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Exhibit 99.2
On April 25, 2000 (the "Closing Date"), pursuant to an agreement and plan
of merger dated April 17, 2000 (the "Merger Agreement") by and among OTG
Software, Inc., a Delaware corporation ("OTG Software"), OTG Merger Corp., a
Delaware corporation and a wholly-owned subsidiary of OTG Software ("Merger
Sub"), and xVault, Inc., a Delaware corporation ("xVault"), OTG Software
acquired xVault through the merger (the "Merger") of Merger Sub with and into
xVault, with xVault remaining as the surviving corporation in the merger under
the name OTG E-Mail Corp. As a result of the Merger, xVault is now a
wholly-owned subsidiary of OTG Software. Merger Sub was created solely for the
purpose of effecting the Merger. 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.
Pursuant to the Merger Agreement, OTG Software issued 160,000 shares of its
common stock and paid an aggregate of $1.75 million in cash to the former xVault
stockholders in exchange for all the outstanding shares of xVault's capital
stock and the cancellation of all outstanding options to purchase xVault common
stock. The cash component of the acquisition price was available to OTG Software
from cash on hand. The value of the common stock component of the consideration
was determined to be $2.2 million based on an analysis prepared by a third-party
appraiser. The acquisition was accounted for under the "purchase method."
Twenty three thousand four hundred fifteen shares (23,415) of OTG Software
common stock issued to the former xVault stockholders pursuant to the Merger
Agreement are being held in escrow for a period of nine months to secure certain
indemnification obligations of the former xVault stockholders. In addition,
fifty three thousand three hundred thirty three shares (53,333) of OTG Software
common stock issued to the former xVault stockholders pursuant to the Merger
Agreement are being held in a separate escrow for a period of six months,
subject to repurchase by OTG Software at a per share price of $16.979 upon the
occurrence of certain conditions.
The following unaudited pro forma condensed consolidated financial
statements of OTG Software include: (1) adjustments necessary to reflect the
fair value of the assets acquired and liabilities assumed from xVault, and; (2)
the use of cash and the issuance of common stock to acquire xVault. The
unaudited pro forma condensed consolidated balance sheet as of December 31, 1999
was prepared as if the acquisition occurred on that date. The unaudited pro
forma condensed consolidated statements of operations for the year ended
December 31, 1999 was prepared as if the acquisition occurred on January 1,
1999. These unaudited pro forma condensed consolidated financial statements
should be read in conjunction with OTG Software's audited consolidated financial
statements and accompanying notes thereto contained in the prospectus included
in OTG Software's Registration Statement on Form S-1, as amended (SEC File No.
333-93581), and the xVault audited consolidated financial statements filed
herewith (see Exhibit 99.1).
In the opinion of OTG Software's management, all adjustments necessary to
present fairly such unaudited pro forma condensed consolidated financial
statements have been made based on the terms and structure of the transaction.
The following unaudited pro forma condensed consolidated financial statements
are presented for illustrative purposes only and do not
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necessarily represent the financial results that would have resulted had the
acquisition actually occurred on the dates indicated nor are the results
indicative of the future results of operations or financial condition of OTG
Software on a consolidated basis. In addition, these statements are based upon
information and assumptions available at the time of the filing of this report,
including preliminary estimates of the fair values of the assets acquired and
the liabilities assumed from xVault as part of the acquisition.
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Unaudited Pro Forma Condensed Consolidated Balance Sheet of OTG Software as of
December 31, 1999
<TABLE>
<CAPTION>
OTG Software xVault Pro forma Pro forma
historical historical adjustments consolidated
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,494 $ 45 $ (1,750) a. $ 789
Certificate of deposit - 54 - 54
Accounts receivable, net 7,596 - - 7,596
Prepaid royalties and other current assets 693 10 - 703
-------- --------- --------- --------
Total current assets 10,783 109 (1,750) 9,142
Other assets
Property and equipment, net 1,444 69 - 1,513
Goodwill, net - - 2,554 c. 2,554
Other intangibles, net - - 804 c. 804
Other assets, net 362 - - 362
-------- --------- --------- --------
Total other assets 1,806 69 3,358 5,233
-------- --------- --------- --------
Total assets $ 12,589 $ 178 $ 1,608 $ 14,375
======== ========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 1,509 $ 76 $ - $ 1,585
Accrued bonuses, compensation and benefits 2,533 13 - 2,546
Accrued liabilities 1,175 - 125 a. 1,300
Accrued interest 1,327 - - 1,327
Notes payable 5,000 - - 5,000
Current portion of long-term debt 13,803 - - 13,803
Subordinated notes payable-stockholders 1,969 - - 1,969
Deferred revenues-other 400 - - 400
Deferred revenues-maintenance and licenses 3,050 19 - 3,069
-------- --------- --------- --------
Total current liabilities 30,766 108 125 30,999
Other liabilities
Long-term debt, net of current portion 3,529 - - 3,529
-------- --------- --------- --------
Total other liabilities 3,529 - - 3,529
-------- --------- --------- --------
Total liabilities 34,295 108 125 34,528
Redeemable common stock - 318 (318) d. -
Shareholders' equity (deficit)
Preferred stock - - - -
Common stock 163 80 (80) d. 165
2 a.
Additional paid-in capital 4,081 714 (714) d. 6,252
2,171 a.
Deferred compensation (2,557) - - (2,557)
Accumulated deficit (22,416) (1,042) 1,042 d.
