S-1 1 w23440sv1.htm FORM S-1 FORM S-1
 

As filed with the Securities and Exchange Commission on August 10, 2006
Registration No. 333-      
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
 
Double-Take Software, Inc.
(Exact name of registrant as specified in its charter)
 
         
Delaware   7372   20-0230046
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
 
257 Turnpike Road, Suite 210
Southborough, Massachusetts 01772
877-335-5674
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
 
 
Dean Goodermote
President and Chief Executive Officer
Double-Take Software, Inc.
257 Turnpike Road, Suite 210
Southborough, Massachusetts 01772
877-335-5674
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
 
 
Copies to:
 
     
Michael J. Silver
Thene M. Martin
Charles E. Sieving
Hogan & Hartson L.L.P.
111 South Calvert Street
Baltimore, Maryland 21202
(410) 659-2700
  Selim Day
Wilson Sonsini Goodrich & Rosati
Professional Corporation
1301 Avenue of the Americas, 40th Floor
New York, New York 10019
(212) 999-5800
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
    Amount of
      Aggregate
    Registration
Title of Each Class of Securities to be Registered     Offering Price(1)(2)     Fee
Common Stock, $0.001 par value per share
    $86,250,000     $9,228.75
             
 
(1)  Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.
 
(2)  Includes offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
PROSPECTUS (Subject to Completion) Dated August 10, 2006
 
           Shares
 
(DOUBLE-TAKE SOFTWARE LOGO)
 
Common Stock
 
 
This is an initial public offering of shares of our common stock. We are selling           shares of common stock and the selling stockholders are selling           shares of common stock. We will not receive any proceeds from the shares of common stock sold by the selling stockholders. Prior to this offering, there has been no public market for our common stock. We have applied for quotation of our common stock on the NASDAQ Global Market under the symbol “DBTK.” We expect that the public offering price will be between $      and $      per share.
 
Our business and an investment in our common stock involve significant risks. These risks are described under the caption “Risk Factors” beginning on page 7 of this prospectus.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
                 
    Per Share     Total  
 
Public offering price
  $       $    
Underwriting discount
  $       $    
Proceeds, before expenses, to Double-Take Software, Inc. 
  $       $    
Proceeds, before expenses, to the selling stockholders
  $       $  
 
The underwriters may also purchase up to an additional           shares from the selling stockholders at the initial public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.
 
The underwriters expect to deliver the shares against payment in New York, New York on          , 2006.
 
 
Joint Bookrunning Managers
 
Cowen and Company Thomas Weisel Partners LLC
 
 
CIBC World Markets
Pacific Crest Securities
 
          , 2006


 

(DOUBLE-TAKE FLOWCHART)

 


 

 
TABLE OF CONTENTS
 
         
    Page
 
Prospectus Summary
  1
Risk Factors
  7
Special Note Regarding Forward-Looking Statements
  18
Use of Proceeds
  19
Dividend Policy
  19
Capitalization
  20
Dilution
  21
Selected Financial Data
  23
Unaudited Pro Forma Financial Data
  25
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  31
Business
  47
Management
  59
Certain Relationships and Related Transactions
  76
Principal and Selling Stockholders
  79
Description of Capital Stock
  82
Shares Eligible for Future Sale
  86
Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Common Stock
  89
Underwriting
  92
Legal Matters
  96
Experts
  96
Where You Can Find Additional Information
  96
Index to Consolidated Financial Statements
  F-1
 
 
You should rely only on the information contained in this prospectus. We have not, and the selling stockholders and underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the selling stockholders and underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.
 
Market data and industry statistics used in this prospectus are based on independent industry publications and other publicly available information. We have not independently verified, and do not guarantee, the accuracy of this information. Accordingly, you should not place undue reliance on this information.
 
 


 

PROSPECTUS SUMMARY
 
This summary does not contain all of the information you should consider before investing in our common stock and you should read this entire prospectus carefully before investing, especially the information discussed under “Risk Factors” beginning on page 7. As used in this prospectus, the terms “we,” “our,” “us,” or “Double-Take Software” refer to Double-Take Software, Inc. and its subsidiaries, taken as a whole, as well as any predecessor entities, unless the context otherwise indicates.
 
Double-Take Software, Inc.
 
Double-Take Software develops, sells and supports affordable software that reduces downtime and protects data for business-critical systems. We believe that we are the leading supplier of replication software for Microsoft server environments and that our business is distinguished by our focus on software license sales, our productive distribution network and our efficient services infrastructure. Organizations of all sizes increasingly rely on application systems and stored electronic data to conduct business, new regulations have increased data protection requirements for businesses in many industries, and new threats of business disruption from events such as 9/11 and Hurricane Katrina are causing more organizations to re-examine their data and server recovery strategies. Our software responds to these needs by continuously replicating changes made to application data on a primary operating server to a duplicate server located on- or off-site. Because the duplicate server can commence operating in place of the primary server at almost any time, our software facilitates rapid failover and application recovery in the event of a disaster or other service interruption.
 
Our success has been driven in large part by our software technology, which we first released in 1995 and has been enhanced by years of customer feedback. Residing on the server operating system, our software continuously monitors and captures file system activity. Intercepting file system changes enables our software to replicate only those changes that are being written to files. Our hardware- and application-independent software efficiently protects data created by any application on any type or brand of disk storage on any brand of server running Windows file systems.
 
We sell our software through multiple channels, including a global distribution network that is supported by an experienced direct sales force. Our distribution partners include leading server manufacturers, such as Dell Computer Corporation and Hewlett-Packard Company, leading distributors, such as Bell Microproducts Inc. and Tech Data Corporation, and over 120 value-added resellers that we believe are generally well-connected with small- and medium-sized enterprises. Our direct sales force augments the revenue generated by our distribution partners and actively supports them in their third-party sales efforts. Our broad distribution network, coupled with affordable price points, feature-rich proven software, modest implementation costs and dependable support, makes our software accessible and scalable from small enterprises of a dozen people to Fortune 500 companies. As of March 31, 2006, our customer base of more than 10,000 organizations included over half of the Fortune 500 companies as well as a large number of law firms, financial institutions, hospitals, school districts and governmental entities. In recent years, we have experienced substantial growth, increasing our total revenue from $7.6 million for the year ended December 31, 2001 to $40.7 million for the year ended December 31, 2005.
 
Our Markets and Opportunities
 
The storage replication market is large and growing. In 2006, International Data Corp., or IDC, a market research firm, estimated in its Worldwide Storage Replication Software 2006-2010 Forecast, Mar 2006 Doc #200998, that the worldwide storage replication software market would grow from $2.1 billion in sales in 2005 to $4.2 billion in 2010, representing a compound annual growth rate of approximately 15%. IDC further estimated that sales in the Windows server sub-segment of this market, which our software currently addresses, would increase at a compound annual growth rate of approximately 25%, from $310 million in 2005 to $940 million in 2010. In addition, we believe that our software is particularly attractive to businesses in the small-and medium-sized enterprise information technology market, which has been growing at a faster rate than the large enterprise information technology market.

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We believe that growth in our market is driven by a number of factors, including the following:
 
  •  the exponential growth in digital data, which has been driven by increased usage of automated systems;
 
  •  an increased focus on protecting a growing number of business-critical applications, such as email applications, particularly in service-oriented industries;
 
  •  government and industry regulations, such as the Health Insurance Portability and Accountability Act of 1996 and the Sarbanes-Oxley Act of 2002, which require data protection and recovery;
 
  •  a heightened awareness of the potential for natural and man-made disasters; and
 
  •  the increasingly high cost of downtime, which is partly attributable to an increase in the sharing of applications with customers, partners and remote users.
 
Our Software
 
By combining efficient, continuous, remote and local data replication with the ability to monitor and quickly switch critical applications to alternate servers, we believe that we have designed our software to provide an affordable, easy to implement and scalable approach to reduce downtime and enhance data recovery for business-critical applications.
 
Our software provides organizations ranging from small enterprises to Fortune 500 companies with data and system recovery solutions that we believe meet their needs by providing the following:
 
  •  Fast and Reliable Data Recovery.  Our software provides fast recovery for the server and application itself, creating a server ready to take over substantially on command and provide rapid access or failover to the replicated data to meet the new availability requirements of business-critical applications, such as Microsoft Exchange Server, Microsoft SQL Server, Microsoft SharePoint Portal Server and Oracle Database. This avoids the time required to rebuild or mount a replicated disk data volume as required by some other approaches.
 
  •  Simple and Affordable Software.  Our software can be easily installed on new or existing file or application servers, can work with most existing storage and network infrastructure and is hardware and application independent. This makes it possible to install and begin protecting an existing server easily and quickly and makes the solution more cost effective than some other approaches. Once installed, our application recovery tools automate failover and user redirection. In addition to being easy to deploy, with a median selling price of approximately $4,000, our software is affordable for a wide variety of organizations.
 
  •  Flexible and Scalable Software.  Our software offers flexibility and scalability. Flexibility means software that is optimized to work with a variety of key applications within the Windows server environment and almost any type of storage architecture from almost any mix of vendors. Scalability means not only efficiently capturing changes and optimizing data transmission, but being able to control which files and which changes need to be replicated, rather than blindly copying disk block changes regardless of whether they contain required information. Our software offers enterprise solutions that are easily deployed and centrally managed across any number of machines, including across “virtual machines” partitioned with software such as VMware.
 
  •  Continuous Backup of Data.  Our software minimizes or eliminates data loss by continuously and efficiently replicating data changes to one or more protected, local or remote locations. Even open applications and files can be mirrored and changes replicated, which enables our software to protect 24x7 applications, such as email and databases, without shutting down the application or affecting users.
 
  •  Efficient, Optimized Protection.  Software running on the server operating system has the advantage of capturing the exact changes an application is generating before those changes are abstracted into generic “disk blocks.” This allows for “intelligent protection” — our software can distinguish between a new email being sent to an Exchange mailbox that needs to be immediately


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  replicated versus a temporary file that does not need to be protected. Because the cost of network bandwidth to transmit changes to a remote site can be a measurable part of the ongoing solution cost, efficiently transmitting the minimum amount of data to maintain protection is a significant architectural advantage.
 
  •  Significant Expertise and Experience.  Our software incorporates our years of experience protecting critical Windows servers and applications like Microsoft Exchange Server, Microsoft SQL Server, Microsoft SharePoint Portal Server and Oracle Database. Although market dynamics have rewarded us for focusing on the Windows server environment to date, we anticipate that we can apply our technology in other server environments to the extent market dynamics shift.
 
Our suite of software is offered in a variety of versions that are aligned to operating system capabilities. Additional versions include those that have been specifically crafted to run within virtual systems, to perform replication only, and versions designed to run within Microsoft Cluster Services called GeoCluster. Some versions are also available from OEM partners under different brand names.
 
Our Strategy
 
Our goal is to provide affordable software that will reduce our customers’ downtime for business-critical systems to as close to zero as possible and offer effective protection and recovery for less critical systems. In striving for this goal, we seek to be the leading provider of software for application availability and data protection. We are pursuing the following key initiatives:
 
  •  Expand our customer base within our current markets;
 
  •  Cross-sell existing and new software to our customer base;
 
  •  Enter new markets;
 
  •  Expand globally; and
 
  •  Continue to innovate.
 
About Us
 
We were organized as a New Jersey corporation in 1991, and we reincorporated in Delaware in 2003. In July 2006 we changed our name to Double-Take Software, Inc. from NSI Software, Inc. Our principal executive offices are located at 257 Turnpike Road, Suite 210, Southborough, Massachusetts 01772, and our main telephone number at that address is (508) 229-8810. We maintain our general corporate website at www.doubletake.com. The contents of our website, however, are not a part of this prospectus.
 
