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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(Mark one)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2000
------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period ________ to _________
COMMISSION FILE NUMBER 000-29809
OTG SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 52-1769077
(state or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
6701 DEMOCRACY BOULEVARD, SUITE 800
BETHESDA, MARYLAND 20817
(301) 897-1400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 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 [ ] NO [X]
As of September 30, 2000, there were outstanding 25,833,664 shares of OTG
Software, Inc. common stock, $0.01 par value per share.
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OTG SOFTWARE, INC.
Form 10-Q
Quarterly Period Ended September 30, 2000
Table of Contents
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 1
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 28
(b) Reports on Form 8-K 28
SIGNATURES 29
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OTG SOFTWARE, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
ASSETS (unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 67,818 $ 2,494
Accounts receivable, net of allowance of
$1,134 and $803, respectively 13,848 7,596
Deferred income taxes 1,445 -
Prepaid royalties and other current assets 2,019 693
--------- ---------
Total current assets 85,130 10,783
Other assets
Property and equipment, net 3,360 1,444
Goodwill, net 2,655 -
Other intangibles, net 699 -
Other assets, net 314 362
--------- ---------
Total other assets 7,028 1,806
--------- ---------
Total assets $ 92,158 $ 12,589
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 2,020 $ 1,509
Income taxes payable 1,447 -
Accrued expenses 4,740 3,708
Accrued interest - 1,327
Notes payable to banks - 5,000
Current portion of long-term debt 46 13,803
Subordinated notes payable-stockholders - 1,969
Deferred revenues 4,662 3,450
--------- ---------
Total current liabilities 12,915 30,766
Other liabilities
Long-term debt, net of current portion 53 3,529
Deferred income taxes 341 -
--------- ---------
Total other liabilities 394 3,529
--------- ---------
Total liabilities 13,309 34,295
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, $0.01 par value; 5,000,000 shares
authorized, none issued - -
Common stock, $0.01 par value; 65,000,000 shares
authorized, 25,833,664 and 16,314,682 shares
issued and outstanding, respectively 258 163
Additional paid-in capital 102,448 4,081
Deferred compensation, net (2,017) (2,557)
Accumulated deficit (20,819) (22,416)
--------- ---------
Total stockholders' equity (deficit) before stock
subscriptions receivable 79,870 (20,729)
--------- ---------
Less: stock subscriptions receivable (1,021) (977)
--------- ---------
Total stockholders' equity (deficit) 78,849 (21,706)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 92,158 $ 12,589
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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OTG SOFTWARE, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
2000 1999 2000 1999
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues
Software licenses $ 9,314 $ 5,115 $ 22,751 $ 12,605
Services 2,810 1,506 7,276 5,011
-------- -------- -------- --------
Total revenues 12,124 6,621 30,027 17,616
Cost of revenues
Software licenses 617 191 1,353 670
Services 1,079 781 3,207 2,188
-------- -------- -------- --------
Total cost of revenues 1,696 972 4,560 2,858
-------- -------- -------- --------
Gross profit 10,428 5,649 25,467 14,758
Operating expenses
Sales and marketing 4,569 2,791 12,691 7,959
Research and development 2,305 1,242 6,142 3,725
General and administrative 1,478 906 4,347 2,680
Amortization of acquired intangible assets 208 - 347 -
Write-off of acquired in-process research
and development - - 620 -
-------- -------- -------- --------
Total operating expenses 8,560 4,939 24,147 14,364
-------- -------- -------- --------
Income from operations 1,868 710 1,320 394
Other income (expense)
Interest income 1,098 9 2,353 26
Interest expense (3) (536) (617) (1,545)
-------- -------- -------- --------
Total other income (expense) 1,095 (527) 1,736 (1,519)
-------- -------- -------- --------
Income (loss) before income taxes 2,963 183 3,056 (1,125)
Provision for income taxes 343 - 343 -
-------- -------- -------- --------
Net income (loss) $ 2,620 $ 183 $ 2,713 $ (1,125)
======== ======== ======== ========
Net income (loss) per common share
Basic $ 0.10 $ 0.01 $ 0.12 $ (0.07)
Diluted $ 0.09 $ 0.01 $ 0.10 $ (0.07)
Shares used for computation
Basic 25,782 16,315 23,410 16,315
Diluted 28,876 19,240 26,400 16,315
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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OTG SOFTWARE, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine months
ended September 30,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Cash and cash equivalents at beginning of period $ 2,494 $ 437
-------- --------
Cash flows from operating activities:
Net income (loss) 2,713 (1,125)
Adjustments to reconcile net income (loss) to cash (used for)
provided by operating activities
Write-off of acquired in-process research and
development 620 -
Amortization of acquired intangible assets 347 -
Depreciation and amortization 743 521
Stock compensation expense 540 150
Provision for bad debts and returns 629 202
Deferred income taxes (1,104) -
Changes in certain assets and liabilities
Accounts receivables (6,881) (1,238)
Prepaid royalties and other current assets (1,511) (336)
Accounts payable and accrued expenses 1,120 1,767
Income taxes payable 1,447 -
Deferred revenues 1,212 584
-------- --------
Net cash (used for) provided by operating activities (125) 525
Cash flows from investing activities:
Purchases of property and equipment (2,553) (685)
Acquisition of xVault, net of cash acquired (1,731) -
-------- --------
Net cash used for investing activities (4,284) (685)
Cash flows from financing activities:
Net proceeds from initial public offering 87,035 -
Proceeds from issuances of common stock 420 -
Repayments on note payable to bank (5,000) (2,300)
Borrowings on note payable to bank - 3,500
Repayments on long-term debt (1,795) (388)
Borrowings under long-term debt 31 -
Repayments of stockholders' notes (9,798) -
Distributions to stockholders (1,160) -
-------- --------
Net cash provided by financing activities 69,733 812
-------- --------
Net increase in cash and cash equivalents 65,324 652
-------- --------
Cash and cash equivalents at end of period $ 67,818 $ 1,089
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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OTG SOFTWARE, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Nature of Operations
The accompanying condensed consolidated financial statements include the
accounts of OTG Software, Inc. (OTG Software), OTG Sales, Inc. (OTG Sales) and
OTG E-Mail Corp. (OTG E-Mail). OTG Software, OTG Sales and OTG E-Mail are
collectively referred to as "the Company." The statements have been prepared in
accordance with generally accepted accounting principles (GAAP) and the
applicable rules and regulations of the United States Securities and Exchange
Commission (SEC). These interim financial statements should be read in
conjunction with the audited consolidated financial statements and accompanying
notes thereto contained in the Company's Registration Statement on Form S-1, as
amended, filed with the SEC on December 23, 1999 (SEC File No. 333-93581). The
interim financial statements contained in this report are unaudited and, as
permitted by GAAP as well as SEC rules and regulations, do not include certain
information and disclosures normally included in audited financial statements
filed annually with the SEC.
In the opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for the periods presented. All
significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of financial statements in conformity with GAAP
requires management to make certain assumptions and estimates that affect the
reported amounts of assets and liabilities as of the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates. In addition, the
Company's operating results for interim periods may not be indicative of the
results of operations for a full fiscal year.
Headquartered in Bethesda, Maryland, OTG Software is a leading provider
of on-line storage management and access solutions, including a dynamic e-mail
management solution. OTG Software's products enable enterprises to store, track
and retrieve data over a variety of network architectures, including the Web
and storage area networks. Through its application-centric product suite, OTG
Software offers a business, Web and e-commerce solution that provides robust
functionality across industry. OTG Software's products empower storage by
combining storage with access and e-mail management. OTG Software's products
support over 600 storage devices, are easy to install and use, and can manage
storage systems ranging in size from a single storage device to an
enterprise-wide network storage system. OTG Software's products are used by
over 7,600 organizations worldwide and are available through a network of over
300 value-added resellers (VARs), distributors and original equipment
manufacturers (OEMs). The Company's primary product line is sold under the name
"XtenderSolutions."
Prior to December 30, 1999, OTG Sales was under common control and
majority stock ownership with OTG Software. On December 30, 1999, in connection
with the Company's planned IPO (as defined below), the stock of OTG Sales was
contributed to OTG Software for no consideration. The combination was accounted
for at historical cost. The accompanying financial statements have been
retroactively restated to give effect to the combination of the two companies as
if the combination occurred prior to January 1, 1997.
OTG E-Mail reflects the activity of the former xVault, Inc. (xVault), a
company that OTG Software acquired on April 25, 2000. Because the acquisition of
xVault was accounted for using the "purchase method," the assets acquired and
liabilities assumed from xVault were
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adjusted to fair value as of April 25, 2000 and consolidated with the Company's
balance sheet as of that date. Activity related to the former xVault entity is
recognized in the Company's financial results beginning April 26, 2000. See Note
3 for additional information.
