<PAGE> 1
================================================================================
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 March 31, 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 April 30, 2000, there were outstanding 25,490,388 shares of OTG
Software, Inc. common stock, $0.01 par value per share.
================================================================================
<PAGE> 2
OTG SOFTWARE, INC.
Form 10-Q
Quarterly Period Ended March 31, 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 March 31, 2000 and
December 31, 1999 1
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 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 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 23
(b) Reports on Form 8-K 24
SIGNATURES 24
</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>
March 31, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 70,703 $ 2,494
Accounts receivable, net of allowance of
$772 and $803, respectively 9,570 7,596
Prepaid royalties and other current assets 1,445 693
------------- -------------
Total current assets 81,718 10,783
Other assets
Property and equipment, net 1,776 1,444
Other assets, net 317 362
------------- -------------
Total other assets 2,093 1,806
------------- -------------
Total assets $ 83,811 $ 12,589
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 2,008 $ 1,509
Accrued bonuses, compensation and benefits 2,311 2,533
Accrued liabilities 2,930 1,175
Accrued interest - 1,327
Notes payable to banks - 5,000
Current portion of long-term debt - 13,803
Subordinated notes payable-stockholders - 1,969
Deferred revenues-other 399 400
Deferred revenues-maintenance and licenses 3,722 3,050
------------- -------------
Total current liabilities 11,370 30,766
Other liabilities
Long-term debt, net of current portion 112 3,529
------------- -------------
Total other liabilities 112 3,529
------------- -------------
Total liabilities 11,482 34,295
Commitments and contingencies
Shareholders' 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, 25,476,188 and 16,314,682 shares
issued and outstanding, respectively 255 163
Additional paid-in capital 99,331 4,081
Deferred compensation (2,347) (2,557)
Accumulated deficit (23,933) (22,416)
------------- -------------
Total shareholders' equity (deficit) before stock
subscriptions receivable 73,306 (20,729)
------------- -------------
Less: stock subscriptions receivable (977) (977)
------------- -------------
Total stockholders' equity (deficit) 72,329 (21,706)
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 83,811 $ 12,589
============= =============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
<PAGE> 4
OTG SOFTWARE, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Revenues
Software licenses $6,437 $3,842
Services 1,863 1,592
------ ------
Total revenues 8,300 5,434
Cost of revenues
Software licenses 241 249
Services 1,005 729
------ ------
Total cost of revenues 1,246 978
------ ------
Gross profit 7,054 4,456
Operating expenses
Sales and marketing 3,758 2,189
Research and development 1,828 1,306
General and administrative 1,414 855
------ ------
Total operating expenses 7,000 4,350
------ ------
Income from operations 54 106
Other income (expense)
Interest income 201 10
Interest expense (612) (490)
------ ------
Total other income (expense) (411) (480)
------ ------
Loss before income taxes (357) (374)
Provision for income taxes - -
------ ------
Net loss $ (357) $ (374)
====== ======
Net loss per common share
Basic and Diluted $(0.02) $ (0.02)
Shares used for computation
Basic and Diluted 18,530 16,315
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 5
OTG SOFTWARE, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Cash and cash equivalents at beginning of period $ 2,494 $ 437
----------- -----------
Cash flows from operating activities:
Net loss (357) (374)
Adjustments to reconcile net income (loss) to cash
provided by operating activities
Depreciation and amortization 233 125
Stock compensation expense 210 -
Provision for bad debts and returns 243 74
Changes in certain assets and liabilities
Accounts receivables, net (2,216) 920
Prepaid royalties and other current assets (751) 18
Accounts payable and accrued liabilities 266 199
Deferred revenues 671 204
----------- -----------
Net cash (used for) provided by operating activities (1,701) 1,166
Cash flows from investing activities
Purchases of property and equipment (519) (147)
----------- -----------
Net cash used for investing activities (519) (147)
Cash flows from financing activities
Net proceeds from issuance of common stock 88,142 -
Repayments on note payable to bank (5,000) -
Borrowings under long-term debt 6 6
Repayments on long-term debt (1,761) (250)
Repayments of stockholders' notes (9,798) -
Distributions to stockholders (1,160) (45)
----------- -----------
Net cash provided by (used for) financing activities 70,429 (289)
----------- -----------
Net increase in cash and cash equivalents 68,209 730
----------- -----------
Cash and cash equivalents at end of period $ 70,703 $ 1,167
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 6
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) and OTG Sales, Inc. (OTG Sales).
OTG Software and OTG Sales 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. 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.
OTG Software is engaged in the development, production, sale, maintenance
and licensing of data storage and document management software products designed
for managing information and enhancing productivity. The Company is
headquartered in Bethesda, Maryland and sells its products primarily through
distributors and resellers. 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.
All significant intercompany balances and transactions have been
eliminated in consolidation.
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 of $86.5 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
8. See also Note 4(a).
4
<PAGE> 7
3. 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. Cash
equivalents are stated at amortized cost, which approximates fair value due to
the highly liquid nature and short maturities of the underlying securities.
4. Stockholders' Equity (Deficit)
(a) Common Stock
On January 18, 2000, the Company's Board of Directors declared a
two-for-one stock 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 holding a majority of the
shares entitled to vote thereon 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 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.
(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.