We own, or claim ownership rights to, a variety of trade names, service marks and trademarks for use in our business, including Double-Take®, GeoCluster®, Balancetm, Double-Take for Virtual Systemstm and Double-Take for Virtual Serverstm in the United States and, where appropriate, in foreign countries. This prospectus also includes product names and other trade names and service marks owned by us and other companies. The trade names and service marks of other companies are the property of those other companies.
 
 


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The Offering
 
Common stock offered by us            shares
 
Common stock offered by the selling stockholders            shares
 
Common stock to be outstanding after this offering            shares
 
Use of proceeds We estimate that our net proceeds from the offering will be approximately $      million. We intend to use approximately $      million of the net proceeds for working capital and other general corporate purposes. In addition, we expect to use approximately $10.2 million of the net proceeds to fund a mandatory payment to the holders of our Series B convertible preferred stock in connection with the conversion of all of the outstanding shares of our Series B convertible preferred stock immediately before the completion of the offering.
 
We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders.
 
Risk factors See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding whether to invest in shares of our common stock.
 
Proposed NASDAQ Global Market symbol “DBTK”
 
The share information above is based on        shares of common stock outstanding as of        , 2006 and excludes:
 
  •             shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $       ;
 
  •          shares of common stock issuable upon the exercise of outstanding warrants as of        , 2006 at a weighted average exercise price of $     ; and
 
  •  the issuance of        shares of our common stock, upon the consummation of this offering, to our chief executive officer pursuant to an employment agreement.
 
Unless we indicate otherwise, the information in this prospectus:
 
  •  reflects a 1-for-     reverse split of our outstanding common stock that occurred on          , 2006;
 
  •  reflects the conversion of the outstanding shares of our Series B convertible preferred stock, including accrued dividends, into 44,564,334 shares of common stock immediately before the completion of this offering, which we have assumed for this purpose occurred on March 31, 2006;
 
  •  reflects the conversion of the outstanding shares of our Series C convertible preferred stock, including accrued dividends, into 8,827,889 shares of common stock immediately before the completion of this offering, which we have assumed for this purpose occurred on March 31, 2006;
 
  •  assumes that the initial public offering price of the common stock will be $      per share, which is the midpoint of the range we show on the cover page of this prospectus; and
 
  •  assumes that the underwriters will not exercise their option to purchase up to an additional           shares from the selling stockholders to cover over-allotments.


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Summary Financial Data
 
The following table shows our summary statement of operations data for each of the years ended December 31, 2005, 2004 and 2003 and the three months ended March 31, 2006 and 2005, and summary balance sheet data at March 31, 2006. The summary statement of operations data for the years ended December 31, 2005, 2004 and 2003 are derived from our audited financial statements prepared in accordance with generally accepted accounting principles, which are included elsewhere in this prospectus. The summary statement of operations data for the three months ended March 31, 2006 and 2005 and the summary balance sheet data at March 31, 2006 are unaudited, but include, in the opinion of management, all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of such data. Our historical results are not necessarily indicative of our results for any future period.
 
This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our financial statements and related notes, and our unaudited pro forma financial data and related notes appearing elsewhere in this prospectus.
 
                                         
    Year ended December 31,     Three Months ended March 31,  
    2005     2004     2003     2006     2005  
                      (unaudited)  
    (in thousands)  
 
Statement of Operations Data:
                                       
Revenue:
                                       
Software licenses
  $ 26,222     $ 19,943     $ 16,283     $ 6,372     $ 5,274  
Maintenance and professional services
    14,488       9,895       7,650       4,307       3,194  
                                         
Total revenue
    40,710       29,838       23,933       10,679       8,468  
                                         
Cost of revenue:
                                       
Software licenses
    38       559       1,426       4       11  
Maintenance and professional services
    4,357       3,694       3,103       1,261       945  
                                         
Total cost of revenue
    4,395       4,253       4,529       1,265       956  
                                         
Gross profit
    36,315       25,585       19,404       9,414       7,512  
                                         
Operating expenses:
                                       
Sales and marketing
    17,191       16,188       13,654       4,330       4,064  
Research and development
    9,748       8,717       6,373       2,464       2,377  
General and administrative
    6,730       5,666       5,253       2,027       2,076  
Depreciation and amortization
    805       527       1,617       251       167  
Legal fees and settlement costs
    5,671       1,755       200             368  
                                         
Total operating expenses
    40,145       32,853       27,097       9,072       9,052  
                                         
Income (loss) from operations
    (3,830 )     (7,268 )     (7,693 )     342       (1,540 )
Interest income
    83       7       19       51       4  
Interest expense
    (36 )     (765 )     (341 )     (17 )     (4 )
                                         
Income (loss) before income taxes
    (3,783 )     (8,026 )     (8,015 )     376       (1,540 )
Income tax expense
                      3        
                                         
Net income (loss)
  $ (3,783 )   $ (8,026 )   $ (8,015 )   $ 373     $ (1,540 )
Less:
                                       
Accretion of redeemable preferred stock
  $ 5,332     $ 5,314     $ 4,928     $ 1,334     $ 1,334  
Beneficial conversion feature on Series B preferred stock
                1,194              
                                         
Dividends on preferred stock
    2,686       2,029       1,637       698       642  
                                         
Net loss attributable to common stockholders
  $ (11,801 )   $ (15,369 )   $ (15,774 )   $ (1,659 )   $ (3,516 )
                                         
 


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    Year ended December 31,     Three Months ended March 31,  
    2005     2004     2003     2006     2005  
                      (unaudited)  
    (in thousands, except per share data)  
 
Net loss attributable to common stockholders per share:
                                       
Basic and diluted
  $ (0.64 )   $ (0.83 )   $ (0.85 )   $ (0.09 )   $ (0.19 )
                                         
Weighted average shares used in computing per share amounts:
                                       
Basic and diluted
    18,565       18,553       18,551       18,576       18,562  
                                         
 
                         
    As of March 31, 2006        
    Actual     As Adjusted(1)        
    (unaudited, in thousands)        
 
Balance Sheet Data:
                       
Cash and cash equivalents
  $ 5,750                  
Working capital
    (1,408 )                
Total assets
    15,369                  
Deferred revenue
    10,820                  
Long-term deferred revenue
    3,126                  
Long-term deferred rent
    490                  
Redeemable convertible preferred stock
    52,699                  
Total stockholders’ deficit
  $ (55,546 )                
 
 
(1) As adjusted to give effect to (i) the conversion of our outstanding shares of Series B convertible preferred stock and Series C convertible preferred stock into an aggregate of 53,392 shares of our common stock immediately before the completion of this offering, which we have assumed for this purpose occurred on March 31, 2006 and (ii) our sale of common stock in this offering at an assumed offering price of $   per share, which is the midpoint of the range we show on the cover page of this prospectus, and the receipt and application of the net proceeds thereof, including the payment of $10.2 million to the Series B preferred stockholders.

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RISK FACTORS
 
An investment in our stock involves a high degree of risk. You should carefully consider the following risks and all of the other information set forth in this prospectus before deciding to invest in shares of our common stock. If any of the events or developments described below occur, our business, financial condition or results of operations could be negatively affected. In that case, the trading price of our common stock could decline, and you could lose all or part of your investment in our common stock.
 
Risks Related to Our Business
 
Intense competition in our industry may hinder our ability to generate revenue and may adversely affect our margins.
 
The market for our software is intensely competitive. Our primary competitors include EMC Corporation (Legato), Neverfail Group, Ltd., Symantec Corporation (Veritas) and CA, Inc. (XOsoft Inc.). Some of these companies and many of our other current and potential competitors have longer operating histories and substantially greater financial, technical, sales, marketing and other resources than we do, as well as larger installed customer bases and greater name recognition. Our competitors may be able to devote greater resources to the development, marketing, distribution, sale and support of their products than we can and some may have the ability to bundle their data replication offerings with their other products. The extensive relationships that these competitors have with existing customers may make it increasingly difficult for us to increase our market share. The resources of these competitors also may enable them to respond more rapidly to new or emerging technologies and changes in customer requirements and to reduce prices to win new customers.
 
As this market continues to develop, a number of other companies with greater resources than ours, including Microsoft, could attempt to enter the market or increase their presence by acquiring or forming strategic alliances with our competitors or business partners or by introducing their own competing products.
 
Our success will depend on our ability to adapt to these competitive forces, to develop more advanced products more rapidly and less expensively than our competitors, to continue to develop a global sales and support network, and to educate potential customers about the benefits of using our software rather than our competitors’ products. Existing or new competitors could introduce products with superior features, scalability and functionality at lower prices. This could dramatically affect our ability to sell our software. In addition, some of our customers and potential customers may buy other software, other competing products and related services from our competitors, and to the extent that they prefer to consolidate their software purchasing from fewer vendors, they may choose not to continue to purchase our software and support services.
 
We expect additional competition from other established and emerging companies. Increased competition could result in reduced revenue, price reductions, reduced gross margins and loss of market share, any of which would harm our results of operations.
 
Because a large majority of our sales are made to or through distributors, value-added resellers and original equipment manufacturers, none of which have any obligation to sell our software applications, the failure of this distribution network to sell our software effectively could materially adversely affect our revenue and results of operations.
 
We rely on distributors, value-added resellers and original equipment manufacturers, or OEMs, together with our inside and field-based direct sales force, to sell our products. These distributors, resellers and OEMs sell our software applications and, in some cases, incorporate our software into systems that they sell. We expect that these arrangements will continue to generate a large majority of our total revenue. Sales to or through our distributors, resellers and OEMs accounted for approximately 93% of our total revenue for the year ended December 31, 2005 and 91% of our total revenue for the three months ended March 31, 2006. Sales to or through our top five distributors, resellers and OEMs accounted for approximately 63% of our total revenue for 2005 and 59% of our total revenue for the three months ended March 31, 2006.


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We have limited control over the amount of software that these businesses purchase from us or sell on our behalf, we do not have long term contracts with any of them, and they have limited obligations to recommend, offer or sell our software applications. Thus there is no guarantee that this source of revenue will continue at the same level as it has in the past. Any material decrease in the volume of sales generated by our larger distributors, resellers and OEMs could materially adversely affect our revenue and results of operations in future periods.
 
We depend on growth in the storage replication market, and lack of growth or contraction in this market could materially adversely affect our sales and financial condition.
 
Demand for data replication software is driven by several factors, including an increased focus on protecting business-critical applications, government and industry regulations requiring data protection and recovery, a heightened awareness of the potential for natural and man-made disasters and the growth in stored data from the increased use of automated systems. Segments of the computer and software industry have in the past experienced significant economic downturns and decreases in demand as a result of changing market factors. A change in the market factors that are driving demand for data replication software could adversely affect our sales, profitability and financial condition.
 
Our current products are designed exclusively for the Microsoft server environment, which exposes us to risks if Microsoft products are not compatible with our software or if Microsoft chooses to compete more substantially with us in the future.
 
We currently depend exclusively on customers that deploy Microsoft products within their organizations. Microsoft could make changes to its software that render our software incompatible or less effective. Furthermore, Microsoft may choose to focus increased resources on applications that compete with our applications, including competing applications that Microsoft bundles with its operating platform. These actions could materially adversely affect our ability to generate revenue and maintain acceptable profit margins.
 
We have not generated net profits for any year since our inception and we may be unable to achieve or sustain profitability in the future.
 