2. Initial Public Offering
On March 10, 2000, the Company issued 5,000,000 shares of common stock,
$0.01 par value (Common Stock), in an initial public offering. The transaction
generated net proceeds to the Company of $87.0 million after direct costs of the
offering (the "IPO"). A portion of the net proceeds of the IPO was used to repay
all outstanding balances under the Company's commercial credit facility ($5.0
million), its senior subordinated notes ($4.5 million) and certain obligations
to stockholders and other related parties ($8.7 million), as discussed in Note
10. See also Note 5(a).
3. Acquisition of xVault
On April 25, 2000, OTG Software acquired xVault by means of a reverse
triangular merger for consideration consisting of a cash payment of $1.75
million and 159,996 shares of the Company's common stock. xVault is a provider
of e-mail solutions to government, business and industry. xVault's products
provide organizations with tools to enforce e-mail policies, increase employee
productivity, comply with statutory and regulatory mandates and secure
electronic data against loss or espionage. xVault has since been renamed "OTG
E-Mail Corp."
The cash component of the acquisition price was available to OTG Software
from cash on hand. The value of the common stock component of the consideration
was determined to be $2.2 million based on an analysis prepared by a third-party
appraiser. The common stock component of the consideration includes certain
restrictions on sale of these shares. The acquisition was accounted for using
the "purchase method" and, accordingly, activity related to the former xVault
entity is included in the Company's financial statements beginning April 26,
2000.
The Company acquired net liabilities from xVault of approximately $72,000
and incurred direct costs associated with the acquisition of approximately
$325,000, including the elimination of a deposit related to an OEM agreement
entered into with xVault in early 2000. The Company recorded goodwill of $2.9
million and other intangibles totaling $0.8 million resulting from the
acquisition. The other intangibles include developed technology, assembled
workforce and acquired customer base. The goodwill is being amortized over 5
years and the other intangibles are being amortized over lives ranging from 3 to
4 years. In addition, the Company recognized a one-time write-off of $620,000
related to in-process research and development resulting from the acquisition.
In-process research and development reflects the portion of the cost of
acquisition representing technology that did not meet the accounting definition
of "completed technology." As such, under generally accepted accounting
principles, the amount allocated to in-process research and development is
required to be immediately charged against earnings. The assessment of
in-process research and development involved analyzing the discounted cash flows
associated with each of the technologies that were under development at the time
of the acquisition, including estimated cash flows from successful completion
and cash flows necessary to complete each project. The resulting cash flows are
adjusted for certain risks before being discounted to present value. Risks taken
into consideration include estimates of market size, timing of completion,
product pricing and competitive factors for each of the acquired technologies.
The discount rate used reflects xVault's estimated weighted average cost of
capital. The acquired technologies were in various stages of completion ranging
from 13% to 43% of completion, with estimated completion dates no later than
2001. A third-party appraiser was used to determine the fair value of the assets
(including goodwill and other intangible assets) and liabilities acquired from
xVault as well as the amount of acquired in-process research and development.
The amounts recorded by OTG Software in its financial statements related to the
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acquisition of xVault, including the write-off of in-process research and
development, are subject to further study and analysis.
The following unaudited pro forma financial information was prepared as
if the acquisition occurred on January 12, 1999 (the date of xVault's
inception). This information excludes the one-time write-off of in-process
research and development discussed above. In the opinion of OTG Software's
management, all adjustments necessary to present fairly such information have
been made based on the terms and structure of the transaction. The following
information is presented for illustrative purposes only and does not necessarily
represent the financial results that would have resulted had the acquisition
actually occurred on the date indicated nor are the results indicative of the
future results of operations or financial condition of OTG Software on a
consolidated basis. In addition, this information is based upon information and
assumptions available at the time of the filing of this report, including fair
values of the assets acquired and the liabilities assumed from xVault as part of
the acquisition which are subject to further study and analysis. This
information should be read in conjunction with OTG Software's Form 8-K and
related Form 8-K/A filed with the SEC on May 9, 2000 and July 10, 2000,
respectively.
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Revenues $ 12,124 $ 6,670 $30,133 $17,665
Operating income (loss) $ 1,869 $ 214 $ 995 $ (851)
Net income (loss) $ 2,620 $ (313) $ 2,489 $(2,370)
EPS-Basic $ 0.10 $ (0.02) $ 0.09 $ (0.14)
EPS-Diluted $ 0.09 $ (0.02) $ 0.08 $ (0.14)
</TABLE>
4. Cash Equivalents
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Management determines the
appropriate classification at the time of purchase and reevaluates such
designations as of each balance sheet date.
All highly liquid investments purchased within three months of maturity
are classified as cash equivalents. These investments are primarily composed of
obligations issued by various federal and state governmental agencies and
certain domestic corporations. Cash equivalents are stated at amortized cost,
which approximates fair value due to the highly liquid nature and short
maturities of the underlying securities.
5. Stockholders' Equity (Deficit)
(a) Common Stock
On January 18, 2000, the Company's Board of Directors declared a
two-for-one split of the Company's Common Stock in the form of a stock dividend
and recommended to the Company's stockholders the adoption of an Amended and
Restated Certificate of Incorporation, which increased the authorized number of
shares of Common Stock to 65,000,000. By written consent dated February 17,
2000, the Company's stockholders approved the adoption of the Company's Amended
and Restated Certificate of Incorporation. The Company's Amended and Restated
Certificate of Incorporation became effective upon filing with the Secretary of
the State of Delaware on March 9, 2000. All common share, per common share and
conversion amounts
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related to Common Stock, stock options and stock purchase warrants included in
the Financial Statements and accompanying Notes to Condensed Consolidated
Financial Statements have been retroactively adjusted to reflect the stock
split.
As discussed in Note 2, on March 10, 2000, the Company issued 5,000,000
shares of Common Stock in the IPO. In addition, in conjunction with the IPO, all
of the Company's outstanding convertible subordinated notes were converted into
4,161,506 shares of Common Stock. Prior to conversion the principal amount of
these notes was $7.6 million and the related accrued interest was $1.2 million;
the Company was not obligated to pay any accrued but unpaid interest on the
notes at the time of conversion.
During the three months ended September 30, 2000, employee exercises of
stock options resulted in proceeds to the Company of approximately $200,000 and
the issuance of 101,894 shares of Common Stock. During the nine months ended
September 30, 2000, employee exercises of stock options resulted in proceeds to
the Company of approximately $420,000 and the issuance of 194,643 shares of
Common Stock.
The first offering period (May 22, 2000 - June 30, 2000) under the
Company's 2000 Employee Stock Purchase Plan (2000 ESPP) ended in June 2000,
resulting in proceeds to the Company of $45,534 and the issuance of 2,837 shares
of Common Stock. Under this plan, sales of Common Stock occur biannually on June
30 and December 31.
(b) Preferred Stock
The Company's Amended and Restated Certificate of Incorporation
authorizes the Company to issue up to 5,000,000 shares of preferred stock with a
par value of $0.01 per share. The preferred stock may be issued at the
discretion of the Company's Board of Directors in one or more series and on one
or more occasions. Each series of preferred stock will have such number of
shares, designations, preferences, voting powers, qualifications and special or
relative rights or privileges as the Company's Board of Directors may determine.
6. Lease Commitment
In June 2000, the Company entered into a lease commitment for a portion
of an office building currently being constructed in Rockville, Maryland. The
payments due under the ten-year arrangement total approximately $39 million,
based on current cost estimates and excluding renewal options. The lease
provides for payments of approximately $271,000 per month during the first year
of the agreement escalating to approximately $362,000 per month in the last year
of the agreement. The Company expects to occupy the new building, which will
serve as the Company's new headquarters, in 2001.
In August 2000, the Company established a standby letter of credit at
PNC Bank naming the lessor of the Company's new headquarters building as
beneficiary. The letter of credit was issued in lieu of the Company making a
cash payment to the lessor for the security deposit. The line of credit, which
expires on August 4, 2001, is for $2.8 million and is collateralized by U.S.
Treasury Bills.
7. Software Revenue Recognition
Software license revenues consist of fees for licenses of the Company's
software products. The Company sells its software products primarily through
value-added resellers, distributors and original equipment manufacturers. The
Company offers extended payment terms to certain customers. For such arrangement
with payment terms within six months, the Company recognizes the revenue when
the agreement is signed, the arrangement fee is fixed and
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determinable, delivery of the software has occurred, and collectibility of the
fee is considered probable. For arrangements in which payment terms extend
beyond six months, the Company recognizes revenue when payment by the customer
is made or becomes due, if all other revenue recognition criteria have been met.
Services revenues consist of customer support, professional services and
training. Revenues from customer support contracts, which include unspecified
when-and-if-available product updates and telephone support services, are
recognized ratably over the term of the contract, typically one year. Other
services revenues are recognized as the related services are provided.