(620) d. (23,036)
-------- --------- --------- --------
Total shareholders' equity (deficit) before stock
subscriptions receivable (20,729) (248) 1,801 (19,176)
Less: stock subscriptions receivable (977) - - (977)
-------- --------- --------- --------
Total stockholders' equity (deficit) (21,706) (248) 1,801 (20,153)
-------- --------- --------- --------
Total liabilities and shareholders'
equity (deficit) $ 12,589 $ 178 $ 1,608 $ 14,375
======== ========= ========= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statement.
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Unaudited Pro Forma Condensed Consolidated Statement of operations of OTG
Software for the Year Ended December 31, 1999
<TABLE>
<CAPTION>
OTG Software xVault Pro forma Pro forma
historical historical adjustments consolidated
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues
Software licenses $ 18,208 $ 82 $ - $ 18,290
Services 7,232 - - 7,232
-------- --------- -------- --------
Total revenues 25,440 82 - 25,522
Cost of revenues
Software licenses 1,062 84 - 1,146
Services 3,017 - - 3,017
-------- --------- --------- -------
Total cost of revenues 4,079 84 - 4,163
-------- --------- -------- --------
Gross profit (loss) 21,361 (2) - 21,359
Operating expenses
Sales and marketing 11,487 344 - 11,831
Research and development 5,137 568 - 5,705
General and administrative 4,139 129 - 4,268
Amortization of acquired intangible assets - - 763 c. 763
Write-off of acquired in-process research
and development - - - c. -
-------- --------- -------- --------
Total operating expenses 20,763 1,041 763 22,567
Income (loss) from operations 598 (1,043) (763) (1,208)
Other income (expense)
Interest income 34 1 (34) e. 1
Interest expense (2,087) - - (2,087)
-------- --------- -------- --------
Total other income (expense) (2,053) 1 (34) (2,086)
-------- --------- ------- --------
Loss before income taxes (1,455) (1,042) (797) (3,294)
-------- --------- ------ --------
Provision for income taxes - - - -
-------- --------- -------- --------
Net loss $ (1,455) $(1,042) $ (797) $ (3,294)
======== ========= ======== ========
Loss per common share
Basic and Diluted $ (0.09) $ - $ (4.98) f. $ (0.20)
Shares used for computation
Basic and Diluted 16,315 - 160 f. 16,475
</TABLE>
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(amounts in thousands except share amounts)
a. Adjustments to cash and cash equivalents and stockholders' equity
(deficit) consist of:
<TABLE>
<S> <C>
Cash component of purchase price $1,750
Issuance of 160,000 shares of OTG Software common stock 2,173
Direct acquisition costs 125
------
Cost of acquisition $4,048
======
</TABLE>
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<TABLE>
<S> <C>
b. Excess of cost of acquisition over the fair value of the tangible net
assets acquired and the liabilities assumed:
Cost of acquisition (see note a. above) $4,048
Less the fair value of the tangible net assets acquired and liabilities
assumed of xVault (70)
------
Excess of cost of acquisition over the fair value of the tangible net
assets acquired and liabilities assumed of xVault $3,978
======
</TABLE>
c. The cost of acquisition was allocated to tangible net assets and
identifiable intangible assets with the remainder attributable to
goodwill. The value of the tangible assets acquired and liabilities
assumed approximated the amounts presented in xVault's historical
financial statements. The estimated fair value of identifiable intangible
assets and goodwill, based on a preliminary assessment of management
together with an independent valuation firm, along with their estimated
lives for amortization, are as follows:
<TABLE>
<CAPTION>
Annual
Life Fair value amortization
---- ---------- ------------
<S> <C> <C> <C>
In-process research and development * $ 620 *
Goodwill 5 years 2,554 $511
Developed technology 3 years 554 $185
Acquired workforce 4 years 200 $ 50
Acquired customer base 3 years 50 $ 17
-------
804
-------
$3,978
=======
</TABLE>
* OTG Software expects to recognize a non-recurring charge of $0.6
million in the quarter ended June 30, 2000 to write-off of
in-process research and development based on an assessment of
purchased technology of xVault as of the acquisition date.
In-process research and development reflects the portion of the
cost of acquisition representing technology that did not meet the
accounting definition of "completed technology." As such, under
generally accepted accounting principles, the amount allocated to
in-process research and development is required to be immediately
charged against earnings. The assessment of in-process research
and development involved analyzing the discounted cash flows
associated with each of the technologies that were under
development at the time of the acquisition, including estimated
cash flows from successful completion and cash flows necessary to
complete each project. The resulting cash flows are adjusted for
certain risks before being discounted to present value. Risks
taken into consideration include estimates of market size, timing
of completion, product pricing and competitive factors for each of
the acquired technologies. The discount rate used reflects
xVault's estimated weighted average cost of capital. The acquired
technologies were in various stages of completion ranging from 13%
to 43% of completion, with estimated completion dates no later
than 2001. This non-recurring
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charge is reflected in the unaudited pro forma condensed
consolidated balance sheet but is not reflected in the unaudited
pro forma condensed consolidated financial statements for the year
ended December 31, 1999.
d. Elimination of xVault's redeemable common stock and stockholders'
deficit.
e. Reduction of interest income due to the use of cash and cash equivalents
to fund a portion of the cost of acquisition.
f. The number of shares used for the Basic net loss per common share
calculation was adjusted as if the 160,000 shares component of the cost
of acquisition were issued as of January 1, 1999. Basic net loss per
common share is computed based upon the weighted average number of shares
of common shares outstanding during the period. The computation of
Diluted net loss per common share does not differ from Basic net loss per
common share because potentially issuable securities (i.e., stock options
and warrants) would be anti-dilutive. Therefore these amounts are not
taken into consideration.
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