We generated net losses of $8.0 million for 2003, $8.0 million for 2004, and $3.8 million for 2005, and we had a net profit of $0.4 million for the three months ended March 31, 2006. As of March 31, 2006, we had an accumulated deficit of approximately $97.6 million. We may be unable to sustain or increase profitability in future periods. We intend to continue to expend significant funds in developing our software offerings and for general corporate purposes, including marketing, services and sales operations, hiring additional personnel, upgrading our infrastructure, and regulatory compliance obligations in connection with being a public reporting company. We expect that associated expenses will precede any revenue generated by the increased spending. If we experience a downturn in our business, we may incur or continue to incur losses and negative cash flows from operations, which could materially adversely affect our results of operations and capitalization.
 
Because we generate substantially all of our revenue from sales of our Double-Take software and related services, a decline in demand for our Double-Take software could materially adversely affect our revenue, profitability and financial condition.
 
We derive nearly all of our software revenue from our Double-Take software, which generated over 97% of our total revenue for the year ended December 31, 2005 and 96% for the three months ended March 31, 2006. In addition, we derive substantially all of our maintenance and professional services revenue from associated maintenance and customer support of these applications. As a result, we are particularly vulnerable to fluctuations in demand for these software applications, whether as a result of competition, product obsolescence, technological change, budgetary constraints of our customers or other factors. If demand for any of these software applications declines significantly, our revenue, profitability and financial condition would be adversely affected.


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We may not be able to respond to technological changes with new software applications, which could materially adversely affect our sales and profitability.
 
The markets for our software applications are characterized by rapid technological changes, changing customer needs, frequent introduction of new software applications and evolving industry standards. The introduction of software applications that embody new technologies or the emergence of new industry standards could make our software applications obsolete or otherwise unmarketable. As a result, we may not be able to accurately predict the lifecycle of our software applications, which may become obsolete before we receive any revenue or the amount of revenue that we anticipate from them. If any of the foregoing events were to occur, our ability to retain or increase market share in the storage replication market could be materially adversely affected.
 
To be successful, we need to anticipate, develop and introduce new software applications on a timely and cost-effective basis that keep pace with technological developments and emerging industry standards and that address the increasingly sophisticated needs of our customers and their budgets. We may fail to develop or sell software applications that respond to technological changes or evolving industry standards, experience difficulties that could delay or prevent the successful development, introduction or sale of these applications or fail to develop applications that adequately meet the requirements of the marketplace or achieve market acceptance. Our failure to develop and market such applications and services on a timely basis, or at all, could materially adversely affect our sales and profitability.
 
Our failure to offer high quality customer support services could harm our reputation and could materially adversely affect our sales of software applications and results of operations.
 
Our customers depend on us, and, to some extent, our distribution partners, to resolve implementation, technical or other issues relating to our software. A high level of service is critical for the successful marketing and sale of our software. If we or our distribution partners do not succeed in helping our customers quickly resolve post-deployment issues, our reputation could be harmed and our ability to make new sales or increase sales to existing customers could be damaged.
 
Defects or errors in our software could adversely affect our reputation, result in significant costs to us and impair our ability to sell our software.
 
If our software is determined to contain defects or errors our reputation could be materially adversely affected, which could result in significant costs to us and impair our ability to sell our software in the future. The costs we would incur to correct product defects or errors may be substantial and would adversely affect our operating results. After the release of our software, defects or errors have been identified from time to time by our internal team and by our clients. Such defects or errors may occur in the future.
 
Any defects that cause interruptions to the data recovery functions of our applications, or that cause other applications on the operating system to malfunction or fail, could result in:
 
  •  lost or delayed market acceptance and sales of our software;
 
  •  loss of clients;
 
  •  product liability suits against us;
 
  •  diversion of development resources;
 
  •  injury to our reputation; and
 
  •  increased maintenance and warranty costs.
 
We may fail to realize the anticipated benefits of our acquisition of Sunbelt System Software S.A.S.
 
Our future success will depend in significant part on our ability to realize the operating efficiencies, new revenue opportunities and cost savings we expect to result from the integration of Sunbelt System Software S.A.S., which is now known as Double-Take Software S.A.S., or Double-Take EMEA. Our


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operating results and financial condition may be adversely affected if we are unable to integrate successfully the operations of Double-Take EMEA, or incur unforeseen costs and expenses or experience unexpected operating difficulties that offset anticipated cost savings. In particular, the integration may involve, among other items, integration of sales, marketing, billing, accounting, management, personnel, payroll, network infrastructure and other systems and operating hardware and software, some of which may be incompatible with our existing systems and therefore may need to be replaced. The integration may place significant strain on our management, financial and other resources.
 
We may not receive significant revenue from our research and development efforts for several years,
if at all.
 
We have made a significant investment in developing and improving our software. Our research and development expenditures were $9.7 million, or approximately 24% of our total revenue, for 2005, $8.7 million, or approximately 29% of our total revenue, for 2004 and $2.5 million, or approximately 23% of our total revenue, for the three months ended March 31, 2006. We believe that we must continue to dedicate a significant amount of our resources to our research and development efforts to maintain our competitive position, and we plan to do so. However, we may not receive significant revenue from these investments for several years following each investment, if ever.
 
The loss of key personnel or the failure to attract and retain highly qualified personnel could adversely affect our business.
 
Our future performance depends on the continued service of our key technical, sales, services and management personnel. We rely on our executive officers and senior management to execute our existing business plans and to identify and pursue new opportunities. The loss of key employees could result in significant disruptions to our business, and the integration of replacement personnel could be time consuming, cause additional disruptions to our business and be unsuccessful. We do not carry key person life insurance covering any of our employees.
 
Our future success also depends on our continued ability to attract and retain highly qualified technical, services and management personnel. Competition for such personnel is intense, and we may fail to retain our key technical, services and management employees or attract or retain other highly qualified technical, services and management personnel in the future. Conversely, if we fail to manage employee performance or reduce staffing levels when required by market conditions, our personnel costs would be excessive and our business and profitability could be adversely affected.
 
We will not be able to maintain our sales growth if we do not retain or attract and train qualified sales personnel.
 
A portion of our revenue is generated by our direct sales force, and our future success will depend in part upon its continued productivity and expansion. To the extent we experience attrition in our direct sales force, we will need to hire replacements. We face intense competition for sales personnel in the software industry, and we may not be successful in retaining, hiring or training our sales personnel in accordance with our plans. If we fail to retain the experienced members of our sales force, or maintain and expand our sales force as needed, our future sales and profitability could be adversely affected.
 
Changes in the regulatory environment and general economic condition and other factors in countries in which we have international sales and operations could adversely affect our operations.
 
We derived approximately 24% of our revenue from sales outside the United States in 2005 and approximately 13% of our revenue from sales outside the United States in the three months ended March 31, 2006. We anticipate that our acquisition of Double-Take EMEA in May 2006 will significantly increase the percentage of our revenue generated from sales outside the United States in future periods.


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Our international operations are subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many countries, including:
 
  •  difficulties in staffing and managing our international operations;
 
  •  costs and delays in downsizing non-United States workforces, if necessary, as a result of applicable non-United States employment and other laws;
 
  •  the adoption or imposition by foreign countries of additional withholding taxes, other taxes on our income, or tariffs or other restrictions on foreign trade or investment, including currency exchange controls;
 
  •  general economic conditions in the countries in which we operate could adversely affect our earnings from operations in those countries;
 
  •  imposition of, or unexpected adverse changes in, foreign laws or regulatory requirements may occur, including those pertaining to export duties and quota, trade and employment restrictions;
 
  •  longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivables;
 
  •  competition from local suppliers; and
 
  •  political unrest, war or acts of terrorism.
 
Each of the foregoing risks could reduce our revenue or increase our expenses.
 
We are exposed to domestic and foreign currency fluctuations that could harm our reported revenue and results of operations.
 
Historically, our international sales were generally denominated in the United States dollar. As a result of our acquisition of Double-Take EMEA, we now have international sales that are denominated in foreign currencies, and this revenue could be materially affected by currency exchange rate fluctuations. Our primary exposures are to fluctuations in exchange rates for the United States dollar versus the Euro and, to a lesser extent, the British Pound. Changes in currency exchange rates could adversely affect our reported revenue and could require us to reduce our prices to remain competitive in foreign markets, which could also materially adversely affect our results of operations. We have not historically hedged exposure to changes in foreign currency exchange rates and, as a result, we could incur unanticipated gains or losses.
 
Protection of our intellectual property is limited, and any misuse of our intellectual property by others could materially adversely affect our sales and results of operations.
 
Proprietary technology in our software is important to our success. To protect our proprietary rights, we rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality procedures and contractual provisions. While we own two issued patents, we have not emphasized patents as a source of significant competitive advantage and have also sought to protect our proprietary technology under laws affording protection for trade secrets, copyright and trademark protection of our software, products and developments where available and appropriate. In addition, our issued patents may not provide us with any competitive advantages or may be challenged by third parties, and the patents of others may seriously impede our ability to conduct our business. Further, any patents issued to us may not be timely or broad enough to protect our proprietary rights.
 
We also have five registered trademarks in the U.S., including the Double-Take mark. Although we attempt to monitor use of and take steps to prevent third parties from using our trademarks without permission, policing the unauthorized use of our trademarks is difficult. If we fail to take steps to enforce our trademark rights, our competitive position and brand recognition may be diminished.
 
We protect our software, trade secrets and proprietary information, in part, by requiring all of our employees to enter into agreements providing for the maintenance of confidentiality and the assignment of rights to inventions made by them while employed by us. We also enter into non-disclosure agreements


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with our consultants to protect our confidential and proprietary information. There can be no assurance that our confidentiality agreements with our employees, consultants and other third parties will not be breached, that we will be able to effectively enforce these agreements, have adequate remedies for any breach, or that our trade secrets and other proprietary information will not be disclosed or otherwise be protected. Furthermore, there also can be no assurance that others will not independently develop technologies that are similar or superior to our technology or reverse engineer our products.
 
Protection of trade secret and other intellectual property rights in the markets in which we operate and compete is highly uncertain and may involve complex legal and scientific questions. The laws of countries in which we operate may afford little or no protection to our trade secrets and other intellectual property rights. Policing unauthorized use of our trade secret technologies and proving misappropriation of our technologies is particularly difficult, and we expect software piracy to continue to be a persistent problem. Piracy of our products represents a loss of revenue to us. Furthermore, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may adversely affect our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our confidential information and trade secret protection. If we are unable to protect our proprietary rights or if third-parties independently develop or gain access to our or similar technologies, our competitive position and revenue could suffer.
 
Claims that we misuse the intellectual property of others could subject us to significant liability and
disrupt our business, which could materially adversely affect our results of operations and financial condition.
 