5. 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
distributors and resellers. In some cases, the Company provides extended payment
terms to certain distributors and resellers. For arrangements in which payment
terms are 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.
For arrangements
5
<PAGE> 8
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 maintenance and technical support, training
and consulting. Revenues from maintenance and technical support, which consists
of unspecified when-and-if-available product updates and customer telephone
support services, are recognized ratably over the term of the service period,
typically one year. Other services revenues are recognized as the related
services are being provided.
6. Net Loss Per Common Share
Net 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 table are in thousands, except per share amounts). Because
the Company recognized net losses in both periods, the inclusion of incremental
shares from the assumed conversion of stock options and warrants into common
stock would be anti-dilutive. Therefore, such amounts have not been included.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Net loss:
Net loss (Basic and Diluted) $ (357) $ (374)
============= =============
Shares of common stock:
Weighted average shares of common stock outstanding (Basic) 18,530 16,315
Incremental shares related to outstanding stock options - -
Incremental shares related to outstanding warrants - -
------------- -------------
Weighted average equivalent shares of common stock
outstanding (Diluted) 18,530 16,315
============= =============
EPS-Basic and Diluted $ (0.02) $ (0.02)
============= =============
</TABLE>
7. 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 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.
6
<PAGE> 9
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.
8. 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 4(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 retired promissory notes with an aggregate principal amount of $3.0
million in March 2000. These notes had similar terms, including retirement
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.
9. Segment Information and Related Disclosures
The Company operates under one business segment providing data storage
management and data access solutions products and services. The Company's
revenues from foreign countries represented 6% and 5% of total revenues for the
three months ended March 31, 2000 and 1999, respectively.
10. Supplemental Information - Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
------ ------
(unaudited)
<S> <C> <C>
Cash paid during the period for (in thousands):
Income taxes $ 3 $ -
Interest $ 674 $ 268
Material non-cash transactions (in thousands):
Conversion of all outstanding convertible subordinated
notes payable (including related accrued interest)
into 4,161,506 shares of Common Stock $8,833 $ -
</TABLE>
7
<PAGE> 10
11. Subsequent Event
On April 25, 2000, OTG Software acquired xVault, Inc. by means of a
reverse triangular merger for consideration consisting of a cash payment of
$1.75 million and 160,000 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. For accounting purposes the
acquisition was treated as a purchase and, accordingly, xVault's results of
operations will be included in the Company's Condensed Consolidated Statements
of Operations beginning April 26, 2000.
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," which is subject to a number of substantial risks and
uncertainties. 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. Such forward-looking statements are made only as of the date of
this report. The Company's actual results could differ materially from those
contained in forward-looking statements. Important factors known to the Company
that could cause such material differences are discussed under the caption "Risk
Factors" below. The Company undertakes no obligations to publicly update or
revise any forward-looking information, whether as a result of new information,
future events or otherwise.
Overview
OTG Software is a leading provider of online data storage, document
management and data access solutions products and services. The Company's
software enables organizations to move, store, manage and access data quickly
and efficiently over a variety of network architectures, including the World
Wide Web and storage area networks (SANs). 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. The Company's primary product line is sold
under the name "XtenderSolutions."
Software license revenues consist of fees for licenses of the Company's
software products. The Company sells its software products primarily through
distributors and resellers. In some cases, the Company provides extended payment
terms to certain distributors and resellers. For arrangements in which payment
terms are 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.
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.
8
<PAGE> 11
The Company reaches its customer base and target market through a
multi-channel sales and marketing strategy that includes original equipment
manufacturers (OEMs) and a network of value-added resellers (VARs) and
distributors (collectively referred to as the indirect sales channel). The
Company's products and services are also sold through a growing in-house sales
force (referred to as the direct sales channel). OEMs either bundle the
Company's products with the products they offer or resell the Company's products
under their own label. The Company recognizes revenue each time an OEM licenses
a copy of its products that incorporates one or more copies of the Company's
products. The Company's license agreements with OEMs generally contain no
minimum sales requirements and no assurance can be given that any OEMs will
either commence or continue licensing the Company's products in the future.
Additionally, following the execution of a new license agreement, a significant
period of time may lapse before any revenues are generated due to the
development work typically associated with such agreements and the time needed
for the sales and marketing groups within these OEMs, customers and resellers to
become familiar with our products.
The Company's services revenues consist of fees derived from annual
maintenance agreements, consulting and training and other services. Maintenance
agreements provide for technical support and minor unspecified product updates
for fees based on the number of software licenses purchased and the level of
service chosen by the customer. The Company also provides training and
consulting services. Consulting services are priced based upon the amount of
time worked and the cost of the materials used in providing the services. The
Company also offers training and provides classrooms as well as on-site training
on a daily fee basis. Training and consulting services revenue typically have
lower gross margins than revenues from sales of software licenses and
maintenance and support agreements.
Services revenues consist of maintenance and technical support, training
and consulting. Revenues from maintenance and technical support, which consists
of unspecified when-and-if-available product updates and customer telephone
support services, are recognized ratably over the term of the service period,
typically one year. Other services revenues are recognized as the related
services are being provided.