8. Net Income (Loss) Per Common Share
Net income or loss per common share (EPS) is presented on both a basic
and diluted basis in accordance with SFAS No. 128, "Earnings per Share." Basic
EPS is computed by dividing net income or loss by the weighted average number of
shares of common stock outstanding during the period. Diluted EPS reflects the
maximum dilution that would result after giving effect to dilutive securities.
The table below presents the computation of Basic and Diluted EPS (the
amounts presented in the table are in thousands, except per share amounts). For
all periods presented, prior to conversion into Common Stock in March 2000, the
assumed conversion of the Company's convertible notes into Common Stock has an
anti-dilutive effect on Diluted EPS and, therefore, assumed conversion is
excluded from the Diluted EPS calculations. In addition, for the nine months
ended September 30, 1999, the assumed conversion of stock options and warrants
into Common Stock has an anti-dilutive effect on Diluted EPS and, therefore, the
assumed conversion of these financial instruments is excluded from the Diluted
EPS calculation for this period.
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Net income (loss):
Net income (loss) (Basic and Diluted) $ 2,620 $ 183 $ 2,713 $ (1,125)
======= ======== ======= ========
Shares of common stock:
Weighted average shares of common
stock outstanding (Basic) 25,782 16,315 23,410 16,315
======= ======== ======= ========
Incremental shares related to:
Outstanding stock options 3,066 2,899 2,962 -
Outstanding warrants 28 26 27 -
Shares purchased by employees under
Employee Stock Purchase Plan - - 1 -
Weighted average equivalent shares of
common stock outstanding (Diluted) 28,876 19,240 26,400 16,315
======= ======== ======= ========
EPS-Basic $ 0.10 $ 0.01 $ 0.12 $ (0.07)
======= ======== ======= ========
EPS-Diluted $ 0.09 $ 0.01 $ 0.10 $ (0.07)
======= ======== ======= ========
</TABLE>
9. Stock-Based Compensation
On January 18, 2000, the Company's Board of Directors adopted, and on
February 17, 2000 the Company's stockholders approved, the 2000 Stock Incentive
Plan (2000 SIP) and the 2000 Employee Stock Purchase Plan (2000 ESPP). Under the
2000 SIP, 1,000,000 shares of the
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Company's Common Stock were reserved for issuance as incentive stock options,
nonstatutory stock options, awards of unvested common stock and other
stock-based awards. The Board of Directors determined that, subsequent to
February 17, 2000, no additional awards of stock-based compensation will be
granted under the Company's Stock Plan, a stock-based award plan authorized in
1998.
The 2000 ESPP authorizes the issuance of up to 600,000 shares of the
Common Stock to participating employees. Eligible employees are permitted to
purchase Common Stock up to 10% of the employee's base pay at a purchase price
equal to 85% of the lesser of the closing price of the Common Stock on the first
and last days of the offering period, as defined in the 2000 ESPP. See also Note
5(a).
10. Related Party Transactions
In March 2000, subsequent to the IPO, the Company made payments totaling
$1.2 million to certain current and former stockholders representing
reimbursement of income taxes paid by these stockholders when the Company was
treated as a Subchapter S entity for income tax purposes. In addition, also in
March 2000 and subsequent to the IPO, the Company retired all of its outstanding
senior subordinated notes held by certain stockholders. At retirement, the
principal amount of these notes was $4.4 million and the related accrued
interest was $0.1 million. See also Note 5(a) related to the conversion of all
of the Company's outstanding convertible notes held by certain stockholders into
shares of the Company's Common Stock.
Pursuant to an agreement with the Company's principal stockholder, the
Company repaid promissory notes with an aggregate principal amount of $3.0
million in March 2000. These notes had similar terms, including repayment within
60 days after the closing of the IPO. As mentioned previously, the Company
completed an IPO on March 10, 2000.
On June 9, 1998, the Company purchased from a former stockholder all of
his shares for $11.5 million. The Company recorded this transaction as the
re-purchase and retirement of treasury stock. The Company paid $6.0 million in
cash and issued a note to the former stockholder with a face value of $5.5
million and a 10% rate of interest. The Company recorded the note at its face
value, which approximated the fair value of the note at the date of issuance. In
January 2000, a principal payment of $1.0 million was made on the note. In late
March 2000, the Company retired the note with a final payment of $4.2 million.
In March 2000, the Company made a bonus compensation payment to a former
employee of $0.3 million. The payment was contingent on the Company consummating
the IPO.
11. Segment Information and Related Disclosures
The Company operations consist of one business segment providing data
storage management and data access solutions products and services. For the
three months and nine months ended September 30, 2000 and 1999, the Company's
revenues from foreign countries represented 7% and 11%, respectively, and 7% and
6%, respectively, of total revenues. One sale (software licenses) recognized in
the second quarter of 2000 represented 34% of the international revenues for the
first nine months of 2000.
(this space intentionally left blank)
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12. Supplemental Information - Condensed Consolidated Statements of Cash
Flows
<TABLE>
<CAPTION>
Nine months
ended September 30,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Cash paid during the period for (in thousands):
Income taxes $ - $ -
Interest $ 682 $ 847
Material non-cash transactions (in thousands):
Issuance of Common Stock related to the
April 2000 acquisition of xVault $ 2,173 $ -
Conversion of all outstanding convertible
subordinated notes payable (including
related accrued interest) into 4,161,506
shares of Common Stock in March 2000 $ 8,833 $ -
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the prospectus included in the Company's Registration Statement on
Form S-1, as amended, filed with the SEC on December 23, 1999 (SEC File No.
333-93581) (the "Form S-1"). The information contained herein is not a
comprehensive discussion and analysis of the financial condition and results of
operations, but rather updates disclosures made in the Company's Form S-1
filing.
Certain information contained herein should be considered
"forward-looking information" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. Forward-looking information is subject
to a number of substantial risks and uncertainties that can cause actual results
to differ materially. These risks and uncertainties include the timely
development and market acceptance of our products and our ability to manage our
growth. Statements contained herein that are not statements of historical fact
may be deemed to be forward-looking information. Without limiting the foregoing,
words such as "anticipates," "believes," "could," "estimate," "expect,"
"intend," "may," "might," "should," "will," and "would" and other forms of these
words or similar words are intended to identify forward-looking information. For
example, the Company's forward-looking statements include statements regarding:
- revenue growth;
- development, deployment and acceptance of new products;
- technological changes;
- use of the proceeds from the Company's initial public offering;
- variations in gross margin;
- expansion plans;
- spending on research and development;
- levels of expenditures generally, including investments in property and
equipment; and
- sufficiency of the Company's liquidity and capital resources.
Such forward-looking statements are made only as of the date of this
report. Important factors known to the Company that could cause such material
differences are discussed under the caption "Risk Factors" below. In light of
these risks, uncertainties and assumptions, the future events, developments, or
results described by the forward-looking statements in this report could
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<PAGE> 13
turn out to be materially different from those discussed or implied. The Company
undertakes no obligation to update or revise any forward-looking information,
whether as a result of new information, future events or otherwise.
Overview
OTG Software is a provider of online data storage management and data
access software. The Company's software enables enterprises to move, store,
manage and access data and e-mail quickly and efficiently over a variety of
network architectures, including the Web and storage area networks. The
Company's software supports many different types of storage devices, is easy to
install and use, and can manage storage systems ranging in size from a single
storage device to an enterprise-wide data storage network.
OTG Software was founded in March 1992. Though profitable for the nine
months ended September 30, 2000, the Company has had operating losses in the
past. As of September 30, 2000, the Company had an accumulated deficit of $20.8
million. The Company expects to incur significant research and development,
sales and marketing and general and administrative expenses, and, as a result,
the Company will need to generate significant revenues to maintain
profitability. Although the Company's revenues have grown, the Company may not
be able to sustain these growth rates, and may not realize sufficient revenues
to maintain profitability.
The Company generates revenues principally from licensing software
products and providing related professional services including maintenance and
technical support, consulting and training.
The Company derives software license revenues from licenses of software
programs to customers primarily through indirect sales channels, including
original equipment manufacturers, value-added resellers and distributors. The
Company also sells through its direct sales force. Original equipment
manufacturers either bundle the Company's products with the products they offer
or resell the Company's products under their own label. The Company receives
software license revenues each time an original equipment manufacturer licenses
a copy of its products that incorporates one or more of the Company's products.
The Company's license agreements with original equipment manufacturers
generally contain no minimum sales requirements and the Company cannot provide
assurance that any original equipment manufacturer will either commence or
continue shipping the Company's products in the future. Moreover, following the
execution of new license agreements, a significant period of time may elapse
before any revenues are generated due to the development work which the Company
often undertakes under these agreements and the time needed for the sales and
marketing groups within these original equipment manufacturers, customers and
resellers to become familiar with the Company's products.