Because of the nature of our business, we may become subject to material claims of infringement by competitors and other third-parties with respect to current or future software applications, trademarks or other proprietary rights. Our competitors, some of which may have substantially greater resources than us and have made significant investments in competing technologies or products, may have, or seek to apply for and obtain, patents that will prevent, limit or interfere with our ability to make, use and sell our current and future products, and we may not be successful in defending allegations of infringement of these patents. Further, we may not be aware of all of the patents and other intellectual property rights owned by third-parties that may be potentially adverse to our interests. We may need to resort to litigation to enforce our proprietary rights or to determine the scope and validity of a third party’s patents or other proprietary rights, including whether any of our products or processes infringe the patents or other proprietary rights of third-parties. The outcome of any such proceedings is uncertain and, if unfavorable, could significantly harm our business. If we do not prevail in this type of litigation, we may be required to:
 
  •  pay damages, including actual monetary damages, royalties, lost profits or other damages and third-party’s attorneys’ fees, which may be substantial;
 
  •  expend significant time and resources to modify or redesign the affected products or procedures so that they do not infringe a third-party’s patents or other intellectual property rights; further, there can be no assurance that we will be successful in modifying or redesigning the affected products or procedures;
 
  •  obtain a license in order to continue manufacturing or marketing the affected products or processes, and pay license fees and royalties; if we are able to obtain such a license, it may be non-exclusive, giving our competitors access to the same intellectual property, or the patent owner may require that we grant a cross-license to part of our proprietary technologies; or
 
  •  stop the development, manufacture, use, marketing or sale of the affected products through a court-ordered sanction called an injunction, if a license is not available on acceptable terms, or not available at all, or our attempts to redesign the affected products are unsuccessful.
 
Any of these events could adversely affect our business strategy and the value of our business. In addition, the defense and prosecution of intellectual property suits, interferences, oppositions and related legal and administrative proceedings in the United States and elsewhere, even if resolved in our favor,


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could be expensive, time consuming, generate negative publicity and could divert financial and managerial resources.
 
In December 2005, we agreed to terms for settlement of a legal proceeding with a provider of information storage systems that involved claims regarding some of the intellectual property components of our software. Pursuant to a settlement agreement, we paid $3.8 million in January 2006 and agreed to pay, or make purchase of their products for our use or for resale in amounts equal to, $500,000 in each of January 2007, 2008, 2009 and 2010.
 
We expect that software developers will increasingly be subject to infringement claims as the number of software applications and competitors in our industry segment grows and the functionality of software applications in different industry segments overlaps. Thus, we could be subject to additional patent infringement claims in the future. There can be no assurance that the claims that may arise in the future can be amicably disposed of, and it is possible that litigation could ensue.
 
Intellectual property litigation can be complex, costly and protracted. As a result, any intellectual property litigation to which we are subject could disrupt our business operations, require us to incur substantial costs and subject us to significant liabilities, each of which could severely harm our business.
 
Plaintiffs in intellectual property cases often seek injunctive relief. Any intellectual property litigation commenced against us could force us to take actions that could be harmful to our business, including the following:
 
  •  stop selling our products or using the technology that contains the allegedly infringing intellectual property;
 
  •  attempt to obtain a license to use the relevant intellectual property, which may not be available on reasonable terms or at all; and
 
  •  attempt to redesign the products that allegedly infringed upon the intellectual property.
 
If we are forced to take any of the foregoing actions, our business, financial position and operating results could be harmed. We may not be able to develop, license or acquire non-infringing technology under reasonable terms, if at all. These developments would result in an inability to compete for customers and would adversely affect our ability to increase our revenue. The measure of damages in intellectual property litigation can be complex, and is often subjective or uncertain. If we were to be found liable for the infringement of a third party’s proprietary rights, the amount of damages we might have to pay could be substantial and would be difficult to predict.
 
We may engage in future acquisitions or investments that present many risks, and we may not realize the anticipated financial and strategic goals for any of these transactions.
 
We do not have significant experience acquiring companies. Since our inception, our only acquisition has been the acquisition of Double-Take EMEA. We may acquire or make investments in additional companies. Acquisitions and investments involve a number of difficulties that present risks to our business, including the following:
 
  •  we may be unable to achieve the anticipated benefits from the acquisition or investment;
 
  •  we may have difficulty integrating the operations and personnel of the acquired business, and may have difficulty retaining the key personnel of the acquired business;
 
  •  we may have difficulty incorporating the acquired technologies or products with our existing software and technology;
 
  •  our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically and culturally diverse locations;
 
  •  we may have difficulty maintaining uniform standards, controls, procedures and policies across locations; and


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  •  we may experience significant problems or liabilities associated with product quality, technology and legal contingencies.
 
These factors could materially adversely affect our business, results of operations and financial condition or cash flow, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as expense.
 
The consideration paid for an investment or acquisition may also affect our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash, including proceeds of this offering. To the extent we issue shares of our capital stock or other rights to purchase shares of our capital stock as consideration for the acquisitions, including options or other rights, our existing stockholders may be diluted, and our earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, write-offs and restructuring charges. They may also result in goodwill and other intangible assets that are subject to an impairment test, which could result in future impairment charges.
 
We cannot predict our future capital needs and we may be unable to obtain additional financing to fund acquisitions, which could materially adversely affect our business, results of operations and financial condition.
 
We may need to raise additional funds in the future in order to acquire complementary businesses, technologies, products or services. Any required additional financing may not be available on terms acceptable to us, or at all. If we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest, and the newly-issued securities may have rights senior to those of the holders of our common stock. If we raise additional funds by obtaining loans from third-parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If additional financing is not available when required or is not available on acceptable terms, we may be unable to successfully develop or enhance our software and services through acquisitions in order to take advantage of business opportunities or respond to competitive pressures, which could materially adversely affect our software and services offerings, revenue, results of operations and financial condition. We have no current plans, nor are we currently considering any proposals or arrangements, written or otherwise, to acquire a business or a material technology, product or service.
 
Risks Related to this Offering
 
We will incur significant increased costs as a result of operating as a public company, and our management and key employees will be required to devote substantial time to new compliance initiatives.
 
We have never operated as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC and Nasdaq, impose various new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will devote substantial amounts of time to these new compliance initiatives. Moreover, these rules and regulations will significantly increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We expect these rules and regulations to increase our legal and financial compliance costs. In addition, we will incur additional costs associated with our public company reporting requirements. We will incur significant costs to remediate any material weaknesses we identify through these efforts. We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. We currently are evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. If our profitability is adversely affected because of these additional costs, it could have a negative effect on the trading price of our common stock.


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We do not know whether a market will develop for our common stock or what the market price of our common stock will be.
 
Before this offering, there was no public trading market for our common stock. If a market for our common stock does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. The initial public offering price range for our common stock has been determined through negotiations with the underwriters and may not bear any relationship to the market price at which the common stock will trade after this offering or to any other established criteria of our value. It is possible that in one or more future periods our operating results may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our common stock may fall.
 
The price of our common stock may be volatile.
 
The trading price of our common stock following this offering may fluctuate substantially. The price of the common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. The price of the common stock may fluctuate as a result of:
 
  •  price and volume fluctuations in the overall stock market from time to time;
 
  •  significant volatility in the market price and trading volume of software companies;
 
  •  actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts;
 
  •  announcements of technological innovations, new solutions, strategic alliances or significant agreements by us or by our competitors;
 
  •  general economic conditions and trends;
 
  •  catastrophic events;
 
  •  sales of large blocks of our stock; or
 
  •  recruitment or departure of key personnel.
 
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
 
We may experience a decline in revenue or volatility in our operating results, which may adversely affect the market price of our common stock.
 
We cannot predict our future revenue with certainty because of many factors outside of our control. A significant revenue or profit decline, lowered forecasts or volatility in our operating results could cause the market price of our common stock to decline substantially. Factors that could affect our revenue and operating results include the following:
 
  •  the possibility that our customers may cancel, defer or limit purchases as a result of reduced information technology budgets;
 
  •  the possibility that our customers may defer purchases of our software applications in anticipation of new software applications or updates from us or our competitors;
 
  •  the ability of our distributors, value-added resellers and OEMs to meet their sales objectives;
 
  •  market acceptance of our new applications and enhancements;
 
  •  our ability to control expenses;
 
  •  changes in our pricing and distribution terms or those of our competitors;


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  •  the demands on our management, sales force and services infrastructure as a result of the introduction of new software applications or updates; and
 
  •  the possibility that our business will be adversely affected as a result of the threat of terrorism or military actions taken by the United States or its allies.
 
Our expense levels are relatively fixed and are based, in part, on our expectations of our future revenue. If revenue levels fall below our expectations, our net income would decrease because only a small portion of our expenses varies with our revenue. Therefore, any significant decline in revenue for any period could have an immediate adverse impact on our results of operations for the period. We believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. In addition, our results of operations could be below expectations of public market analysts and investors in future periods, which would likely cause the market price of our common stock to decline.
 
If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.
 
The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts covering us downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease coverage of our company, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.
 
Sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly, even if our business is doing well.
 
If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline below the initial public offering price. After this offering, approximately   shares of our common stock will be outstanding. Of these shares,   shares of our common stock (including the   shares of our common stock sold in this offering) will be freely tradable, without restriction, in the public market. Cowen and Company, LLC and Thomas Weisel Partners LLC, may, in their discretion, permit our directors, officers, employees and current stockholders who are subject to a 180-day contractual lockup to sell shares prior to the expiration of the lockup agreements. The lockup is subject to extension under certain circumstances. See “Shares Eligible for Future Sale — Lockup Agreements.”
 
After the lockup agreements pertaining to this offering expire 180 days from the date of this prospectus, up to an additional   shares will be eligible for sale in the public market,  of which are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933 as amended, or the Securities Act. In addition, the   shares subject to outstanding warrants and the   shares underlying options that are either subject to the terms of our equity compensation plans or reserved for future issuance under our equity compensation plans will become eligible for sale in the public market to the extent permitted by the provisions of various option agreements and warrants, the lockup agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. For additional information, see “Shares Eligible for Future Sale.”
 
Some of our stockholders will continue to exert significant influence over us.
 
As of June 30, 2006, funds affiliated with ABS Capital Partners beneficially owned in the aggregate shares representing approximately 56.5% of our outstanding voting power. Two general partners of ABS Capital Partners currently serve on our board of directors. After completion of this offering, affiliates of ABS Capital Partners will beneficially own in the aggregate shares representing approximately  % of our outstanding voting power, or approximately  % if the underwriters exercise their over-allotment option in full. As a result, these stockholders will continue to be able to exert significant influence over all matters presented to our stockholders for approval, including election and removal of our directors and change of


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control transactions. The interests of these stockholders may not coincide with the interests of the other holders of our common stock with respect to our operations or strategy.
 
We do not anticipate paying any dividends on our common stock.
 
We do not anticipate paying any cash dividends on our common stock in the foreseeable future. If we do not pay cash dividends, you could only receive a return on your investment in the common stock if the market price of the common stock increases before you sell your shares. In addition, the terms of our loan and security agreement restrict our ability to pay dividends.
 
You will experience immediate and substantial dilution in your investment.
 
The offering price of the common stock is substantially higher than the net tangible book value per share of our common stock, which on a pro forma basis was $(0.18) as of March 31, 2006. As a result, you will experience immediate and substantial dilution in net tangible book value when you buy shares of common stock in the offering. This means that you will pay a higher price per share than the amount of our total assets, minus our total liabilities, divided by the number of outstanding shares. Holders of the common stock will experience further dilution if options, warrants or other rights to purchase our common stock that are outstanding or that we may issue in the future are exercised or converted, or if we issue additional shares of our common stock, at prices lower than our net tangible book value at such time.
 
Provisions in our organizational documents and in the Delaware General Corporation Law may prevent takeover attempts that could be beneficial to our stockholders.
 
Provisions in our charter and bylaws and in the Delaware General Corporation Law may make it difficult and expensive for a third party to pursue a takeover attempt we oppose even if a change in control of our company would be beneficial to the interests of our stockholders. Our board of directors has the authority to issue up to      shares of preferred stock in one or more series and to fix the powers, preferences and rights of each series without stockholder approval. The ability to issue preferred stock could discourage unsolicited acquisition proposals or make it more difficult for a third-party to gain control of our company, or otherwise could adversely affect the market price of our common stock. Further, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. This section generally prohibits us from engaging in mergers and other business combinations with stockholders that beneficially own 15% or more of our voting stock, or with their affiliates, unless our directors or stockholders approve the business combination in the prescribed manner. However, our board of directors has approved measures that make Section 203 inapplicable to any business combination or transaction with ABS Capital Partners or its affiliates.
 