Growth and New Products
For the first three months of 2000, the Company's revenues increased 53%
compared with the first three months of 1999. The Company's revenues for 1999
represented a 47% increase compared with revenues recognized in 1998 and were
more than double revenues for 1997. The Company expects to continue to increase
its employee base in support of its expanding operations, particularly in sales
and marketing, research and development and infrastructure areas. As of March
31, 2000, the Company had 205 employees compared with 171 and 136 employees as
of December 31, 1999 and 1998, respectively.
On February 18, 2000, the Company introduced a new version of DiskXtender,
which enables comprehensive data storage management throughout an enterprise's
network. The new product "DiskXtender 2000," allows the Company's existing
technology to operate on the Windows 2000 platform.
During the quarter, the Company announced that Tivoli Systems, Inc.
(Tivoli), an IBM subsidiary, had selected DiskXtender 2000 as its Windows
NT/2000 solution for Tivoli Space Manager, Tivoli's storage management and data
migration product. Under the terms of an OEM agreement, Tivoli will sell
DiskXtender worldwide, integrated with Tivoli Space Manager. The Company
believes that this relationship will help increase the exposure of the Company's
products, particularly to larger, multi-national organizations.
9
<PAGE> 12
In April 2000, the Company acquired xVault, Inc., 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. The Company believes that the
technology and workforce acquired as part of this acquisition will result in
additional enhancements to the Company's product offerings, particularly
eMailXtender.
The Company continues to increase its international presence. The
Company's international sales are primarily generated through indirect sales
channels, although the Company has employees in England, Germany and the
Netherlands. In March 2000, OTG Software entered into a strategic alliance with
Mitsui & Company, a Japanese company and one of the largest conglomerates in the
world. One of the key goals of this relationship is to develop a Japanese
version of "DiskXtender." Revenues derived from customers located outside of the
United States and Canada, most of which are denominated in U.S. dollars,
accounted for approximately 6% of the Company total revenues in each of 1999 and
1998. For 1999, the Company's international revenues increased 32% compared with
1998. For the first three months of 2000, the Company's revenues from
international sales increased 97.2% to 5.9% of revenues versus 4.6% of revenues
for the comparable period in 1999.
IPO and Related Transactions
On March 10, 2000, the Company issued 5,000,000 shares of common stock,
$0.1 par value per share (Common Stock), in an initial public offering,
generating net proceeds of $86.5 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 8
to the Notes to Condensed Consolidated Financial Statements, which are contained
in Part I, Item 1 of this report.
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.
(this space intentionally left blank)
10
<PAGE> 13
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
ended March 31, 2000 with the three months ended March 31, 1999.
The table below presents the line items included in the Company's
Condensed Consolidated Statements of Operations as a percentage of total
revenues.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Revenues
Software licenses 78% 71%
Services 22 29
---- ----
Total revenues 100 100
Cost of revenues
Software licenses 3 5
Services 12 13
---- ----
Total cost of revenues 15 18
---- ----
Gross profit 85 82
Operating expenses
Sales and marketing 45 40
Research and development 22 24
General and administrative 17 16
---- ----
Total operating expenses 84 80
---- ----
Income from operations 1 2
Other income (expense)
Interest income 2 -
Interest expense (7) (9)
---- ----
Total other income (expense) (5) (9)
---- ----
Loss before income taxes (4) (7)
Provision for income taxes - -
---- ----
Net loss (4)% (7)%
==== ====
</TABLE>
Software licenses revenues-Software licenses revenues increased $2.6 million
(68%) due primarily to an increase in overall demand for data storage management
products, increasing market acceptance of the Company's products, the
introduction of new products and continued expansion of sales through the
Company's indirect distribution channel.
Services revenues-Services revenues increased $0.3 million (17%) due primarily
to increased sales of services and support contracts on sales of software
licenses to new customers, an increase in the number of renewals of maintenance
contracts by existing customers and, to a lesser extent, increased demand for
consulting and training services. See also "Software licenses revenues" above
related to changes in services fees revenues as a percentage of total revenues.
11
<PAGE> 14
Cost of software licenses revenues-Cost of software licenses revenues consists
primarily of royalties, media, product manuals and distribution expenses.
Although these expenses decreased marginally to $241,000, as a percentage of
revenues these costs decreased to 3% for the first quarter of 2000 from 5% for
the first quarter of 1999. This decrease resulted from changes in the Company's
obligations under certain royalty and license agreements. The gross margins on
software license revenues may vary from period to period based on the software
license mix as certain of the Company's products have higher royalty rates than
others. The gross margin on software license revenues is substantially higher
than gross margin on services revenues, reflecting the low materials, packaging
and other costs associated with software licenses compared with the relatively
high personnel costs associated with providing maintenance and technical
support, consulting and training services. The Company does not anticipate
significant improvements in gross margin on software license revenues.
Cost of services revenues-Cost of services revenues consist primarily of
personnel-related costs in providing maintenance and technical support,
consulting and training to customers. Cost of services revenues varies based
upon the mix of the services performed during a period. These expenses increased
$0.3 million (38%) due primarily to an increase in personnel in the Company's
customer support, training and consulting organizations, particularly in support
of implementation and related services. The gross margins on services revenues
may vary from period to period based on the mix of maintenance and technical
support, consulting and training services. See also "Cost of software licenses
revenues" above.