The Company offers extended payment terms to certain customers. For
arrangements with payment terms within six months, the Company recognizes the
revenue when the agreement is signed, the arrangement fee is fixed and
determinable, delivery of the software has occurred and collectibility of the
fee is considered probable. As of September 30, 2000, amounts due from such
arrangements were $6.1 million. For arrangements in which payment terms extend
beyond six months, the Company recognizes revenue when payment by the customer
is made or becomes due, if all other revenue recognition criteria listed above
have been met.
The Company's services revenues consist of fees derived from annual
maintenance agreements, consulting and training and other professional
services. The maintenance agreements covering the Company's products provide
for technical support and minor unspecified product upgrades for fees based on
the number of software licenses purchased and the level of service chosen by
the customer. The Company recently began to require that at least
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<PAGE> 14
one year of customer maintenance support be purchased with new license
purchases. Maintenance fees are recognized ratably over the term of the
maintenance contract. The Company provides consulting and other professional
services, for which the Company charges a fee based upon the amount of time
worked and the cost of the materials used in providing the services. The Company
provides classroom and on-site training to our customers on a daily fee basis.
Professional services and training services typically have lower gross margins
than sales of software licenses and customer support.
The Company's international sales are primarily generated through
indirect sales channels. Revenues derived from customers located outside the
United States and Canada, most of which are denominated in U.S. currency,
accounted for approximately 6% of the Company's total revenues in each of 1998
and 1999 and accounted for approximately 11% of the Company's total revenues
for the nine months ended September 30, 2000.
The Company currently has sales and services offices in the United States
and provides sales and services support in Europe through employees located in
England, Germany and the Netherlands. The Company plans to expand its
international operations by establishing additional foreign offices, hiring
additional personnel and recruiting additional international resellers.
Recent Developments
In April, 2000, the Company acquired xVault, Inc. (xVault) for
consideration of 159,996 shares of the Company's Common Stock and $1.75 million
in cash. xVault was a provider of e-mail management and archiving solutions to
government, business and industry. The Company incorporated xVault's technology
into the recently released EmailXtender product. The acquisition was accounted
for using the purchase method.
In June 2000, the Company released its EmailXtender product. EmailXtender
is designed to be integrated with leading e-mail platforms and provides
intelligent storage, indexing, archiving, and retrieval of e-mail messages and
attachments. EmailXtender also provides timely recovery from virus attacks and
eliminates the need for administrative restrictions on message or attachment
size. The Company intends to continue to capitalize on its position as an early
provider of e-mail storage management and promote the adoption of this product
in the electronic collaboration market.
In June 2000, the Company also announced its OnlineStor.com offering.
OnlineStor.com provides the Company's XtenderSolutions product suite on a
leased or metered basis over the Web through application service providers and
storage service providers. The Company intends to expand its capability to
enable its customers to outsource data storage capacity and management over the
Web by expanding existing relationships and pursuing additional relationships
with application service providers and storage service providers.
In September 2000, the Company released its SANXtender product.
SANXtender provides automated, centralized management of data stored on a
storage area network, enabling users and applications to access data directly
from a storage area network. The Company has successfully demonstrated the
compatibility of its technology and its ability to operate with the products of
leading manufacturers of storage area network technologies such as Advanced
Digital Information, ATL Products, ATTO Technology, Brocade Communications
Systems, Chaparral Network Storage, Compaq Computer, Crossroads Systems,
Emulex, Gadzoox Networks, Hewlett-Packard, QLogic and Vixel. The Company
intends to continue to pursue strategic alliances with other leading providers
of storage area network technologies.
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IPO and Related Transactions
On March 10, 2000, the Company issued 5,000,000 shares of common stock,
$0.01 par value per share (Common Stock), in an initial public offering,
generating net proceeds to the Company of $87.0 million after considering the
direct costs of the offering (the "IPO"). A portion of the net proceeds of the
IPO was used to repay all outstanding balances under the Company's commercial
credit facility ($5.0 million), its senior subordinated notes ($4.5 million) and
certain obligations to stockholders and other related parties ($8.7 million).
In conjunction with the IPO, all of the Company's outstanding convertible
subordinated notes were converted into 4,161,506 shares of Common Stock. Prior
to conversion, the principal amount of these notes was $7.6 million and the
related accrued interest was $1.2 million; the Company was not obligated to pay
any accrued but unpaid interest on the converted notes at the time of
conversion.
The Company intends to use the remaining net proceeds of the IPO for
working capital and general corporate purposes as well as in support of
advancing strategic objectives, including the acquisition of other businesses,
products or technologies that are complementary to our business. See related
information under Part II, Item 2 of this report.
RESULTS OF OPERATIONS
The following section pertains to activity included in the Company's
Condensed Consolidated Statements of Operations (which are contained in Part I,
Item 1 of this report), comparing results of operations for the three months and
nine months ended September 30, 2000 with the comparable periods in 1999.
The table below presents the line items included in the Company's
Condensed Consolidated Statements of Operations as a percentage of total
revenues. This table excludes the write-off of in-process research and
development in the amount of $620,000, and amortization of acquired intangible
assets in the amount of $208,000 and $347,000 for the three months and nine
months ended September 30, 2000, respectively, associated with the Company's
acquisition of xVault in April 2000. The write-off of in-process research and
development is a one-time charge. Both items are discussed in detail in Note 3
to Notes to Consolidated Condensed Financial Statements.
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues
Software licenses 77 % 77 % 76 % 72 %
Services 23 23 24 28
---- ---- ---- ----
Total revenues 100 100 100 100
Cost of revenues
Software licenses 5 3 5 4
Services 9 12 10 12
---- ---- ---- ----
Total cost of revenues 14 15 15 16
---- ---- ---- ----
Gross profit 86 85 85 84
</TABLE>
(table is continued on following page)
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<PAGE> 16
(table is continued from preceeding page)
<TABLE>
<S> <C> <C> <C> <C>
Operating expenses
Sales and marketing 38 42 42 45
Research and development 19 19 21 21
General and administrative 12 13 15 16
Amortization of acquired intangible assets - - - -
Write-off of acquired in-process research
and development - - - -
---- ---- ---- ----
Total operating expenses 69 74 78 82
Income from operations 17 11 7 2
Other income (expense)
Interest income 9 - 8 -
Interest expense - (8) (2) (8)
---- ---- ---- ----
Total other income (expense) 9 (8) 6 (8)
---- ---- ---- ----
Income (loss) before income taxes 26 3 13 (6)
Provision for income taxes (3) - (1) -
---- ---- ---- ----
Net income (loss) 23 % 3% 12 % (6)%
==== ==== === ====
</TABLE>
Comparison of Three Months Ended September 30, 2000 and 1999
Revenues
Total revenues increased 83% from $6.6 million for the three months ended
September 30, 1999 to $12.1 million for the same period in 2000. The Company
believes that the percentage increase in total revenues achieved in this period
is not necessarily indicative of future results. The Company's revenues consist
of software license revenues and services revenues. Software license revenues
are derived primarily from licenses of the Company's software products. Services
revenues are derived primarily from contracts for software maintenance and
technical support and, to a lesser extent, consulting, training and other
professional services. Software license revenues were 77% of total revenues for
both the three months ended September 30, 2000 and for the same period in 1999.
Software license revenues-Software license revenues increased 82% from
$5.1 million for the three months ended September 30, 1999 to $9.3 million for
the same period in 2000. The increase was primarily due to an increase in
overall demand for data storage management products, increased market acceptance
of our products, introduction of new products and continued expansion of sales
through the Company's indirect distribution channels. For the three months ended
September 30, 2000, the Company recognized revenues of $1.9 million from one
customer, which accounted for 21% of the Company's total license revenues for
that period. In addition, for the three months ended September 30, 2000, the
Company recognized revenues of $4.6 million, or 50% of the Company's total
license revenues during that period, under arrangements with payment terms
extending up to six months.
Services revenues-Services revenues increased 87% from $1.5 million for
the three months ended September 30, 1999 to $2.8 million for the same period in
2000. The increase was primarily due to increased sales of maintenance and
technical support contracts on new license sales, increased renewals of these
contracts by the Company's installed base of licensees and, to a lesser extent,
increased demand for consulting, training and other professional services.
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<PAGE> 17
Cost of revenues
Cost of software license revenues consists primarily of royalties, media,
manuals and distribution costs. Cost of services revenues consists primarily of
personnel-related costs in providing maintenance and technical support,
consulting and training to customers. Gross margin on software license revenues
is substantially higher than gross margin on services revenues, reflecting the
low materials, packaging and other costs of software products compared with the
relatively high personnel costs associated with providing maintenance and
technical support, consulting and training services. Cost of services revenues
varies based upon the mix of maintenance and technical support, consulting and
training services.