We will retain broad discretion in using the net proceeds from this offering and may spend a substantial portion in ways with which you do not agree.
 
Our management will retain broad discretion to allocate the net proceeds of this offering. The net proceeds may be applied in ways with which you and other investors in the offering may not agree, or which do not increase the value of your investment. We anticipate we will use a substantial portion of the net proceeds that we receive from the offering for working capital and general corporate purposes, including potential acquisitions of products, technologies or companies. We have not allocated these net proceeds for any specific purposes. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. We will not receive any of the proceeds from the sale of the shares of our common stock by the selling stockholders.
 
We expect to need additional members of our board of directors and we may have difficulty recruiting qualified individuals to our board.
 
In order to meet the board of directors and audit committee independence and other requirements of the federal securities laws and the NASDAQ Global Market we expect that we will need to add one or more additional members to our board of directors that meet relevant independence criteria. We may have difficulty recruiting qualified persons who meet these criteria and therefore may have difficulty in the


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future in continuing to comply with all of these requirements. Failure to comply with these requirements could cause us to be unable to maintain our listing on the NASDAQ Global Market and could affect the liquidity of our shares of common stock.
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” contains forward-looking statements. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “will,” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this prospectus include statements about:
 
  •  competition and competitive factors in the markets in which we operate;
 
  •  demand for replication software;
 
  •  the advantages of our technology as compared to others;
 
  •  changes in customer preferences and our ability to adapt our product and services offerings;
 
  •  our ability to obtain and maintain distribution partners and the terms of these arrangements;
 
  •  our ability to develop and maintain positive relationships with our customers;
 
  •  our ability to maintain and establish intellectual property rights;
 
  •  our ability to retain and hire necessary employees and appropriately staff our development, marketing, sales and distribution efforts;
 
  •  our spending of the proceeds from this offering;
 
  •  our cash needs and expectations regarding cash flow from operations;
 
  •  our ability to manage and grow our business and execution of our business strategy;
 
  •  our financial performance; and
 
  •  the costs associated with being a public company.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements, which apply only as of the date of this prospectus. These important factors include those that we discuss in this prospectus under the caption “Risk Factors” and elsewhere. You should read these factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.


18


 

 
USE OF PROCEEDS
 
We estimate that we will receive approximately $      million in net proceeds from our sale of the           shares of common stock sold by us in the offering. Our net proceeds from the offering represent the amount we expect to receive after paying the underwriting discounts and commissions and other expenses of the offering payable by us. For purposes of estimating our net proceeds, we have assumed that the initial public offering price of our common stock will be $     , which is the midpoint of the range that we show on the cover page of this prospectus.
 
We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders, including any shares sold by the selling stockholders upon exercise of the underwriters’ over-allotment option.
 
We intend to use approximately $      million of the net proceeds from this offering for working capital and other general corporate purposes. In addition, we also expect to use approximately $10.2 million of the net proceeds to fund a mandatory payment to the holders of our Series B convertible preferred stock in connection with the conversion of the outstanding shares of our Series B convertible preferred stock immediately before the completion of this offering.
 
We pursue acquisitions of other businesses as part of our business strategy and may use a portion of the net proceeds to fund these acquisitions. We have no agreement with respect to any acquisition, although we assess opportunities on an ongoing basis and from time to time have discussions with other companies about potential transactions.
 
Our management will have significant flexibility in applying the net proceeds of the offering. Further, changing business conditions and unforeseen circumstances could cause the actual amounts used for these purposes to vary from our estimates. Pending their use, we will invest the net proceeds of the offering in short-term, interest-bearing securities. We cannot predict whether the proceeds invested will yield a favorable return.
 
DIVIDEND POLICY
 
We do not anticipate that we will pay cash dividends on our common stock in the foreseeable future. Future declaration and payment of dividends, if any, on our common stock will be determined by our board of directors in light of factors the board of directors deems relevant, including our earnings, operations, capital requirements and financial condition and restrictions in our financing agreements. In addition, the terms of our loan and security agreement with Silicon Valley Bank restrict our ability to pay dividends.


19


 

 
CAPITALIZATION
 
The following table shows our cash and capitalization as of March 31, 2006:
 
  •  on an actual basis, after giving affect to a 1-for-  reverse split of our common stock that occurred on          , 2006;
 
  •  on an as adjusted basis to reflect:
 
  •  the conversion of the outstanding shares of our Series B convertible preferred stock into 44,564,334 shares of common stock immediately before completion of the offering, which we have assumed for this purpose occurred on March 31, 2006;
 
  •  the conversion of the outstanding shares of our Series C convertible preferred stock into 8,827,889 shares of common stock immediately before completion of the offering, which we have assumed for this purpose occurred on March 31, 2006;
 
  •  the sale of           shares of common stock in the offering by us at an assumed initial public offering price of $      per share, which is the midpoint of the range we show on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and other offering expenses; and
 
  •  our payment of $10.2 million to the holders of our Series B convertible preferred stock in connection with the conversion of such preferred stock.
 
You should read this table together with the information under “Selected Financial Data,” “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our financial statements and related notes and the other financial information included elsewhere in this prospectus.
 
                 
    As of March 31, 2006  
    Actual     As Adjusted  
    (in thousands)  
 
Cash and cash equivalents
  $ 5,750     $          
                 
Total long-term-debt, including current portion
             
                 
Redeemable convertible preferred stock, $0.01 par value per share:
               
Series B convertible preferred stock, 14,451,572 shares authorized, 13,633,333 shares outstanding, actual, no shares outstanding as adjusted
    44,039          
                 
Series C convertible preferred stock, 8,382,201 shares authorized, 7,840,092 shares outstanding, actual, no shares outstanding as adjusted
    8,660          
                 
Stockholders’ equity (deficit):
               
Common stock, par value $.001 per share, 100,000,000 shares authorized, 18,581,946 shares outstanding, actual,     shares outstanding as adjusted
    19          
Additional paid-in capital
    42,002          
Accumulated deficit
    (97,567 )        
                 
Total stockholders’ equity (deficit)
    (55,546 )        
                 
Total capitalization
  $ (2,847 )   $  
                 


20


 

 
DILUTION
 
Purchasers of the common stock in the offering will suffer an immediate and substantial dilution in net tangible book value per share. Dilution is the amount by which the initial public offering price paid by purchasers of shares of our common stock exceeds the net tangible book value per share of our common stock after the offering. Net tangible book value represents the amount of our total tangible assets reduced by our total liabilities. Tangible assets equals our total assets less goodwill and intangible assets. Net tangible book value per share represents our net tangible book value divided by the number of shares of our common stock outstanding. As of March 31, 2006, on a pro forma basis after giving effect to the conversion of the outstanding shares of Series B and Series C convertible preferred stock into 53,392,223 shares of common stock immediately before completion of the offering, which we have assumed for this purpose occurred on March 31, 2006, our pro forma net tangible book value was $(13.0) million and our pro forma net tangible book value per share was $(0.18).
 
Pro forma net tangible book value at March 31, 2006 is calculated as follows:
 
         
Common shares outstanding, actual
    18,581,946  
Common shares issuable upon conversion of Series B and C preferred shares and accrued dividends
    53,392,223  
         
Pro forma common shares outstanding
    71,974,169  
         
Tangible net book value, actual
  $ (55,546,000 )
Conversion of preferred shares to equity
    52,699,000  
Mandatory payment on preferred shares
    (10,200,000 )
         
    $ (13,047,000 )
         
 
After giving effect to the sale by us of           shares of common stock in the offering at an initial public offering price of $      per share, which is the midpoint of the range we show on the cover page of this prospectus, and the application of the estimated net proceeds from the offering, including the payment of approximately $10.2 million to the holders of our Series B convertible preferred stock in connection with the conversion of the outstanding shares of Series B convertible preferred stock immediately before the completion of this offering, our pro forma net tangible book value as of March 31, 2006 would have been $      million, or $      per share. This represents an immediate increase in pro forma net tangible book value of $      per share to existing stockholders and an immediate dilution of $           per share to new investors purchasing shares in the offering. The following table illustrates this per share dilution:
 
                 
Assumed public offering price per share
          $          
Pro forma net tangible book value per share as of March 31, 2006
  $ (0.18 )        
Increase in pro forma net tangible book value per share attributable to the offering
  $            
Pro forma net tangible book value per share after the offering
          $    
Dilution per share to new investors
          $  
 
Our pro forma net tangible book value after the offering, and the dilution to new investors in the offering, will not change from the amounts shown above if the underwriters’ over-allotment option is exercised as any overallotment shares will be purchased from selling shareholders.


21


 

The following table illustrates, on the pro forma basis described above as of March 31, 2006, the total number of shares held, total consideration paid and average price per share paid by existing stockholders and by new investors for the shares of common stock, assuming the sale of shares of common stock in the offering at an initial public offering price of $      per share, which is the midpoint of the range we show on the cover page of this prospectus:
                                         
    Shares Purchased     Total Consideration     Average Price
 
    Number     Percent     Amount     Percent     Per Share  
 
Existing stockholders
                  %   $               %   $          
New investors
                                       
                                         
Total
            100 %   $         100 %   $    
                                         
 
The data in the tables above assume that outstanding options and warrants to purchase common stock are not exercised and do not give effect to the issuance of      shares of common stock to our chief executive officer upon the completion of this offering under an employment agreement. As of June 30, 2006, options to purchase 13,975,464 shares of common stock at a weighted average exercise price of $0.59 per share and warrants to purchase 800,000 shares of common stock at a weighted average exercise price of $0.44 per share were outstanding. If all those options and warrants had been exercised, and assuming the issuance of the      shares to our chief executive officer, the dilution to new investors purchasing shares in the offering as of March 31, 2006 would have increased by $      per share to $      per share. To the extent that any options or warrants are granted in the future and are exercised, new investors will experience further dilution.


22


 

 
SELECTED FINANCIAL DATA
 
The following table shows our selected statement of operations data for each of the years ended December 31, 2005, 2004, 2003, 2002 and 2001 and the three months ended March 31, 2006 and 2005 and our selected balance sheet data as of December 31, 2005 2004, 2003, 2002 and 2001 and March 31, 2006. The selected statement of operations data for the years ended December 31, 2005, 2004 and 2003 and the balance sheet data at December 31, 2005 and 2004 are derived from our audited financial statements prepared in accordance with generally accepted accounting principles, which are included elsewhere in this prospectus. The selected statement of operations data for the years ended December 31, 2002 and 2001 and the selected balance sheet data at December 31, 2003, 2002 and 2001 are derived from our financial statements prepared in accordance with generally accepted accounting principles, which are not included in this prospectus. The selected statement of operations data for the three months ended March 31, 2006 and 2005 and the selected balance sheet data at March 31, 2006 are unaudited, but include, in the opinion of management, all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of such data. Our historical results are not necessarily indicative of our results for any future period.
 
You should read the selected financial data in conjunction with “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes appearing elsewhere in this prospectus.
 