Sales and marketing expenses-These expenses consist primarily of the costs of
the Company's sales and marketing personnel as well as the costs of direct mail,
advertising, and other sales and marketing efforts. These expenses increased
$1.6 million (72%) attributable primarily to an increase in the number of sales
and marketing employees and an overall increase in marketing efforts. In
addition, expenses related to incentive programs with channel partners increased
approximately $350,000 and stock compensation expense related to the Company's
stock-based compensation program increased approximately $130,000. The Company
continues to expand its global sales and marketing infrastructure, including its
direct sale force, and, accordingly, expects sales and marketing expenses to
continue to increase in future periods.
Research and development expenses-These expenses consist primarily of personnel
costs and other engineering-related costs associated with the Company's efforts
to research, develop, maintain and enhance the Company's existing software
product lines and with the development of new products. These expenses increased
$0.5 million (40%) due primarily to higher staffing levels in the Company's
research and development areas. The Company believes that a significant level of
research and development investment is required to remain competitive. The
Company expects research and development expenses to increase in future periods.
General and administrative expenses-These expenses include the costs of
corporate operations, accounting and finance, legal, human resources and other
similar expenses. General and administrative expenses increased $0.6 million
(66%) related to increased staffing and expenses associated with enhancing the
Company's infrastructure in order to manage and support the Company's continued
expansion of its operations and operating as a publicly-held company.
Interest income-The substantial increase is related to an increase in cash and
cash equivalents, which increased substantially as a result of the Company's
March 2000 IPO.
Interest expense, net-The Company repaid all outstanding balances under its
revolving line of credit facility, retired all notes payable to certain
stockholders and the Company's senior subordinated notes following its IPO. In
addition, in conjunction with the IPO, the Company's convertible subordinated
notes were converted into shares of the Company's Common Stock. As of March 31,
2000, the Company had no interest-bearing long-term obligations, with the
12
<PAGE> 15
exception of $112,000 related to certain equipment acquired under a capital
lease.
Provision (credit) for income taxes-Primarily as a result of a pre-tax loss for
the period, the Company does have an income tax obligation for the first quarter
of 2000. In addition, because the Company has a history of operating losses, a
valuation allowance has been established for the full value of the net operating
loss generated during the period. The Company will reevaluate the
appropriateness of this allowance at each balance sheet date.
The Company was treated as a Subchapter S corporation for federal and
state income tax purposes prior to the IPO. Under Subchapter S, the Company's
income was allocated and taxable to the Company's stockholders. Accordingly, the
Company did not recognize any federal or state income taxes prior to
consummation of the IPO. Immediately preceding the consummation of the IPO, the
Company elected to terminate its Subchapter S status. Accordingly the Company is
currently subject to federal and state income taxes as a Subchapter C
corporation. As a result, the Company has adopted SFAS No. 109, "Accounting for
Income Taxes." Had the Company been a Subchapter C corporation for the entire
three months ended March 31, 2000 and March 31, 1999, the Company would not have
recognized a tax obligation or benefit for either period primarily related to
the Company experiencing losses for both periods as well as the Company's
history of operating losses (a valuation allowance would have been established
for the full value of the net operating loss generated in both periods).
Recently issued accounting standards In December 1999, the SEC issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." This SAB 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 may report a change in accounting principle no later than
the second fiscal quarter of the fiscal year beginning after December 15, 1999.
The Company does not believe that the application of this SAB 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 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 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 Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). The new standard 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
quarters beginning after June 15, 2000. The Company does not expect SFAS 133 to
have a material affect on its financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company's cash and cash equivalents totaled $70.7
million, representing 84% of total assets. As of March 31, 2000, the Company had
no interest-bearing
13
<PAGE> 16
debt outstanding, with the exception of $112,000 related to certain equipment
acquired under a capital lease (see "IPO and Related Transactions" above). As of
December 31, 1999, the Company had outstanding notes and similar obligations
totaling $24.3 million. In 1999, the Company recognized interest expenses
totaling $2.1 million related to interest-bearing debt obligations.
As discussed above, the Company realized net proceeds of $86.5 million
(after direct costs of the offering, including $1.7 million of direct costs that
were accrued as of March 31, 2000) from the IPO completed on March 10, 2000. As
of March 31, 2000, the Company had stockholders' equity of $72.3 million
compared with a stockholders' deficit of $(21.7) million as of December 31,
1999. The increase in stockholders' equity reflects the Company's sale of common
stock in the IPO and the conversion of the Company's subordinated convertible
notes to Common Stock completed in conjunction with the IPO.
For the three months ended March 31, 2000, net cash used for operating
activities was $1.7 million. For the corresponding period in 1999, operating
activities provided net cash of $1.2 million. The decrease in cash provided by
operating activities is primarily related to an increase in accounts receivable.
An increase in prepaid royalties and other current assets, primarily an increase
in prepaid insurance, contributed to the decrease in cash flows from operating
activities.
For the three months ended March 31, 2000 and 1999, net cash used for
investing activities was $0.5 million and $0.1 million, respectively. The
increase reflects an increase in the Company's investment in property and
equipment in support of its expanding operations. Although the Company does not
currently have any material, specifically identifiable commitments for capital
expenditures, the Company expects to continue to invest in property and
equipment in the ordinary course of its business as required, particularly in
support of the Company's expanding operations and infrastructure needs.