Cost of software license revenues-Cost of software license revenues
increased 223% from approximately $191,000 for the three months ended September
30, 1999 to approximately $617,000 for the same period in 2000, due primarily to
an increase in royalty expenses. As a result, gross margin on software license
revenues decreased from 96% for the three months ended September 30, 1999 to 93%
for the same period in 2000. The gross margin on software license revenues may
vary from period to period based on the software license revenues mix and
certain products having higher royalty rates than other products. The Company
does not expect significant improvement in gross margin on software license
revenues.
Cost of services revenues-Cost of services revenues increased 38% from
approximately $781,000 for the three months ended September 30, 1999 to $1.1
million for the same period in 2000 primarily due to personnel additions in the
Company's customer support, training and consulting organizations, in
anticipation of increased demand for these services. Gross margin on services
revenues increased from 48% for the three months ended September 30, 1999 to 62%
for the three months ended September 30, 2000 due primarily to the margins
achieved on several consulting services engagements. The gross margins on
services revenues may vary from period to period based upon the mix of
maintenance and technical support, consulting and training services.
Operating Expenses
Sales and marketing-Sales and marketing expenses consist of salaries,
related benefits, commissions, consultant fees, tradeshow, advertising and other
costs associated with our sales and marketing efforts. Sales and marketing
expenses increased 64% from $2.8 million for the three months ended September
30, 1999 to $4.6 million for the same period in 2000. The increase in sales and
marketing expenses is attributable to an increase in the number of sales and
marketing employees and increases in marketing programs. As a percentage of
total revenues, sales and marketing expenses decreased from 42% for the three
months ended September 30, 1999 to 38% for the same period in 2000. The decrease
as a percentage of total revenues was primarily due to the increase in total
revenues. The Company intends to continue to expand our global sales and
marketing infrastructure, and, accordingly, sales and marketing expenses are
expected to increase in future periods.
Research and development-Research and development expenses consist
primarily of salaries, related benefits and other engineering-related costs.
Research and development expenses increased 86% from $1.2 million for the three
months ended September 30, 1999 to $2.3 million for the same period in 2000. The
increase was primarily due to increased staffing levels. As a percentage of
total revenues, research and development expenses remained unchanged at 19% for
the three months ended September 30, 2000 and 1999. The Company believes that a
significant level of research and development investment is required to remain
competitive, and expects that the dollar amount of these expenses will continue
to increase in future periods.
General and administrative-General and administrative expenses consist
primarily of salaries, related benefits and fees for professional services, such
as legal and accounting services. General
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<PAGE> 18
and administrative expenses increased 63% from approximately $906,000 for the
three months ended September 30, 1999 to $1.5 million for the same period in
2000, primarily due to additional personnel costs and other expenses associated
with enhancing the Company's infrastructure to support expansion of its
operations. As a percentage of total revenues, general and administrative
expenses decreased from 13% for the three months ended September 30, 1999 to 12%
for the same period in 2000. The decrease as a percentage of total revenues was
primarily due to the increase in total revenues. The Company expects the dollar
amount of general and administrative expenses will increase as it expands
operations.
Other income (expense)-Other income (expense) changed from approximately
$(536,000) net other expense for the three months ended September 30, 1999 to
$1.1 million net other income for the same period in 2000. This change is
primarily due to the Company's use of proceeds from its initial public offering
in March 2000. The Company used the proceeds of its initial public offering to
repay outstanding balances under its credit facility, retire its senior
subordinated notes and retire all notes payable to certain stockholders.
Further, the conversion of the Company's convertible subordinated notes into
common stock in conjunction the Company's initial public offering eliminated
related interest expense. In addition, the remaining proceeds from the initial
public offering increased cash and cash equivalents resulting in increased
interest income.
Provision for income taxes-The Company was treated as a subchapter S
corporation for federal and state income tax purposes prior to its initial
public offering in March 2000. Under subchapter S, the Company's income was
allocated and taxable to its stockholders. Accordingly, the Company did not
recognize any federal or state income taxes prior to the consummation of its
initial public offering. Upon consummation of the initial public offering, the
Company ceased to be treated as a subchapter S corporation. Accordingly, the
Company has been subject to federal and state income taxes since its initial
public offering.
The Company recorded a tax provision of approximately $343,000 for the
three months ended September 30, 2000. This provision reflects an effective tax
rate of 11.6% for that period. A reduction in the valuation allowance against
gross deferred tax assets established when the Company ceased to be treated as a
subchapter S corporation. The Company expects its effective income tax rate to
increase in future years.
Recently issued accounting standards-In March 2000, the FASB issued
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions involving
Stock Compensation." FIN 44 is an interpretation of Accounting Principal Board's
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Among other
matters, FIN 44 clarifies the application of APB 25 regarding the definition of
employee for purposes of applying APB 25, the criteria for determining whether a
plan qualifies as noncompensatory and the accounting consequences of
modifications to the terms of a previously issued stock options or similar
awards. The Company adopted the provisions of FIN 44 in the third quarter of
2000. The adoption of FIN 44 did not have a material impact on the Company's
financial condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements" (SAB 101), as amended by SAB 101A
and SAB 101B, which expresses the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements.
Registrants can apply the accounting and disclosure requirements of this SAB
retrospectively, or, for entities with a calendar year end, such as OTG
Software, adopt the provisions for the fourth quarter of 2000. The Company does
not believe that the application of this SAB in its existing format will have a
material impact on the Company's financial statements.
In October 1997, The American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 97-2, "Software Revenue Recognition"
(SOP 97-2). Subsequently, in
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<PAGE> 19
March 1998 and December 1998, the AICPA issued SOP No. 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2" (SOP 98-4) and SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions" (SOP 98-9), respectively. SOP 98-4 and SOP 98-9 deferred the
effective date for application of certain provisions of SOP 97-2 until January
1, 2000, including guidance in SOP 97-2 that limited the definition of vendor
specific objective evidence for determining the fair value of various elements
in a multiple element arrangement. The Company adopted the provisions of SOP
97-2 not deferred by SOP 98-4 and SOP 98-9 on January 1, 1998 and the remaining
provisions of SOP 97-2 on January 1, 2000. The adoption of these accounting
policies did not have a material impact on the Company's financial condition or
results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which establishes accounting and
reporting standards for derivative instruments embedded in other contracts and
for hedging activities. This statement, as amended, is effective for all fiscal
years beginning after June 15, 2000. The Company does not believe adoption of
the provisions of SFAS 133 will have a material affect on the Company's
financial condition or results of operations.
Comparison of Nine Months Ended September 30, 1999 and 2000
Revenues
Total revenues increased 70% from $17.6 million for the nine months ended
September 30, 1999 to $30.0 million for the same period in 2000. As mentioned
above under the comparison of quarterly results, the Company believes that the
percentage increase in total revenues achieved in this period is not necessarily
indicative of future results. Software license revenues were 72% of total
revenues for the nine months ended September 30, 1999 and 76% of total revenues
for the same period in 2000.
Software license revenues-Software license revenues increased 80% from
$12.6 million for the nine months ended September 30, 1999 to $22.8 million for
the same period in 2000. The increase was primarily due to an increase in
overall demand for data storage management products, increased market acceptance
of the Company's products, introduction of new products and continued expansion
of sales through the Company's indirect distribution channels. For the nine
months ended September 30, 2000, the Company recognized revenues of $2.9 million
from two customers, which accounted for 13% of the Company's total license
revenues for that period. In addition, for the nine months ended September 30,
2000, the Company recognized revenues of $10.4 million, or 46% of the Company's
total license revenues during that period, under arrangements with payment terms
extending up to six months.
Services revenues-Services revenues increased 45% from $5.0 million for
the nine months ended September 30, 1999 to $7.3 million for the same period in
2000. The increase was primarily due to increased sales of maintenance and
technical support contracts on new license sales, increased renewals of these
contracts by the Company's installed base of licensees and, to a lesser extent,
increased demand for consulting, training and other professional services.
Cost of Revenues
Cost of software license revenues-Cost of software license revenues
increased 102% from $670,000 for the nine months ended September 30, 1999 to
$1.4 million for the same period in 2000, due primarily to an increase in
royalty expenses. As a result, gross margin on software license revenues
decreased from 95% for the nine months ended September 30, 1999 to 94% for the
same period in 2000. As mentioned above in the comparison of quarterly results,
the gross margin on
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software license revenues may vary from period to period based on the software
license revenues mix and certain products having higher royalty rates than other
products.
Cost of services revenues-Cost of services revenues increased 47% from
$2.2 million for the nine months ended September 30, 1999 to $3.2 million for
the same period in 2000 primarily due to personnel additions in the Company's
customer support, training and consulting organizations, in anticipation of
increased demand for these services. Gross margin on services revenues remained
at 56% for the nine months ended September 30, 2000 and 1999.