                                                         
    Year ended December 31,     Three Months ended March 31,  
    2005     2004     2003     2002     2001     2006     2005  
                      (unaudited)     (unaudited)  
    (in thousands)  
 
Statement of Operations Data:
                                                       
Revenue:
                                                       
Software licenses
  $ 26,222     $ 19,943     $ 16,283     $ 10,294     $ 4,590     $ 6,372     $ 5,274  
Maintenance and professional services
    14,488       9,895       7,650       4,031       3,039       4,307       3,194  
                                                         
Total revenue
    40,710       29,838       23,933       14,325       7,629       10,679       8,468  
                                                         
Cost of revenue:
                                                       
Software licenses
    38       559       1,426       3,066       1,411       4       11  
Maintenance and professional services
    4,357       3,694       3,103       2,182       738       1,261       945  
                                                         
Total cost of revenue
    4,395       4,253       4,529       5,248       2,149       1,265       956  
                                                         
Gross margin
    36,315       25,585       19,404       9,077       5,480       9,414       7,512  
                                                         
Operating expenses:
                                                       
Sales and marketing
    17,191       16,188       13,654       11,501       10,566       4,330       4,064  
Research and development
    9,748       8,717       6,373       3,987       8,084       2,464       2,377  
General and administrative
    6,730       5,666       5,253       3,722       3,394       2,027       2,076  
Depreciation and amortization
    805       527       1,617       1,751       1,682       251       167  
Legal fees and settlement costs
    5,671       1,755       200                         368  
                                                         
Total operating expenses
    40,145       32,853       27,097       20,961       23,726       9,072       9,052  
                                                         
Income (loss) from operations
    (3,830 )     (7,268 )     (7,693 )     (11,884 )     (18,246 )     342       (1,540 )
Interest income
    83       7       19       20       909       51       4  
Interest expense
    (36 )     (765 )     (341 )     (2,923 )     (4,590 )     (17 )     (4 )
                                                         
Income (loss) before income taxes
    (3,783 )     (8,026 )     (8,015 )     (14,787 )     (21,927 )     376       (1,540 )
Income tax expense
                                  3        
                                                         
Net income (loss)
  $ (3,783 )   $ (8,026 )   $ (8,015 )   $ (14,787 )   $ (21,927 )   $ 373     $ (1,540 )
                                                         
 


23


 

                                                         
    Year ended December 31,     Three Months ended March 31,  
    2005     2004     2003     2002     2001     2006     2005  
                      (unaudited)     (unaudited)  
    (in thousands, except per share data)  
 
Less:
                                                       
Accretion of preferred stock
  $ 5,332     $ 5,314     $ 4,928     $ 1,240     $ 503     $ 1,334     $ 1,334  
Beneficial conversion feature on preferred stock:
                                                       
Reduction in Series B preferred stock conversion price
                1,194                          
Warrants exchanged for common stock
                      4                    
Exchange of Series A for Series B preferred stock
                      1,511                    
Dividends on preferred stock
    2,686       2,029       1,637       206             698       642  
                                                         
Net loss attributable to common stockholders
  $ (11,801 )   $ (15,369 )   $ (15,774 )   $ (17,748 )   $ (22,430 )   $ (1,659 )   $ (3,516 )
                                                         
Net loss attributable to common stockholders per share:
                                                       
Basic and diluted
  $ (0.64 )   $ (0.83 )   $ (0.85 )   $ (1.41 )   $ (2.13 )   $ (0.09 )   $ (0.19 )
                                                         
Weighted average shares used in computing per share amounts:
                                                       
Basic and diluted
    18,565       18,553       18,551       12,902       10,542       18,576       18,562  
                                                         
 
                                                 
                                  As of
 
    As of December 31,     March 31,
 
    2005     2004     2003     2002     2001     2006  
                      (unaudited)           (unaudited)  
    (in thousands)  
 
Balance Sheet Data:
                                               
Cash and cash equivalents
  $ 8,341     $ 5,831     $ 676     $ 3,844     $ 1,118     $ 5,750  
Working capital
    (2,263 )     459       (1,151 )     2,733       (266 )     (1,408 )
Total assets
    18,590       13,318       8,772       11,307       9,581       15,369  
Deferred revenue
    10,562       7,304       4,144       2,292       1,017       10,820  
Long-term deferred revenue
    2,887       1,607       586                   3,126  
Long-term deferred rent
    518       610       668       673       3,768       490  
Redeemable convertible preferred stock
    50,561       42,489       27,646       19,501       34,623       52,699  
Total stockholders’ deficit
  $ (54,307 )   $ (42,601 )   $ (27,386 )   $ (13,080 )   $ (31,516 )   $ (55,546 )

24


 

 
UNAUDITED PRO FORMA FINANCIAL DATA
 
On May 23, 2006, Double-Take Software acquired all of the issued and outstanding shares of Sunbelt System Software S.A.S., which is now known as Double-Take Software S.A.S., or Double-Take EMEA. From 1998 through the acquisition date, Double-Take EMEA was the principal or exclusive distributor of our software in the European, Middle Eastern and African market and a certified Double-Take training organization. An initial payment of $1.1 million was made to the former stockholders of Double-Take EMEA for the acquisition. The remaining portion of the total purchase price, which is estimated to range between $10 and $12 million based on an earn-out formula, will be payable in monthly increments based upon a specified percentage of the amounts paid by Double-Take EMEA to us each month in respect of purchases under our intercompany distribution agreement with Double-Take EMEA through December 31, 2007. Of the initial payment of $1.1 million, an earn-out payment of $0.657 million related to Double-Take EMEA purchases from Double-Take Software for the period from January 1, 2006 through March 31, 2006. A portion of the earn-out payments are to be held in escrow.
 
The following represents the preliminary allocation of the purchase price of Double-Take EMEA. The acquisition adjustments are based on currently available information and upon certain assumptions and estimates that management believes are reasonable. Our acquisition of Double-Take EMEA was accounted for using the purchase method of accounting, and the assets acquired and liabilities assumed were accounted for at their fair values at the acquisition date based on preliminary estimates. The purchase price allocation is preliminary, and a final determination of required purchase accounting adjustments will be made upon the completion of the valuation of identified intangible assets by an independent third-party.
 
The details of the preliminary purchase price allocation are as follows (in thousands):
 
         
Earn-out payments for period from January 1, 2006 through March 31, 2006
  $ 657  
Dividend payable to former Double-Take EMEA shareholders
    932  
Transaction costs
    250  
         
Total purchase price
  $ 1,839  
         
 
The preliminary estimate of identifiable assets and liabilities on the date of the acquisition is:
 
         
Estimated fair value of identifiable assets acquired
  $ 8,459  
Estimated fair value of the liabilities acquired
    (7,154 )
         
Net identifiable assets acquired
    1,305  
         
Estimated value of intangibles assets
  $ 534  
         
 
The following pro forma financial data have been prepared by our management to give effect to our acquisition of Double-Take EMEA. The pro forma adjustments, which are based upon available information and upon assumptions that our management believes are reasonable, are described in the accompanying notes.
 
For purposes of the pro forma financial statements, we have assumed that all intangible assets are amortizable with an average life of five years.
 
The unaudited pro forma statement of operations combines the statement of operations with Double-Take EMEA’s for the year ended December 31, 2005 and for the three month period ended March 31, 2006, to reflect our acquisition of Double-Take EMEA as if such acquisition had been completed and was effective as of January 1, 2005 and January 1, 2006, respectively.
 
The pro forma balance sheet data at March 31, 2006 have been prepared to give effect to the acquisition of Double-Take EMEA as if it had occurred on March 31, 2006.
 
The financial effects to us of our acquisition of Double-Take EMEA as presented in the pro forma financial data are not necessarily indicative of the consolidated financial position or results of operations we would have obtained if the Double-Take EMEA acquisition had actually occurred on the dates described above, nor are they necessarily indicative of the results of our future operations. The pro forma


25


 

financial data should be read in conjunction with the accompanying notes, which are an integral part of the pro forma information, and the historical financial statements of Double-Take Software and Double-Take EMEA and the related notes appearing elsewhere in this prospectus.
 
Double-Take Software, Inc.
Pro Forma Balance Sheet
As of March 31, 2006
(unaudited)
 
                                 
                Pro Forma as
       
    Double-
    Double-Take
    Adjusted for the
       
    Take(1)     EMEA(2)     Acquisition(3)     Pro Forma  
    (historical)              
    (in thousands of US $)  
 
Current assets:
                               
Cash and cash equivalents
  $ 5,750     $ 3,167     $ (2,095 )(4)   $ 6,822  
Accounts receivable
    7,182       3,190       (1,008 )(3)     9,364  
Inventory
          404             404  
Other current assets
    260       2,564       (1,606 )     1,218  
                                 
Total current assets
    13,192       9,325       (4,709 )(3)     17,808  
Equipment
    2,061       274             2,335  
Acquired intangibles
    58             476  (5)     534  
Other assets
    58       53             111  
                                 
Total assets
  $ 15,369     $ 9,652     $ (4,233 )   $ 20,788  
                                 
Current liabilities:
                               
Dividend payable to former Double-Take EMEA shareholders
              $ 932  (6)   $ 932  
Accounts payable
  $ 1,033     $ 636       (291 )(3)     1,378  
Accrued expense
    2,747       1,747       192  (7)     4,686  
Other current liabilities
          59             59  
Deferred revenue
    10,820       3,683       (1,606 )     12,897  
                                 
Total current liabilities
    14,600       6,125       (773 )     19,952  
Long term deferred revenue
    3,126       67             3,193  
Deferred rent
    490                   490  
                                 
Total liabilities
    18,216       6,192       (773 )     23,635  
                                 
Redeemable convertible Series B preferred stock
    44,039                   44,039  
Redeemable convertible Series C preferred stock
    8,660                   8,660  
                                 
Total redemption value
    52,699                   52,699  
Common stock
    19       45       (45 )(8)     19  
Additional paid in capital
    42,002                   42,002  
Retained earnings (deficit)
    (97,567 )     3,417       (3,417 )(4)(5)(6)(7)     (97,567 )
Cumulative translation adjustment
          (2 )     2  (7)(8)      
                                 
Total equity
    (55,546 )     3,460       (3,460 )     (55,546 )
                                 
Total liabilities and equity
  $ 15,369     $ 9,652     $ (4,233 )   $ 20,788  
                                 
 
See accompanying notes to unaudited combined pro forma balance sheet


26


 

NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(in thousands, except where noted otherwise)
 
(1) Derived from the Company’s unaudited balance sheet at March 31, 2006.
 
  (2)  Derived from the unaudited consolidated balance sheet of Double-Take EMEA (which is Double-Take Software S.A.S. and formerly Sunbelt System Software) at March 31, 2006 and converted from Euros to US dollars using the $/Euro exchange rate on March 31, 2006 of 1.2139.
 
  (3)  Elimination of inter-company balances between the Company and Double-Take EMEA at March 31, 2006.
 
  •  Accounts receivable elimination relates to accounts receivable of the Company from Double-Take EMEA.
 
  •  Inventory elimination relates to inventory held by Double-Take EMEA at March 31, 2006 which was purchased from the Company.
 
  •  Elimination of prepaid maintenance of Double-Take EMEA and related deferred revenue of the Company.
 
  •  Accounts payable elimination relates to net amounts due to the Company from Double-Take EMEA.
 
  •  Deferred revenue elimination relates to maintenance sales by the Company to Double-Take EMEA.
 