For the first three months of 2000, cash provided by financing activities
was $70.4 million, which reflects proceeds from the IPO offset by repayments of
certain obligations (see discussion above under "IPO and Related Transactions").
For the first three months of 1999, cash used in financing activities was $0.3
million related primarily to repayments of certain obligations.
The Company believes that its current liquidity, defined as cash and cash
equivalents and both short-term and long-term investments, combined with
anticipated cash flows from operating activities, will satisfy the Company's
anticipated working capital and capital expenditures requirements for at least
the next twelve months.
RISK FACTORS
There are a number of important factors that could affect our 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.
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 and Windows 2000, or the failure of the market for storage area networks to
develop, could also affect our revenue growth.
14
<PAGE> 17
Our operating results may fluctuate significantly
Our revenues in any quarter will depend substantially on orders we receive
and ship 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 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 and distribution terms; and
- the timing and size of acquisitions.
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.
15
<PAGE> 18
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 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.
Furthermore, if we fail to introduce Windows 2000-compatible versions of our
product suite within a short time after the commercial release of Windows 2000,
the delay may cause customers to forego purchases of our products and instead
purchase those of our competitors.
Our success depends 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 a total of 104 employees,
as of December 31, 1998 we had a total of 144 employees, as of December 31, 1999
we had a total of 172 employees and as of March 31, 2000 we had a total of 205
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.
16
<PAGE> 19
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 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 primarily depend 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. During 1999, 1998 and 1997, sales of our
XtenderSolutions products accounted for approximately 72%, 70% and 72% of our
total revenues, respectively. 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
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 which are also important to our business. If these versions do not
result in substantial revenues, our business and financial results could be
adversely affected.
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.
17
<PAGE> 20
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.
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.
The market for outsourced data storage software over the Web is new and
evolving, and if this market fails to develop, 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 do not currently provide outsourced data storage services and do not
have any significant experience in the market for these services. We are
expending significant resources to develop products for this market, and if this
market fails to develop, or if we are unable to enter 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 will 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 expect that we will not develop the hardware and networking
infrastructure ourselves, but rather will contract with third parties, such as
Internet service providers and application service providers, to supply these
components on our behalf. For this reason, we will be 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
18
<PAGE> 21
with the customer to provide the outsourced services; in other cases, we might
act as a reseller for application service providers, Internet 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.
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,
Legato Systems, Computer Associates 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 has
recently begun to offer a Windows NT-based product that competes with
DiskXtender. 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. Developers of these products may change their products so
that they will no longer be compatible with our
19
<PAGE> 22
products. These other 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.
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.
20
<PAGE> 23
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 which could have an adverse impact on our revenue and
business
In both 1998 and 1999, products we sold to customers outside North America
accounted for 6% of our total revenues. 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.
As we seek to expand our international operations, if any of these risks
materialize, our revenues and our business could be adversely affected.
21
<PAGE> 24
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 assimilating 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.
Furthermore, we may use the proceeds of this offering, incur debt or issue
equity securities to pay for any future acquisitions. 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 $112,000 related to certain
equipment acquired under a capital lease. As a result, the Company believes that
its exposure to interest rate risk is not material to its financial condition
and results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
No new material legal proceedings have commenced during the time period
covered by this interim report.
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 $8.5
million, of which $6.7 million was for underwriting discounts and commissions
and approximately $1.8 million was for other direct expenses of the offering.
The Company's net proceeds from the initial public offering were approximately
$86.5 million. From the effective date of the registration statement through
March 31, 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 $2.2 million for
operating and investing activities in the normal course of business.
Approximately $8.7 million of the $13.2 million distribution to related parties
was paid to certain officers, directors and 10% stockholders of the Company. In
addition, the Company acquired
22
<PAGE> 25
xVault, Inc. in April 2000 for consideration consisting of cash of $1.75 million
and 160,000 shares of the Company's common stock. xVault is a provider of e-mail
solutions to government, business and industry.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters To a Vote of Security Holders
By written consent dated February 17, 2000, stockholders of the Company
holding 64.5% of the shares entitled to vote took the following actions:
- Approved the Company's Amended and Restated Certificate of
Incorporation;
- Approved the Company's Amended and Restated By-Laws;
- Approved the Company's 2000 Stock Incentive Plan;
- Approved the Company's 2000 Employee Stock Purchase Plan;
- Re-elected Gabriel A. Battista, John Burton, F. William Caple, Joseph R.
Chinnici, Geaton A. DeCesaris, Jr., Donald B. Hebb, Jr. and Richard A.
Kay as the members of the Company's board of directors; and
- Effective upon the filing of the Amended and Restated Certificate of
Incorporation, classified the board of directors into three classes as
follows:
Class I Directors (term expiring at 2001 Annual Meeting):
Donald B. Hebb, Jr.
Joseph R. Chinnici
Class II Directors (term expiring at 2002 Annual Meeting):
F. William Caple
John Burton
Class III Directors (term expiring at 2003 Annual Meeting):
Gabriel A. Battista
Geaton A. DeCesaris, Jr.
Richard A. Kay
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).
(table continued on following page)
23
<PAGE> 26
(table continued from preceding page)
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.
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).
27.1 Financial Data Schedule as of March 31, 2000
27.2 Financial Data Schedule as of March 31, 1999
(b) Reports on Form 8-K
May 9, 2000 Item 2; Related to OTG Software's acquisition of xVault, Inc.