Operating Expenses
Sales and marketing-Sales and marketing expenses increased 59% from $8.0
million for the nine months ended September 30, 1999 to $12.7 million for the
same period in 2000. The increase in sales and marketing expenses is
attributable to an increase in the number of sales and marketing employees and
increases in marketing programs. As a percentage of total revenues, sales and
marketing expenses decreased from 45% for the nine months ended September 30,
1999 to 42% for the same period in 2000. The decrease as a percentage of total
revenues was primarily due to the increase in total revenues.
Research and development-Research and development expenses increased 65%
from $3.7 million for the nine months ended September 30, 1999 to $6.1 million
for the same period in 2000. The increase was primarily due to increased
staffing levels. As a percentage of total revenues, research and development
expenses decreased from 21% for the nine months ended September 30, 1999 to 20%
for the same period in 2000.
General and administrative-General and administrative expenses increased
62% from $2.7 million for the nine months ended September 30, 1999 to $4.3
million for the same period in 2000, primarily due to additional personnel costs
and other expenses associated with enhancing the Company's infrastructure to
support expansion of its operations. As a percentage of total revenues, general
and administrative expenses decreased from 16% for the nine months ended
September 30, 1999 to 15% for the same period in 2000. The decrease as a
percentage of total revenues was primarily due to the increase in total
revenues.
Other income (expense)-Other income (expense) changed from $(1.5) million
net other expense for the nine months ended September 30, 1999 to $1.7 million
net other income for the same period in 2000. See discussion above in the
comparison of quarterly results.
Provision for income taxes-The Company recorded a tax provision of
approximately $343,000 for the nine months ended September 30, 2000. This
provision reflects an effective tax rate of 11.2% for that period. See
discussion above in the comparison of quarterly results for additional
information.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, cash and cash equivalents totaled $67.8
million, representing 74% of total assets. In March 2000, the Company raised
$87.0 million of net proceeds from an initial public offering. For the nine
months ended September 30, 2000, the Company earned interest of $2.4 million on
cash and cash equivalents. As of September 30, 2000, the Company had
interest-bearing debt outstanding of approximately $99,000, related to certain
equipment acquired under a capital lease.
For the nine months ended September 30, 2000, net cash used in operating
activities was approximately $125,000. For the same period in 1999, operating
activities provided net cash of $525,000. The decrease in cash provided by
operating activities primarily reflects an increase in
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accounts receivable and prepaid expenses, partially offset by an increase in
deferred revenues. The increase in accounts receivable was primarily due to an
increase in the number and dollar value of arrangements with extended payment
terms.
Net cash used in investing activities for the nine months ended September
30, 2000 increased to $4.3 million from $685,000 for the same period in 1999.
The increase is a result of the Company's acquisition of xVault in April 2000
and an increase in the Company's investment in property and equipment in support
of its rapidly expanding operations. The Company expects to continue to invest
in property and equipment in the ordinary course of business as required. In the
third quarter of 2000, the Company launched a project to implement software to
improve management of its sales and marketing, research and development,
professional services and technical support functions. The total investment in
this program, which the Company expects to be substantially complete before the
end of 2000, is expected to exceed $1.0 million, excluding training and other
periodic costs. The capitalized costs associated with this program will be
amortized over a three-year period.
For the nine months ended September 30, 2000, cash provided by financing
activities was $69.7 million, which reflects net proceeds from the Company's
initial public offering offset by repayments of certain debt obligations.
Employee exercises of stock options generated proceeds of approximately
$420,000 during the first nine months of 2000. For the same period in 1999,
cash provided by financing activities was $812,000.
The Company believes that its current cash, cash equivalents and
anticipated cash flows from operating activities will satisfy anticipated
working capital and capital expenditure requirements for at least the next
twelve months. After that, the Company may require additional funds to support
our working capital requirements or for other purposes and may seek to raise
such additional funds through public or private equity financing or from other
sources. The Company cannot provide assurance that additional financing will be
available at all or that, if available, the Company will be able to obtain it
on terms favorable to the Company.
RISK FACTORS
There are a number of important factors that could affect the Company's
business and future operating results, including, without limitation, the
factors set forth below, and the information contained in this Quarterly Report
on Form 10-Q should be read in light of such factors. Any of the following
factors could harm our business and our future operating results. References to
"we", "us", or "our" below mean OTG Software, Inc. and its wholly-owned
subsidiaries.
We may not be able to sustain our current revenue growth rates
Although our revenues have grown rapidly in recent years, we may not be
able to maintain this rate of revenue growth because of the difficulty of
maintaining high percentage increases as our base of revenue increases. In
addition, growing competition, lower-than-expected market acceptance of Windows
NT or Windows 2000, or the failure of the market for storage area networks to
develop, could also affect our revenue growth.
Our operating results may fluctuate significantly
Our revenues in any quarter will depend substantially on orders we
receive, ship and determine to be collectable in that quarter. In addition, we
typically receive a significant portion of orders during the last month of each
quarter, and we cannot predict whether those orders will be placed, fulfilled
and shipped in that period. If we have lower revenues than we expect, we
probably will not be able to reduce our operating expenses in time to compensate
for any revenue shortfall. Therefore, any significant shortfall in revenues or
delay of customer orders could have
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an immediate adverse effect on our operating results in that quarter.
Our operating results have fluctuated in the past, and they are likely to
fluctuate significantly in the future. Quarterly comparisons of our financial
results are not necessarily meaningful and you should not rely on them as an
indication of our future performance.
Factors that could affect our operating results include:
- the unpredictability of the timing and level of sales through our
indirect sales channels;
- the timing and magnitude of large orders;
- changes in the mix of our sales, including the mix between higher
margin software licenses and lower margin services;
- the timing and amount of our marketing, sales and product
development expenses;
- the cost and time required to develop new software products;
- the introduction, timing and market acceptance of new products
introduced by us or our competitors;
- changes in data storage and networking technology or the
introduction of new operating system upgrades, which could require
us to modify our products or develop new products;
- the growth rate of Windows NT;
- the rate of adoption of Windows 2000;
- the rate of adoption of storage area networks;
- pricing policies, payment terms and distribution terms;
- the failure of customers, especially those to whom we have granted
extended payment terms, to pay amounts owed when due, and;
- the timing and size of acquisitions, if any.
In addition, our efforts to expand our software product suite, sales and
marketing activities, direct and indirect distribution channels and maintenance
and technical support functions and to pursue strategic relationships or
acquisitions may not succeed or may prove more expensive than we anticipate. As
a result, we cannot predict our future operating results with any degree of
certainty and our operating results may vary significantly from quarter to
quarter.
Fluctuations in our operating results are likely to affect our stock
price in a manner that may be unrelated to our long-term operating performance.
Our business depends on the acceptance of Windows NT and Windows 2000 to run
computer networks, and a decrease in their rates of acceptance could cause our
revenues to decline
For the foreseeable future, we expect a substantial majority of our
revenues to continue to come from sales of our Windows NT-based data storage
software products. As a result, we depend on the growing use of Windows NT for
computer networks. If the deployment of Windows NT does not increase as we
anticipate, or if it decreases, our revenues could decline. In
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addition, if users do not accept Windows 2000, or if there is a wide acceptance
of other existing or new operating systems, our business would suffer.
Windows 2000 may not gain market acceptance. In addition, users of
previous versions of Windows NT may decide to migrate to another operating
system due to these delays or improved functionality of another operating
system. We have expended significant resources on the development of Windows
2000-compatible versions of our product suite and our future success depends
upon sales of this product suite. If users of Windows 2000 networks do not
widely adopt and purchase our products, our revenue and business will suffer.
In the future, our business may depend upon the development of the
emerging market for storage area networks, and if this market fails to develop,
or develops more slowly than we anticipate, or if our products are not widely
accepted in this market, our business will suffer
Our future growth and profitability will depend upon the widespread
acceptance of storage area networks as an enterprise-wide data storage method
and the acceptance of our products for use in such networks. Accordingly,
widespread adoption of storage area networks is critical to our future success.
The market for storage area networks has only recently begun to develop and
evolve. Because this market is new, it is difficult to predict its potential
size or growth rate. Potential customers that have invested substantial
resources in their existing data storage management systems may be reluctant or
slow to adopt a new approach like storage area networks. Our success in
generating revenues in this emerging market will depend, among other things, on
our ability to educate potential original equipment manufacturers and system
integrators, as well as potential end-users, about the benefits of storage area
networks and our data storage management solutions when deployed in the storage
area network environment. Furthermore, although we are attempting to position
our products as a standard for data storage management on storage area
networks, if we are unsuccessful in doing so, competing standards may emerge
that will be preferred by original equipment manufacturers, systems integrators
or end-users.
