 $ 4,924 $ 3,601
-------- -------- --------
-------- -------- --------
</TABLE>
The Company's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 2,541 $ 1,909 $ 1,292
State 348 160 110
Foreign 272 241 44
-------- -------- --------
Total current 3,161 2,310 1,446
Deferred:
Federal (186) (270) (48)
State (19) (22) (2)
Foreign (97) (218) -
-------- -------- --------
Total deferred (302) (510) (50)
-------- -------- --------
Total income tax expense $ 2,859 $ 1,800 $ 1,396
-------- -------- --------
-------- -------- --------
</TABLE>
The Company's effective tax rates differed from the federal statutory tax rate
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected tax expense at federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 2.5 1.8 3.1
Tax exempt interest (4.1) (1.1) -
Other, net 1.2 1.9 1.7
---- ---- ----
33.6% 36.6% 38.8%
----- ----- -----
----- ----- -----
</TABLE>
<PAGE>
Deferred tax assets consist of the following components:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Allowance for doubtful accounts and returns $ 300 $ 205
Accrued expenses 132 79
German tax loss carry forward 315 218
Excess of book over tax depreciation 69 125
Foreign cash movements - 60
Other, net 1 7
------ ------
$ 817 $ 694
------ ------
------ ------
</TABLE>
NOTE 8 - 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 $569, $333 and $264 in 1997, 1996,
and 1995, 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 any
postretirement benefits.
NOTE 9 - 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 $934, $782 and $512 for the years ended
December 31, 1997, 1996, and 1995, respectively.
Future minimum lease payments under all operating leases are as follows:
<TABLE>
<S> <C>
1998 $ 916
1999 531
2000 367
2001 151
-------
$ 1,965
-------
-------
</TABLE>
<PAGE>
NOTE 10 - 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 were 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:
<TABLE>
<CAPTION>
At or For Years Ended December 31,
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Domestic operations $ 29,526 $ 22,555 $ 14,914
European operations 6,470 4,011 1,945
Japanese operations 414 661 431
Eliminations (1,161) (464) (145)
--------- --------- ---------
Consolidated $ 35,249 $ 26,763 $ 17,145
--------- --------- ---------
--------- --------- ---------
Net income (loss):
Domestic operations $ 5,208 $ 2,581 $ 1,734
European operations 75 (52) 83
Japanese operations 373 595 388
--------- --------- ---------
Consolidated $ 5,656 $ 3,124 $ 2,205
--------- --------- ---------
--------- --------- ---------
Identifiable assets:
Domestic operations $ 44,558 $ 36,050 $ 6,665
European operations 2,531 1,856 782
Eliminations (1,964) (1,271) (586)
--------- --------- ---------
Consolidated $ 45,125 $ 36,635 $ 6,861
--------- --------- ---------
--------- --------- ---------
</TABLE>
Intercompany transactions are eliminated in consolidation and consist mainly
of royalty charges by the U.S. parent to the European subsidiaries for data
recovery technology.
<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 and of cash flows
present fairly, in all material respects, the financial position of ONTRACK
Data International, Inc. and its subsidiaries at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 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 4, 1998
<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 4, 1998 appearing in the Annual Report to
Shareholders which is incorporated in this Annual Report on Form 10-K.
Price Waterhouse LLP
Minneapolis, Minnesota
March 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE TWELVE MONTHS ENDED DECEMBER
31, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,315
<SECURITIES> 14,861
<RECEIVABLES> 4,179
<ALLOWANCES> 858
<INVENTORY> 91
<CURRENT-ASSETS> 37,539
<PP&E> 9,771
<DEPRECIATION> 5,692
<TOTAL-ASSETS> 45,125
<CURRENT-LIABILITIES> 5,794
<BONDS> 0
0
0
<COMMON> 99
<OTHER-SE> 39,232
<TOTAL-LIABILITY-AND-EQUITY> 45,125
<SALES> 8,560
<TOTAL-REVENUES> 35,249
<CGS> 1,343
<TOTAL-COSTS> 5,758
<OTHER-EXPENSES> 22,091
<LOSS-PROVISION> 92
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> 8,515
<INCOME-TAX> 2,859
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,656
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.56
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED AS SPECIFIED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 DEC-31-1996
<CASH> 3,401 22,684
<SECURITIES> 0 0
<RECEIVABLES> 2,426 3,078
<ALLOWANCES> 0 579
<INVENTORY> 0 132
<CURRENT-ASSETS> 6,722 26,427
<PP&E> 7,044 7,707
<DEPRECIATION> 3,571 3,974
<TOTAL-ASSETS> 10,426 36,635
<CURRENT-LIABILITIES> 2,936 4,087
<BONDS> 0 142
0 0
0 0
<COMMON> 76 98
<OTHER-SE> 7,253 32,308
<TOTAL-LIABILITY-AND-EQUITY> 10,426 36,635
<SALES> 18,573 7,109
<TOTAL-REVENUES> 18,573 26,763
<CGS> 3,227 1,718
<TOTAL-COSTS> 3,227 4,522
<OTHER-EXPENSES> 12,273 17,609
<LOSS-PROVISION> 0 149
<INTEREST-EXPENSE> 0 21
<INCOME-PRETAX> 3,157 4,924
<INCOME-TAX> 1,200 1,800
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,957 3,124
<EPS-PRIMARY> 0.33 0.46
<EPS-DILUTED> 0.25 0.38
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED AS SPECIFIED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 12,077 18,487 20,126
<SECURITIES> 8,577 3,995 5,658
<RECEIVABLES> 3,648 3,237 4,261
<ALLOWANCES> 802 790 969
<INVENTORY> 134 104 107
<CURRENT-ASSETS> 24,757 26,478 30,470
<PP&E> 8,111 8,622 9,101
<DEPRECIATION> 4,399 4,866 5,173
<TOTAL-ASSETS> 37,357 38,900 41,244
<CURRENT-LIABILITIES> 3,487 3,728 4,548
<BONDS> 125 106 87
0 0 0
0 0 0
<COMMON> 98 98 98
<OTHER-SE> 33,648 34,968 36,511
<TOTAL-LIABILITY-AND-EQUITY> 37,357 38,900 41,244
<SALES> 1,958 4,024 5,819
<TOTAL-REVENUES> 8,070 16,215 25,207
<CGS> 315 706 1,058
<TOTAL-COSTS> 1,261 2,633 4,125
<OTHER-EXPENSES> 5,096 10,292 15,902
<LOSS-PROVISION> 1 35 55
<INTEREST-EXPENSE> 4 8 12
<INCOME-PRETAX> 1,931 3,792 5,964
<INCOME-TAX> 686 1,300 2,017
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,245 2,492 3,947
<EPS-PRIMARY> 0.13 0.25 0.40
<EPS-DILUTED> 0.12 0.25 0.39
</TABLE>