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: May 15, 2000
---------------------------
Richard A. Kay
President, Chairman and Chief Executive Officer
By: /s/ Ronald W. Kaiser Date: May 15, 2000
--------------------------
Ronald W. Kaiser
Chief Financial Officer and Treasurer
(Principal Financial Officer)
(this space intentionally left blank)
24
<PAGE> 1
EXHIBIT 10.3
OTG SOFTWARE, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
The purpose of this Plan is to provide eligible employees of OTG
Software, Inc. (the "Company") and certain of its subsidiaries with
opportunities to purchase shares of the Company's common stock, par value $0.01
per share (the "Common Stock"). Six hundred thousand (600,000) shares of Common
Stock in the aggregate have been approved for this purpose. This Plan is
intended to qualify as an "employee stock purchase plan" as defined in Section
423 of the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations promulgated thereunder, and shall be interpreted consistent
therewith.
1. Administration. The Plan will be administered by the Company's Board
of Directors (the "Board") or by a Committee appointed by the Board (the
"Committee"). The Board or the Committee has authority to make rules and
regulations for the administration of the Plan and its interpretation and
decisions with regard thereto shall be final and conclusive.
2. Eligibility. All employees of the Company, including Directors who
are employees, and all employees of any subsidiary of the Company (as defined in
Section 424(f) of the Code) designated by the Board or the Committee from time
to time (a "Designated Subsidiary"), are eligible to participate in any one or
more of the offerings of Options (as defined in Section 9) to purchase Common
Stock under the Plan provided that:
(a) they are customarily employed by the Company or a Designated
Subsidiary for more than 20 hours a week and for more than six months in a
calendar year; and
(b) they are employees of the Company or a Designated Subsidiary
on the first day of the applicable Plan Period (as defined below).
No employee may be granted an option hereunder if such employee,
immediately after the option is granted, owns 5% or more of the total combined
voting power or value of the stock of the Company or any subsidiary. For
purposes of the preceding sentence, the attribution rules of Section 424(d) of
the Code shall apply in determining the stock ownership of an employee, and all
stock which the employee has a contractual right to purchase shall be treated as
stock owned by the employee.
3. Offerings. The Company will make one or more offerings ("Offerings")
to employees to purchase stock under this Plan. Offerings will begin each July 1
and December 1, or the first business day thereafter (the "Offering Commencement
Dates"). Each Offering Commencement Date will begin a six-month period (a "Plan
Period") during which payroll deductions will be made and held for the purchase
of Common Stock at the end of the Plan
1
<PAGE> 2
Period. The Board or the Committee may, at its discretion, choose a different
Plan Period of twelve (12) months or less for subsequent Offerings.
Notwithstanding the above, the first Plan Period shall begin on May 22, 2000 and
shall end on June 30, 2000.
4. Participation. An employee eligible on the Offering Commencement
Date of any Offering may participate in such Offering by completing and
forwarding a payroll deduction authorization form to the employee's appropriate
payroll office at least 15 days prior to the applicable Offering Commencement
Date. The form will authorize a regular payroll deduction from the Compensation
received by the employee during the Plan Period. Unless an employee files a new
form or withdraws from the Plan, his deductions and purchases will continue at
the same rate for future Offerings under the Plan as long as the Plan remains in
effect. The term "Compensation" means the amount of money reportable on the
employee's Federal Income Tax Withholding Statement, excluding overtime, shift
premium, incentive or bonus awards, allowances and reimbursements for expenses
such as relocation allowances for travel expenses, income or gains on the
exercise of Company stock options or stock appreciation rights, and similar
items, whether or not shown on the employee's Federal Income Tax Withholding
Statement, but including, in the case of salespersons, sales commissions to the
extent determined by the Board or the Committee.
5. Deductions. The Company will maintain payroll deduction accounts for
all participating employees. With respect to any Offering made under this Plan,
an employee may authorize a payroll deduction in any dollar amount up to a
maximum of 10% of the Compensation he or she receives during the Plan Period or
such shorter period during which deductions from payroll are made. Payroll
deductions may be at any percentage (up to 10%) of Compensation, with any change
in Compensation during the Plan Period to result in an automatic corresponding
change in the dollar amount withheld. The minimum payroll deduction is such
percentage of Compensation as may be established from time to time by the Board
or the Committee.
No employee may be granted an Option (as defined in Section 9) which
permits his rights to purchase Common Stock under this Plan and any other
employee stock purchase plan (as defined in Section 423(b) of the Code) of the
Company and its subsidiaries, to accrue at a rate which exceeds $25,000 of the
fair market value of such Common Stock (determined at the Offering Commencement
Date of the Plan Period) for each calendar year in which the Option is
outstanding at any time.
6. Deduction Changes. An employee may decrease or discontinue his
payroll deduction once during any Plan Period, by filing a new payroll deduction
authorization form. However, an employee may not increase his payroll deduction
during a Plan Period. If an employee elects to discontinue his payroll
deductions during a Plan Period, but does not elect to withdraw his funds
pursuant to Section 8 hereof, funds deducted prior to his election to
discontinue will be applied to the purchase of Common Stock on the Exercise Date
(as defined below).