We have experienced significant growth in our business and our failure to manage
this growth or any future growth could harm our business
We continue to increase the scope of our operations and have grown our
headcount substantially. As of June 30, 1998, we had 104 employees, as of
December 31, 1998 we had 144 employees, as of December 31, 1999 we had 172
employees and as of September 30, 2000, we had a total of 251 employees. Our
productivity and the quality of our products may be adversely affected if we do
not integrate and train our new employees quickly and effectively. We also
cannot be sure that our revenues will continue to grow at a rate sufficient to
absorb the costs associated with a larger overall headcount.
Our future success and our ability to sustain our revenue growth also
depend upon the continued service of our executive officers and other key sales
and research and development personnel. The loss of any of our executive
officers or key employees, especially Richard A. Kay, F. William Caple and
Ronald W. Kaiser, could adversely affect our business and slow our product
development processes. Although we have employment agreements with these
executives, these agreements do not obligate them to remain employed by us. We
do not have key person life insurance policies covering any of our employees.
Furthermore, we must continue to hire large numbers of highly qualified
individuals. Competition for these individuals is intense, and we may not be
able to attract, assimilate or retain additional highly qualified personnel in
the future.
To achieve our business objectives, we may recruit and employ skilled
technical professionals from other countries to work in the United States.
Limitations imposed by federal
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immigration laws and the availability of visas could compromise our ability to
attract necessary qualified personnel. This may have a negative effect on our
business and future operating results.
Our revenues depend primarily on sales of licenses for one product line, our
XtenderSolutions product suite, and a decline in sales of licenses for this
product suite could cause our revenues to fall
We have derived the substantial majority of our revenue from the sale of
our XtenderSolutions product suite. For the first nine months of 2000 and for
1999, 1998 and 1997, sales of our XtenderSolutions products accounted for at
least 70% our total revenues. We expect that these products will continue to
account for a large portion of our revenues for the foreseeable future.
Accordingly, our business and future operating results depend on the continued
market acceptance of our XtenderSolutions products and future enhancements to
these products. Any factors adversely affecting the pricing of, demand for or
market acceptance of our XtenderSolutions products, including competition or
technological change, could cause our revenues to decline and our business and
future operating results to suffer.
Our multiple distribution channels are subject to many risks that could
adversely affect our sales
Direct sales: We have a growing direct sales force to sell our products,
especially to large customers. Direct sales involve a number of risks,
including:
- longer sales cycles, typically three to six months;
- our need to hire, train, retain and motivate our sales force; and
- the length of time it takes our new sales representatives to begin
generating sales.
Indirect sales: We expect that a significant portion of our revenues will
continue to come from indirect sales. These include sales to original equipment
manufacturers that incorporate our data storage management software into systems
they sell. We also expect future revenues from distributors and value-added
resellers that sell our software, often bundled with their own software or
services. We have no control over the shipping dates or volumes of systems our
original equipment manufacturers, value-added resellers or distributors ship,
and they have no obligation to ship systems incorporating our software. They
generally have no minimum sales requirements and can terminate their
relationship with us on short notice. We develop customized versions of our
products for some of our original equipment manufacturers to be included in
their systems software and other products. Developing products for these
original equipment manufacturers causes us to divert resources from other
activities that are also important to our business. If these versions do not
result in substantial revenues, our business and financial results could be
adversely affected.
Our original equipment manufacturers could choose to compete with us or with
each other, which could harm our business
Our original equipment manufacturers, value-added resellers and
distributors could choose to develop their own data storage management products
and incorporate those products into their systems or product offerings in lieu
of our products. In addition, the original equipment manufacturers that we do
business with may compete with one another. To the extent that one of our
original equipment manufacturer customers views the products we have developed
for another original equipment manufacturer as competitive, it may decide to
stop doing business with us, which could harm our business.
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Overlapping sales efforts may lead to inefficiencies and may adversely affect
our relationships with those who sell our products
Our original equipment manufacturers, value-added resellers, distributors
and direct sales force might target the same sales opportunities, which could
lead to an inefficient allocation of sales resources. This would result in us
marketing similar products to the same end-users. These overlapping sales
efforts could also adversely affect our relationships with our original
equipment manufacturers, value-added resellers, distributors and other sales
channels and result in them being less willing to market our products
aggressively, and could compromise margins on products the Company sells
directly.
The market for outsourced data storage software over the Web is new and
evolving, and if this market fails to develop, or if our products are not widely
accepted in this market, our business could suffer
Part of our strategy is to offer outsourced data storage software to
customers over the Web. In this business model, customers who wish to reduce
their in-house hardware and maintenance costs would pay us or a third party
using our products to provide metered or leased data storage capacity and
management. If this business model does not gain acceptance among potential
customers, we will not be able to implement this strategy successfully. The
market for electronic outsourced data storage software has only recently begun
to emerge and we cannot be sure that it will develop or grow. Among other
things, the development of this market could be limited by:
- concerns over the reliability and security of the Web, especially
as a means of moving data that is critical to the customer's
business; and
- customer reluctance to cede control over the hardware and network
infrastructure used to store important data and to rely on systems
provided by a third party.
We have only recently begun to provide outsourced data storage service
through OnlineStor.com and do not have any significant experience in the market
for these services. We are expending significant resources to develop the market
for these services and if this market fails to develop, or if we are not able to
penetrate it successfully, we will not realize any return on this investment,
and our business may suffer.
If we encounter system failures or other difficulties in providing outsourced
data storage services, we could be exposed to liability and our reputation could
suffer
We depend upon a hardware and networking infrastructure to deliver
outsourced data storage capacity to our customers. If this infrastructure fails,
or customers otherwise experience difficulties or delays in retrieving data, we
could face liability claims from them and our reputation could be damaged. We
currently do not develop the hardware and networking infrastructure ourselves,
but rather contract with third parties, such as storage service providers and
application service providers, to supply these components on our behalf. For
this reason, we are dependent on the performance of the systems deployed and
maintained by these parties, whom we will not control. In some cases, we might
contract directly with the customer to provide the outsourced services; in other
cases, we might act as a reseller for application service providers, storage
service providers or others. In either case, we would expect to include
contractual provisions limiting our liability to the customer for system
failures and delays, but we cannot be sure that these limits will be enforceable
or will be sufficient to shield us from liability. We also expect that we would
carry liability insurance to cover problems of this nature, but we cannot
guarantee that insurance will be available or that the amounts of our coverage
will be sufficient to cover all potential claims.
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Other companies have developed or may choose to develop competing products and
potential customers for our products may choose to develop internal data storage
management capabilities or satisfy their needs with a traditional data back-up
solution, any of which could cause our revenues and our business to suffer
We face a variety of competitors that offer products with some of our
products' features. Some potential customers may elect to internally develop
capabilities similar to those provided by our products rather than buying them
from us or another outside vendor. Although our products generally enhance
traditional data back-up capabilities offered by companies such as VERITAS
Software, Legato Systems, Computer Associates International and IBM, our
products may compete against traditional back-up solutions when a potential
customer seeks to address its storage needs with only a data back-up solution.
Furthermore, VERITAS Software has recently begun to offer a Windows NT-based
product that competes with DiskXtender and a Microsoft Exchange-based back-up
product for e-mail attachments that competes with EmailXtender. If potential
customers choose to develop their own capabilities, choose a traditional data
back-up solution or purchase a competing product, our revenues and business will
suffer.
In addition, Microsoft could develop competing products. Windows 2000
includes basic data storage management capabilities. Microsoft could compete
with us by enhancing and expanding these capabilities to offer an integrated
storage management capability within their basic operating system. This would
reduce or eliminate the need to purchase our products, which would cause our
revenues and business to suffer.
Our products must remain compatible with operating system software, network
hardware and software configurations, which are currently undergoing, and will
likely continue to undergo, significant change that could render our products
obsolete
The market for our data storage management software is characterized by
rapid technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changes in customer demands and evolving industry
standards. Our products could be rendered obsolete if products based on new
technologies are introduced or new industry standards emerge. We have expended
significant resources to allow our products to take advantage of the release of
Windows 2000 and to prepare our products for the emergence of storage area
networks, and we expect to continue to do so. If Windows 2000 and storage area
networks are not widely adopted, our business and future operating results will
suffer.
As the emergence of storage area networks demonstrates, the computing
environments in which our products must operate are complex and change rapidly.
As a result, we cannot accurately estimate the life cycles of our software
products. New products and product enhancements can require long development and
testing periods, and depend significantly on our ability to hire and retain
increasingly scarce technically competent personnel. Significant delays in new
product releases or significant problems in installing or implementing new
product releases could result in lost revenues and significant additional
expense.
Our future success also depends, in part, on the compatibility of our
products with other vendors' software and hardware products, particularly those
provided by Microsoft and storage area network manufacturers. Microsoft or other
vendors may change their products so that they will no longer be compatible with
our products. These vendors may also decide to bundle their products with other
competing products for promotional purposes. If that were to happen, our
business and future operating results might suffer as we might be priced out of
the market or no longer be able to offer commercially viable products.