  (4)  The components of the pro forma adjustment to cash are as follows:
 
         
Payment in transit from Double-Take EMEA to the Company on March 31, 2006
  $ 717  
Earn-out payments related to period from January 1 through March 31, 2006
    (657 )
Dividend paid to former Double-Take EMEA shareholder prior to closing
    (2,155 )
         
    $ (2,095 )
         
 
(5) The components of the pro forma adjustment to intangible assets are:
 
         
Estimate of total intangible assets acquired
  $ 534  
Intangible asset recorded by the Company prior to March 31, 2006
    (58 )
         
Total adjustment
  $ 476  
         
 
  (6)  Dividend payable to former shareholders of Double-Take EMEA in connection with the acquisition.
 
(7) Accrual for acquisition costs incurred after March 31, 2006.
 
(8) To eliminate Double-Take EMEA equity.


27


 

Double-Take Software, Inc.

Pro Forma Statement of Operations
Year Ended December 31, 2005
(unaudited)
 
                                         
                Pro Forma as
             
    Double-
    Double-Take
    Adjusted for
    Double-Take
       
    Take(1)     EMEA(2)     the Acquisition     Pro Forma        
    (historical)                    
    (in thousands of US $, except share and per share amounts)  
 
Revenue:
                                       
Software licenses
  $ 26,222     $ 11,673     $ (4,207 )(3)   $ 33,688          
Maintenance and professional services
    14,488       4,828       (1,995 )(4)     17,321          
                                         
Total revenue
    40,710       16,501       (6,202 )     51,009          
Cost of revenue:
                                       
Software licenses
    38       5,081       (2,654 )(5)     2,465          
Maintenance and professional services
    4,357       2,649       (1,922 )(6)     5,084          
                                         
Total cost of revenue
    4,395       7,730       (4,576 )     7,549          
                                         
Gross margin
    36,315       8,771       (1,626 )     43,460          
Operating expenses:
                                       
Sales and marketing
    17,191       5,589       (169 )(7)     22,611          
Research and development
    9,748                   9,748          
General and administrative
    6,730       1,454             8,184          
Depreciation and amortization
    805       106       107  (8)     1,018          
Legal fees and settlement costs
    5,671                   5,671          
                                         
Total operating expenses
    40,145       7,149       (62 )     47,232          
                                         
                                         
Income (loss) from operations
    (3,830 )     1,622       (1,564 )     (3,772 )        
Interest income
    83       47             130          
Interest expense
    (36 )     (144 )           (180 )        
                                         
Income (loss) before income taxes
    (3,783 )     1,525       (1,564 )     (3,822 )        
Income tax expense
          (461 )           (461 )        
                                         
Net income (loss)
    (3,783 )     1,064       (1,564 )     (4,283 )        
Accretion on redeemable shares:
                                       
Series B
    (5,310 )                 (5,310 )        
Series C
    (22 )                 (22 )        
Dividends on Series B
    (2,035 )                 (2,035 )        
Dividends on Series C
    (651 )                 (651 )        
                                         
Net income (loss) attributable to common stockholders
  $ (11,801 )   $ 1,064     $ (1,564 )   $ (12,301 )        
                                         
Net loss attributable to common stockholders per share:
                                       
Basic and diluted
  $ (0.64 )                   $ (0.66 )        
                                         
Weighted-average number of shares used in per share amounts:
                                       
Basic and diluted
    18,564,790                       18,564,790          
                                         
 
See accompanying notes to unaudited pro forma statements of operations


28


 

Double-Take Software, Inc.

Pro Forma Statement of Operations
Three Months Ended March 31, 2006
(unaudited)
 
                                 
                Pro Forma as
       
    Double-
    Double-Take
    Adjusted for the
    Double-Take
 
    Take(1)     EMEA(2)     Acquisition     Pro Forma  
    (historical)              
    (in thousands of US $, except share and per share amounts)  
 
Revenue:
                               
Software licenses
  $ 6,372     $ 2,848     $ (71 )(3)   $ 9,149  
Maintenance and professional services
    4,307       1,778       (576 )(4)     5,509  
                                 
Total revenue
    10,679       4,626       (647 )     14,658  
                                 
Cost of revenue:
                               
Software licenses
    4       1,383       (1,260 )(5)     127  
Maintenance and professional services
    1,261       876       (659 )(6)     1,478  
                                 
Total cost of revenue
    1,265       2,259       (1,919 )     1,605  
                                 
Gross margin
    9,414       2,367       1,272       13,053  
                                 
Operating expenses:
                               
Sales and marketing
    4,330       1,496       134  (7)     5,960  
Research and development
    2,464                   2,464  
General and administrative
    2,027       430             2,457  
Depreciation and amortization
    251       29       27  (8)     307  
Legal fees and settlement costs
                       
                                 
Total operating expenses
    9,072       1,955       161       11,188  
                                 
Income (loss) from operations
    342       412       1,111       1,865  
Interest income
    51       83             134  
Interest expense
    (17 )     (42 )           (59 )
                                 
Income (loss) before income taxes
    376       453       1,111       1,940  
Income tax expense
    3       133             136  
                                 
Net income (loss)
    373       320       1,111       1,804  
Accretion on redeemable shares:
                               
Series B
    (1,328 )                 (1,328 )
Series C
    (6 )                 (6 )
Dividends on Series B
    (528 )                 (528 )
Dividends on Series C
    (170 )                 (170 )
                                 
Net income (loss) attributable to common stockholders
  $ (1,659 )   $ 320     $ 1,111     $ (228 )
                                 
Net income (loss) attributable to common stockholders per share:
                               
Basic and diluted
  $ (0.09 )                   $ (0.01 )
                                 
Weighted-average number of shares used in per share amounts:
                               
Basic and diluted
    18,575,487                       18,575,487  
                                 
 
See accompanying notes to unaudited pro forma statements of operations


29


 

NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(in thousands, except where noted otherwise)
 
  (1)  Derived from the Company’s historical statement of operations for the year ended December 31, 2005 and the historical unaudited statement of operation for the three months ended March 31, 2006.
 
  (2)  Derived from the historical consolidated statement of operations for Double-Take EMEA (which is Double-Take Software S.A.S. and formerly Sunbelt System Software) for the year ended December 31, 2005 and the three months ended March 31, 2006 and converted from Euros to US dollars using the $/Euro average exchange rate of 1.2447 for the year ended December 31, 2005 and 1.2031 for the three months ended March 31, 2006.
 
  (3)  Elimination of the Company’s revenue recorded in Software licenses related to sales of licenses to Double-Take EMEA.
 
  (4)  Elimination of the Company’s revenue recorded in Maintenance and professional services related to maintenance sold to Double-Take EMEA.
 
  (5)  Elimination of Double-Take EMEA cost of software licenses related to the cost of the licenses paid to the Company for licenses purchased.
 
  (6)  Elimination of Double-Take EMEA cost of maintenance and professional services associated with maintenance fees paid by Double-Take EMEA to the Company.
 
  (7)  Elimination in 2005 of $169 of marketing expense recorded by the Company related to Double-Take EMEA. Double-Take EMEA did not record this transaction until the three month period ending March 31, 2006.
 
The components of the pro forma adjustment to marketing expense for the three month period ending March 31, 2006 are as follows:
 
         
Company expense for marketing activities recorded by Double-Take EMEA but not the Company
  $ 169  
Expense recorded by the Company during the three month period ending March 31, 2006 but not recorded by Double-Take EMEA
    (35 )
         
Total adjustment
  $ 134  
         
 
  (8)  Adjustment to record amortization of the identified intangible assets from the Double-Take EMEA acquisition.
 
The adjustment for the year ended December 31, 2005 was calculated as follows:
 
         
Intangible asset
  $ 534  
Average life
    5  
         
Amortization for year
  $ 107  
         
 
The adjustment for the three month period ending March 31, 2006 was calculated as follows:
 
         
Full year amortization
  $ 107  
Divide to quarterly amount
    4  
         
Amortization for quarter
  $ 27  
         


30


 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis together with our historical and pro forma financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below. Accordingly, investors should not place undue reliance upon our forward-looking statements. See “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of these risks and uncertainties.
 
Overview
 
Double-Take Software develops, sells and supports affordable software that reduces downtime and protects data for business-critical systems. We believe that we are the leading supplier of replication software for Microsoft server environments. By simply loading our software onto servers running current Windows operating systems, organizations of any size can maintain an off-site standby server with replicated data, providing rapid recovery in the event of a disaster. We estimate that we have sold licenses for approximately 100,000 copies of Double-Take to more than 10,000 customers.
 
In recent years, we have experienced substantial growth, increasing our total revenue from $7.6 million for the year ended December 31, 2001 to $40.7 million for the year ended December 31, 2005. We believe that our focus on providing affordable replication software to companies of all sizes through an efficient direct sales team and robust distribution network has been instrumental to our continued revenue growth. Revenue generated by sales of our software represented 60% of our total revenue in the three months ended March 31, 2006. Sales of maintenance and professional services generated the remainder of our revenue.
 
As a result of our investments in developing our software and establishing our broad distribution network (as well as legal fees and settlement costs associated with the defense and settlement of a legal case involving our intellectual property) we experienced significant operating losses through 2005. Our ability to increase the productivity of our sales force and distribution partners while controlling our other expenses has driven an improvement in our results, from an operating loss of $18.2 million and a net loss of $21.9 million in 2001 to an operating and net loss of $3.8 million in 2005. We first achieved operating income on a quarterly basis in the three months ended September 30, 2005. We achieved operating income of $0.3 million and net income of $0.4 million in the three months ended March 31, 2006.
 
We commenced operations in 1991, primarily developing software for load balancing between network interface cards of servers running NetWare, a then-popular network operating system developed by Novell, Inc. We released the first Windows-based version of Double-Take in 1996 based, in part, on these experiences.
 
Some Important Aspects of Our Operations
 
We license our software under perpetual licenses to end-user customers directly and to a network of distributors, value-added resellers and original equipment manufacturers, or OEMs. Our distributors primarily sell our software to our resellers. Our resellers bundle or sell our software together with their own products and also sell our software independently. Our OEMs market, sell and support our software and services on a stand-alone basis and incorporate our software into their own hardware and software products.
 
Software sales made to or through our distributors, value-added resellers and OEMs generated approximately 94% of total software revenue in 2005 and approximately 94% in the three months ended March 31, 2006. During the three months ended March 31, 2006, approximately 6% of our software sales were made solely by our direct sales force, approximately 19% were made to our distributors for sale to value-added resellers, approximately 63% of which were made directly through resellers and approximately 12% were made through OEMs, primarily Hewlett-Packard Co. We believe that we will need to continue to maintain close relationships with our partners to sustain and increase profitability. We have no current plans to focus future growth on one distribution channel versus another. We believe our direct sales force


31


 

complements our indirect distribution network, and we intend to continue to increase revenue generated by both.
 
In 2005, the median price of sales of Double-Take software licenses to customers was approximately $4,000 and the average sales cycle was less than three months. We believe that these factors have contributed to more balanced sales throughout the quarter and more predictable revenue streams in comparison to other software companies with perpetual license models. We believe that the affordability of our software is a competitive advantage.
 
On May 23, 2006, we completed our acquisition of Sunbelt System Software S.A.S., which is now known as Double-Take Software S.A.S., or Double-Take EMEA. From 1998 through the acquisition date, Double-Take EMEA was the principal or exclusive distributor of our software in our European, Middle Eastern and African markets and a certified Double-Take training organization. Sales of our software and related services generated 93% of Double-Take EMEA’s revenue in 2005. Our acquisition of Double-Take EMEA has provided us with a direct presence in the European, Middle Eastern and African markets, the opportunity to further our strategic initiative to increase revenue generated outside of the United States, and opportunities for improved margins. The inclusion of Double-Take EMEA’s assets and operations in our business since May 23, 2006 has contributed to a significant increase in the size of our business since March 31, 2006.
 