2
<PAGE> 3
7. Interest. Interest will not be paid on any employee accounts, except
to the extent that the Board or the Committee, in its sole discretion, elects to
credit employee accounts with interest at such per annum rate as it may from
time to time determine.
8. Withdrawal of Funds. An employee may at any time prior to the close
of business on the last business day in a Plan Period and for any reason
permanently draw out the balance accumulated in the employee's account and
thereby withdraw from participation in an Offering. Partial withdrawals are not
permitted. The employee may not begin participation again during the remainder
of the Plan Period. The employee may participate in any subsequent Offering in
accordance with terms and conditions established by the Board or the Committee.
9. Purchase of Shares. On the Offering Commencement Date of each Plan
Period, the Company will grant to each eligible employee who is then a
participant in the Plan an option ("Option") to purchase on the last business
day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter
provided for, the largest number of whole shares of Common Stock of the Company
as does not exceed the number of shares determined by multiplying $2,083 by the
number of full months in the Offering Period and dividing the result by the
closing price (as defined below) on the Offering Commencement Date of such Plan
Period.
The purchase price for each share purchased will be 85% of the closing
price of the Common Stock on (i) the first business day of such Plan Period or
(ii) the Exercise Date, whichever closing price is less. Such closing price
shall be (a) the closing price on any national securities exchange on which the
Common Stock is listed, (b) the closing price of the Common Stock on the Nasdaq
National Market or (c) the average of the closing bid and asked prices in the
over-the-counter-market, whichever is applicable, as published in The Wall
Street Journal. If no sales of Common Stock were made on such a day, the price
of the Common Stock for purposes of clauses (a) and (b) above shall be the
reported price for the next preceding day on which sales were made.
Notwithstanding anything to the contrary contained herein, if the first business
day of the first plan period is the day immediately after the pricing of the
Company's initial public offering, then the purchase price for shares purchased
during that initial period will be 85% of the lower of (i) the price at which
the Common Stock is sold to the public in that offering and (ii) the closing
price of the Common Stock on the Exercise Date.
Each employee who continues to be a participant in the Plan on the
Exercise Date shall be deemed to have exercised his Option at the Option Price
on such date and shall be deemed to have purchased from the Company the number
of full shares of Common Stock reserved for the purpose of the Plan that his
accumulated payroll deductions on such date will pay for, but not in excess of
the maximum number determined in the manner set forth above.
Any balance remaining in an employee's payroll deduction account at the
end of a Plan Period will be automatically refunded to the employee, except that
any balance which is less than the purchase price of one share of Common Stock
will be carried forward into the employee's payroll deduction account for the
following Offering, unless the employee elects not to participate in the
following Offering under the Plan, in which case the balance in the employee's
account shall be refunded.
3
<PAGE> 4
10. Issuance of Certificates. Certificates representing shares of Common
Stock purchased under the Plan may be issued only in the name of the employee,
in the name of the employee and another person of legal age as joint tenants
with rights of survivorship, or (in the Company's sole discretion) in the name
of a brokerage firm, bank or other nominee holder designated by the employee.
The Company may, in its sole discretion and in compliance with applicable laws,
authorize the use of book entry registration of shares in lieu of issuing stock
certificates.
11. Rights on Retirement, Death or Termination of Employment. In the
event of a participating employee's termination of employment prior to the last
business day of a Plan Period, no payroll deduction shall be taken from any pay
due and owing to an employee and the balance in the employee's account shall be
paid to the employee or, in the event of the employee's death, (a) to a
beneficiary previously designated in a revocable notice signed by the employee
(with any spousal consent required under state law) or (b) in the absence of
such a designated beneficiary, to the executor or administrator of the
employee's estate or (c) if no such executor or administrator has been appointed
to the knowledge of the Company, to such other person(s) as the Company may, in
its discretion, designate. If, prior to the last business day of the Plan
Period, the Designated Subsidiary by which an employee is employed shall cease
to be a subsidiary of the Company, or if the employee is transferred to a
subsidiary of the Company that is not a Designated Subsidiary, the employee
shall be deemed to have terminated employment for the purposes of this Plan.
12. Optionees Not Stockholders. Neither the granting of an Option to an
employee nor the deductions from his pay shall constitute such employee a
stockholder of the shares of Common Stock covered by an Option under this Plan
until such shares have been purchased by and issued to him.
13. Rights Not Transferable. Rights under this Plan are not transferable
by a participating employee other than by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only by the
employee.
14. Application of Funds. All funds received or held by the Company
under this Plan may be combined with other corporate funds and may be used for
any corporate purpose.
15. Adjustment in Case of Changes Affecting Common Stock. In the event
of a subdivision of outstanding shares of Common Stock, or the payment of a
dividend in Common Stock, other than the two-for-one stock split declared by the
Board on January 18, 2000, the number of shares approved for this Plan, and the
share limitation set forth in Section 9, shall be increased proportionately, and
such other adjustment shall be made as may be deemed equitable by the Board or
the Committee. In the event of any other change affecting the Common Stock, such
adjustment shall be made as may be deemed equitable by the Board or the
Committee to give proper effect to such event.