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We have experienced errors in our products in the past, and any such errors in
the future could harm our reputation and could cause customers to demand refunds
from us or assert claims for damages against us, which could harm our business
and future operating results
Because our software products are complex, they have in the past, and
could in the future, contain errors or bugs. Bugs can be detected at any point
in a product's life cycle. In the past, we have devoted significant resources to
the detection and correction of errors and we expect to do so in the future.
While we continually test our products for errors and work with customers
through our customer support services and engineering personnel to identify and
correct bugs in our software, we expect that errors in our products, especially
new releases of our current products and new product offerings, will continue to
be found in the future. Any of these errors could be significant and could harm
our business and future operating results. Detection of any significant errors
may result in:
- the loss of or delay in market acceptance and sales of our
products;
- diversion of development resources;
- injury to our reputation; or
- increased maintenance and warranty costs.
Because customers use our products to store and retrieve critical
information, we may be subject to significant liability claims if our products
do not work properly. Our agreements with customers typically contain provisions
intended to limit our exposure to liability claims. However, these limitations
may not preclude all potential claims. Liability claims could require us to
spend significant time and money in litigation or pay significant damages.
Claims of this nature, whether or not successful, could seriously damage our
reputation and our business.
Our software products rely on our intellectual property, and any failure by us
to protect, or any misappropriation of, our intellectual property could enable
our competitors to market products with similar features that may reduce demand
for our products
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. Policing unauthorized use of our products is difficult, and we
cannot be certain that the steps we have taken will prevent misappropriation of
our technology, particularly in foreign countries where we are seeking to expand
our operations and where the laws may not protect our proprietary rights as
fully as those in the United States. Our success and ability to compete depend
substantially upon our internally developed technology, which is incorporated in
the source code for our products. We protect our intellectual property through a
combination of copyright, trade secret and trademark law. We have registered, or
are in the process of registering, all of our trademarks under applicable law.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to our source
code and other intellectual property and the distribution of our software,
documentation and other proprietary information. These measures afford only
limited protection and may be inadequate, especially because employees such as
ours are highly sought after and may leave our employ with significant knowledge
of our proprietary information. Others may develop technologies that are similar
or superior to our technology or design around the copyrights and trade secrets
we own.
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Our products employ technology that may infringe the proprietary rights of
others, and we may be liable for significant damages as a result
We expect that our software products may be increasingly subject to
third-party infringement claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. We do not conduct comprehensive patent searches to determine whether
technologies used in our products infringe upon patents or patent applications
held by others. In addition, we hire employees who may be privy to the
proprietary information of their prior employers. Although we believe that our
products do not employ technology that infringes any proprietary rights of third
parties, third parties nevertheless may claim that we infringe their
intellectual property rights. Regardless of whether these claims have any merit,
they could:
- be time-consuming to defend;
- result in costly litigation;
- divert our management's attention and resources;
- cause product shipment delays; or
- require us to enter into royalty or licensing agreements, which
may not be available on terms acceptable to us, if at all.
A successful claim of product infringement against us or our failure or
inability to license the infringed or similar technology could damage our
business because we would not be able to sell our products without redeveloping
them or incurring significant additional expenses.
The expansion of our international operations subjects our business to
additional economic risks that could have an adverse impact on our revenue and
business
In both 1998 and 1999, products we sold to customers outside the United
States accounted for approximately 6% of our total sales. For the nine months
ended September 30, 2000, the Company's international revenues represented 11%
of total revenues. One sale of software licenses recognized in the second
quarter of 2000 represented 34% of the international revenues for the first
nine months of 2000.
We plan to increase our international sales activities, but these
activities are subject to a number of risks, including:
- greater difficulty in accounts receivable collection and longer
collection periods;
- political and economic instability;
- greater difficulty in attracting distributors that market and
support our products effectively;
- the need to comply with varying employment policies and
regulations which could make it more difficult and expensive to
manage our headcount if we need to establish more direct sales
staff outside the United States;
- weaker operating results from our international operations in our
quarters ending each September 30 due to the summer slowdown in
Europe; and
- the effects of currency fluctuations.
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As we seek to expand our international operations, if any of these risks
materialize, our revenues and our business could be adversely affected.
If we undertake acquisitions, they may be expensive and disruptive to our
business and could have an adverse effect on our business, future operations and
market price of our stock
In April 2000, we acquired a complementary business by means of a merger.
We may continue to make investments in complementary companies, products or
technologies. We could have difficulty in integrating an acquired company's
personnel and operations. In addition, the key personnel of the acquired
company may decide not to work for us. If we make other types of acquisitions,
we could have difficulty in assimilating the acquired technology or products
into our operations. These difficulties could disrupt our ongoing business,
distract our management and employees and increase our expenses. We also expect
that we would incur substantial expenses if we acquired other businesses or
technologies. If we issue additional equity securities, our stockholders could
experience dilution and the market price of our stock may decline. As of the
date of this report, we have no agreements or understandings regarding any
future acquisitions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not currently have any derivative financial instruments
and does not invest in derivative financial instruments. The Company invests
excess cash in short-term, highly-liquid investments. In addition, the Company
currently has no long-term indebtedness, except for $99,000 related to certain
equipment acquired under capital lease. As a result, the Company believes that
its exposure to interest rate risk is not material to its financial condition or
results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
The Company sold 5,000,000 shares of its Common Stock on March 10, 2000
pursuant to a Registration Statement on Form S-1 (Registration No. 333-93581),
which was declared effective by the SEC on March 9, 2000. A stockholder of the
Company sold an aggregate of 750,000 shares of the Company's Common Stock
pursuant to this registration statement. The managing underwriters of the
initial public offering were Credit Suisse First Boston Corporation, Deutsche
Bank Securities Inc., SG Cowen Securities Corporation and Friedman, Billings,
Ramsey & Co., Inc. The aggregate, gross proceeds raised in the initial public
offering from the sale of the stock by the Company and the selling shareholder
were $95.0 million and $14.25 million, respectively. The Company's total
expenses in connection with the initial public offering were approximately $8.0
million, of which $6.7 million was for underwriting discounts and commissions
and approximately $1.3 million was for other direct expenses of the offering.
The Company's net proceeds from the initial public offering were approximately
$87.0 million. From the effective date of the registration statement through
September 30, 2000, the Company used $18.2 million of such net proceeds to
retire its revolving line of credit facility, subordinated senior notes, notes
to its principal stockholder, notes to certain other related parties and
distributions to certain stockholders to cover their aggregate federal and state
income tax liabilities for 1998, 1999 and the portion of 2000 prior to the
Company terminating its S Corporation status and approximately $2.7 million for
operating and investing activities in the normal course of business. Of the
$13.2 million distribution to related parties, approximately $8.7 million was
paid to certain officers,
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directors and 10% stockholders of the Company. In addition, the Company
acquired xVault in April 2000 for consideration consisting of cash of $1.75
million and 159,996 shares of the Company's common stock. xVault was a provider
of e-mail software. See Note 3 to Notes to Condensed Consolidated Financial
Statements for additional information related to the Company's purchase of
xVault.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters To a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1; SEC file No.
333-93581).
3.2 Restated By Laws of the Company (incorporated herein by
reference to Exhibit 3.4 to the Company's Registration
Statement on Form S-1; SEC file No. 333-93581).
4.1 Refer to Exhibits 3.1 and 3.2.
10.1 1998 Stock Incentive Plan, as amended (incorporated herein by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1; SEC file No. 333-93581).
10.2 2000 Stock Incentive Plan (incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-1; SEC file No. 333-93581).
10.3 2000 Employee Stock Purchase Plan, as amended (incorporated
herein by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the Three Month Period Ended March 31,
2000).
10.4 Form of Indemnification Agreement to be executed with
directors and executive officers (incorporated herein by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1; SEC file No. 333-93581).
10.5 Form of Subchapter S Tax Indemnification Agreement to be
executed with certain stockholders (incorporated herein by
reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1; SEC file No. 333-93581).
10.6 Lease for facilities at 2600 Tower Oaks Boulevard in
Rockville, Maryland (incorporated herein by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q
for the Three Month Period Ended June 30, 2000).
27.1 Financial Data Schedule as of September 30, 2000
27.2 Financial Data Schedule as of September 30, 1999
(b) Reports on Form 8-K
July 10, 2000 Item 2; Related to OTG Software's acquisition of
xVault.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: /s/ RICHARD A. KAY Date: October 19, 2000
-----------------------------
Richard A. Kay
President, Chairman and Chief Executive Officer
By: /s/ RONALD W. KAISER Date: October 19, 2000
----------------------------
Ronald W. Kaiser
Chief Financial Officer and Treasurer
(Principal Financial Officer)
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29
