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.
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
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
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
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
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
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:
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.
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.
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.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
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.
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.
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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9.
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.
ITEM 10. EXECUTIVE COMPENSATION
The information set forth in the 1998 Proxy Statement under the caption "Executive Compensation" is incorporated herein by reference.
ITEM 11.
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.
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
(b) REPORTS ON FORM 8-K. None.
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.