16. Merger. If the Company shall at any time merge or consolidate with
another corporation and the holders of the capital stock of the Company
immediately prior to such
4
<PAGE> 5
merger or consolidation continue to hold at least 80% by voting power of the
capital stock of the surviving corporation ("Continuity of Control"), the holder
of each Option then outstanding will thereafter be entitled to receive at the
next Exercise Date upon the exercise of such Option for each share as to which
such Option shall be exercised the securities or property which a holder of one
share of the Common Stock was entitled to upon and at the time of such merger or
consolidation, and the Board or the Committee shall take such steps in
connection with such merger or consolidation as the Board or the Committee shall
deem necessary to assure that the provisions of Section 15 shall thereafter be
applicable, as nearly as reasonably may be, in relation to the said securities
or property as to which such holder of such Option might thereafter be entitled
to receive thereunder.
In the event of a merger or consolidation of the Company with or into
another corporation which does not involve Continuity of Control, or of a sale
of all or substantially all of the assets of the Company while unexercised
Options remain outstanding under the Plan, (a) subject to the provisions of
clauses (b) and (c), after the effective date of such transaction, each holder
of an outstanding Option shall be entitled, upon exercise of such Option, to
receive in lieu of shares of Common Stock, shares of such stock or other
securities as the holders of shares of Common Stock received pursuant to the
terms of such transaction; or (b) all outstanding Options may be cancelled by
the Board or the Committee as of a date prior to the effective date of any such
transaction and all payroll deductions shall be paid out to the participating
employees; or (c) all outstanding Options may be cancelled by the Board or the
Committee as of the effective date of any such transaction, provided that notice
of such cancellation shall be given to each holder of an Option, and each holder
of an Option shall have the right to exercise such Option in full based on
payroll deductions then credited to his account as of a date determined by the
Board or the Committee, which date shall not be less than ten (10) days
preceding the effective date of such transaction.
17. Amendment of the Plan. The Board may at any time, and from time to
time, amend this Plan in any respect, except that (a) if the approval of any
such amendment by the shareholders of the Company is required by Section 423 of
the Code, such amendment shall not be effected without such approval, and (b) in
no event may any amendment be made which would cause the Plan to fail to comply
with Section 423 of the Code.
18. Insufficient Shares. In the event that the total number of shares of
Common Stock specified in elections to be purchased under any Offering plus the
number of shares purchased under previous Offerings under this Plan exceeds the
maximum number of shares issuable under this Plan, the Board or the Committee
will allot the shares then available on a pro rata basis.
19. Termination of the Plan. This Plan may be terminated at any time by
the Board. Upon termination of this Plan all amounts in the accounts of
participating employees shall be promptly refunded.
20. Governmental Regulations. The Company's obligation to sell and
deliver Common Stock under this Plan is subject to listing on a national stock
exchange or quotation on the Nasdaq National Market (to the extent the Common
Stock is then so listed or quoted) and the
5
<PAGE> 6
approval of all governmental authorities required in connection with the
authorization, issuance or sale of such stock.
21. Governing Law. The Plan shall be governed by Delaware law except to
the extent that such law is preempted by federal law.
22. Issuance of Shares. Shares may be issued upon exercise of an Option
from authorized but unissued Common Stock, from shares held in the treasury of
the Company, or from any other proper source.
23. Notification upon Sale of Shares. Each employee agrees, by entering
the Plan, to promptly give the Company notice of any disposition of shares
purchased under the Plan where such disposition occurs within two years after
the date of grant of the Option pursuant to which such shares were purchased.
24. Effective Date and Approval of Shareholders. The Plan shall take
effect on January 18, 2000 subject to approval by the shareholders of the
Company as required by Section 423 of the Code, which approval must occur within
twelve months of the adoption of the Plan by the Board.
Adopted by the Board of Directors of
the Company on January 18, 2000.
Approved by the stockholders of the
Company on February 17, 2000.
Amended by the Board of Directors of
the Company on May 10, 2000.
6
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 70,703
<SECURITIES> 0
<RECEIVABLES> 10,342
<ALLOWANCES> 772
<INVENTORY> 0
<CURRENT-ASSETS> 81,718
<PP&E> 3,077
<DEPRECIATION> 1,301
<TOTAL-ASSETS> 83,811
<CURRENT-LIABILITIES> 11,370
<BONDS> 0
0
0
<COMMON> 255
<OTHER-SE> 72,074
<TOTAL-LIABILITY-AND-EQUITY> 83,811
<SALES> 0
<TOTAL-REVENUES> 8,300
<CGS> 0
<TOTAL-COSTS> 1,246
<OTHER-EXPENSES> 7,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 612
<INCOME-PRETAX> (357)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (357)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,167
<SECURITIES> 0
<RECEIVABLES> 4,606
<ALLOWANCES> 738
<INVENTORY> 0
<CURRENT-ASSETS> 5,667
<PP&E> 1,787
<DEPRECIATION> 731
<TOTAL-ASSETS> 7,024
<CURRENT-LIABILITIES> 11,972
<BONDS> 0
0
0
<COMMON> 182
<OTHER-SE> (21,431)
<TOTAL-LIABILITY-AND-EQUITY> 7,024
<SALES> 0
<TOTAL-REVENUES> 5,434
<CGS> 0
<TOTAL-COSTS> 978
<OTHER-EXPENSES> 4,350
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 490
<INCOME-PRETAX> (374)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (374)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