Revenue
 
We derive revenue from sales of perpetual licenses for our software and from maintenance and professional services.
 
Software Licenses.  We derive the majority of our revenue from sales of perpetual licenses of our software applications, which allow our customers to use the software indefinitely. We do not customize our software for a specific end user customer. We recognize revenue from sales of perpetual licenses generally upon shipment of the software. Our software revenue is reported net of rebates and discounts.
 
Our software revenue generated approximately 64% of our total revenue in 2005 and 60% of our total revenue in the three months ended March 31, 2006. Sales to existing customers generated approximately 55% of our software revenue in 2005 and 41% in the three months ended March 31, 2006. Sales to new customers generated the remainder of our software revenue for these periods. We do not anticipate that our acquisition of Double-Take EMEA in May 2006 will materially affect the percentage of our total revenue that is generated by software sales.
 
Our software revenue generally experiences some seasonality. Many organizations do not make the bulk of their information technology purchases, including software, in the first quarter of any year. We believe that this generally has resulted in lower revenue generated by software sales in our first quarter in prior years. We also have experienced in prior years lower revenue in the summer months.
 
Maintenance and Professional Services.  We also generate revenue by providing our customers with maintenance comprised of software updates and product support. We generally include our maintenance for a designated period in the price of the software at the time of sale. In addition, many of our customers enter into a maintenance agreement for longer periods on a stand-alone basis. These agreements entitle our customers to software updates on a when-and-if-available basis and product support for an annual fee based on the licenses purchased and the level of service subscribed. Almost all of our customers that purchase maintenance pay the entire amount payable under the agreement in advance, although we recognize maintenance revenue ratably over the term of the agreement. This policy has contributed to increasing deferred revenue balances on our balance sheet and positive cash flow from operations.
 
In some cases, most often in connection with the licensing of our software, we provide professional services to assist our customers in strategic planning for disaster recovery and application high availability, the installation of our software and the training of their employees to use our software. We provide most of our professional services on a fixed price basis and we recognize the revenue for professional services once we complete the engagement.


32


 

Of total maintenance and professional services revenue, maintenance revenue represented 84% in 2005 and 86% in the three months ended March 31, 2006. Professional services generated the remainder of our total maintenance and professional services revenue in these periods.
 
Of our total revenue, maintenance revenue represented 30% in 2005 and 35% in the three months ended March 31, 2006. Professional services accounted for 6% of our total revenue in 2005 and 5% for the three months ended March 31, 2006. Our maintenance and professional services revenue historically has generated lower gross margins than our software revenue. The gross margin generated by our maintenance and professional services revenue was 70% in 2005 and 71% in the three months ended March 31, 2006. We expect the proportion of revenue derived from sales of maintenance to increase in the future as we increase the number of software licenses sold and in service. As the percentage of total revenue attributable to maintenance increases, our overall gross margins will be adversely affected.
 
Cost of Revenue
 
Our cost of revenue primarily consists of the following:
 
Cost of Software Revenue.  Cost of software revenue consists primarily of media, manual, translation and distribution costs and may in the future include royalties to third-party software developers for technology embedded within our software. Cost of software revenue also has included amortization of internally-developed capitalized software. Because our recent development initiatives have resulted in a significant decrease in the time and costs incurred between technological feasibility and the point at which the software is ready for general release, we no longer capitalize costs of our internally-developed software. As a result, we do not believe that amortization of internally developed software will have any effect on our cost of software revenue in future periods.
 
Cost of Services Revenue.  Cost of services revenue consists primarily of salary and other personnel-related costs incurred in connection with our provision of maintenance and professional services. Cost of services revenue also includes other allocated overhead expenses for our professional services and product support personnel, as well as travel-related expenses for our staff to perform work at a customer’s site.
 
Operating Expenses
 
We classify our operating expenses as follows:
 
Sales and Marketing.  Sales and marketing expenses primarily consist of the following:
 
  •  personnel and related costs for employees engaged in sales, corporate marketing, product marketing and product management, including salaries, commissions and other incentive compensation, including equity-based compensation, related employee benefit costs and allocated overhead expenses;
 
  •  travel related expenses to meet with existing and potential customers, and for other sales and marketing related purposes; and
 
  •  sales promotion expenses, public relations expenses and costs for marketing materials and other marketing events, including trade shows, industry conventions and advertising, and marketing development funds for our distribution partners.
 
We expense our sales commissions at the time the related revenue is recognized. We expect our sales and marketing expense to increase in the future as we increase the number of direct sales professionals and invest in marketing programs. However, we expect sales and marketing expense to decrease as a percentage of revenue for the near future as we anticipate that our revenue will increase more rapidly than our sales and marketing costs.


33


 

Research and Development.  Research and development expenses primarily represent the expense of developing new software and modifying existing software. These expenses primarily consist of the following:
 
  •  personnel and related costs, including salaries, employee benefits, equity and other incentive compensation and allocated overhead expenses, for research and development personnel, including software engineers, software quality assurance engineers and systems engineers; and
 
  •  contract labor expense and consulting fees paid to independent consultants and others who provide software engineering services to us, as well as other expenses associated with the design and testing of our software.
 
To date, our research and development efforts have been primarily devoted to increases in features and functionality of our existing software. We expect research and development expense to increase in the future as we continue to develop new solutions for our customers. However, we expect research and development expense to remain relatively consistent, or possibly decrease slightly, as a percentage of revenue.
 
General and Administrative.  General and administrative expenses represent the costs and expenses of managing and supporting our operations. General and administrative expenses consist primarily of the following:
 
  •  personnel and related costs including salaries, employee benefits, equity and other incentive compensation and allocated overhead expenses, for our executives, finance, human resources, corporate information technology systems, strategic business, corporate quality, corporate training and other administrative personnel;
 
  •  legal and accounting professional fees;
 
  •  recruiting and training costs;
 
  •  travel related expenses for executives and other administrative personnel; and
 
  •  computer maintenance and support for our internal information technology system.
 
We expect general and administrative expenses to increase in the future as we incur increased expenses related to being a publicly-traded company and invest in an infrastructure to support our continued growth. However, we expect general and administrative expenses to decrease as a percentage of revenue for the foreseeable future after fiscal 2006, as we believe the rate at which our revenue will increase will exceed the rate at which we expect to incur these additional expenses. In the period in which our proposed public offering goes effective, we will incur significant general and administrative expenses related to the restricted shares to be issued to and the acceleration of options of our Chief Executive Officer.
 
Depreciation and Amortization.  Depreciation and amortization expense consists of depreciation expense primarily for computer equipment we use for information services and in our development and test labs.
 
Legal Fees and Settlement Costs.  In December 2005, we agreed to terms for settlement of a legal proceeding with a provider of information storage systems that involved claims regarding some of the intellectual property used in our software. Pursuant to a settlement agreement entered into in January 2006, we paid $3.8 million in January 2006, which represented our initial settlement payment in connection with the resolution of this matter, and we agreed to pay the other company an additional $0.5 million in each of January 2007, 2008, 2009 and 2010. Our obligation to make these future payments will be reduced on a dollar-for-dollar basis to the extent that we purchase or resell the other company’s products. Our obligation to make these payments is collateralised by a letter of credit from Silicon Valley Bank. Legal fees and settlement costs are composed of the legal fees and expenses we have incurred in connection with this legal proceeding.


34


 

Stock-Based Compensation
 
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123(R), Share-Based Payment. SFAS No. 123(R) is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guide. SFAS No. 123(R) requires the measurement of the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the date of grant. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. We adopted SFAS No. 123(R) on January 1, 2006, which requires compensation cost to be recognized as expense in 2006 and future periods for the portion of outstanding awards that were unvested at that date and awards that are subsequently granted, based on the fair value of those awards on the date of grant, calculated using an option pricing model under SFAS No. 123 for pro forma disclosures. Based on unvested options outstanding as of March 31, 2006 and applying the Black-Scholes option pricing model, we estimate the effect of adopting SFAS No. 123(R) will reduce our net income by approximately $0.3 million in 2006. This amount is not necessarily reflective of the actual amount that we will record in 2006 because it does not include the effect of any options we may grant after March 31, 2006.
 
Results of Operations
 
The following table sets forth our sources of revenue, costs of revenue and other selected financial data for the specified periods and as a percentage of our total revenue for those periods.
 
                                         
    Year Ended
    Three Months
 
    December 31,     Ended March 31,  
    2005     2004     2003     2006     2005  
                      (unaudited)  
    (in thousands)  
 
Revenue:
                                       
Software licenses
  $ 26,222     $ 19,943     $ 16,283     $ 6,372     $ 5,274  
Maintenance and professional services
    14,488       9,895       7,650       4,307       3,194  
                                         
Total revenue
    40,710       29,838       23,933       10,679       8,468  
                                         
Cost of revenue:
                                       
Software licenses
    38       559       1,426       4       11  
Maintenance and professional services
    4,357       3,694       3,103       1,261       945  
                                         
Total cost of revenue
    4,395       4,253       4,529       1,265       956  
                                         
Gross profit
    36,315       25,585       19,404       9,414       7,512  
                                         
Operating expenses:
                                       
Sales and marketing
    17,191       16,188       13,654       4,330       4,064  
Research and development
    9,748       8,717       6,373       2,464       2,377  
General and administrative
    6,730       5,666       5,253       2,027       2,076  
Depreciation and amortization
    805       527       1,617       251       167  
Legal fees and settlement costs
    5,671       1,755       200             368  
                                         
Total operating expenses
    40,145       32,853       27,097       9,072       9,052  
                                         
Income (loss) from operations
    (3,830 )     (7,268 )     (7,693 )     342       (1,540 )
Interest income
    83       7       19       51       4  
Interest expense
    (36 )     (765 )     (341 )     (17 )     (4 )
                                         
Income (loss) before income taxes
    (3,783 )     (8,026 )     (8,015 )     376       (1,540 )
Income tax expense
                      3        
                                         
Net income (loss)
  $ (3,783 )   $ (8,026 )   $ (8,015 )   $ 373     $ (1,540 )
                                         
 


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    Year Ended
    Three Months
 
    December 31,     Ended March 31,  
     2005       2004       2003       2006       2005   
 
Revenue:
                                       
Software licenses
    64 %     67 %     68 %     60 %     62 %
Maintenance and professional services
    36 %     33 %     32 %     40 %     38 %
                                         
Total revenue
    100 %     100 %     100 %     100 %     100 %
                                         
Cost of revenue:
                                       
Software licenses
          2 %     6 %            
Maintenance and professional services
    11 %     12 %     13 %     12 %     11 %
                                         
Total cost of revenue
    11 %     14 %     19 %     12 %     11 %
                                         
Gross profit
    89 %     86 %     81 %     88 %     89 %
                                         
Operating expenses:
                                       
Sales and marketing
    42 %     54 %     57 %     41 %     48 %
Research and development
    24 %     29 %     27 %     23 %     28 %
General and administrative
    17 %     19 %     22 %     19 %     25 %
Depreciation and amortization
    2 %     2 %     7 %     2 %     2 %
Legal fees and settlement costs
    14 %     6 %     1 %           4 %
                                         
Total operating expenses
    99 %     110 %     113 %     85 %     107 %
                                         
Income (loss) from operations
    (9 )%     (24 )%     (32 )%     3 %     (18 )%
Interest income
                      1 %      
Interest expense
          (3 )%     (1 )%            
Income (loss) before income taxes
    (9 )%     (27 )%     (33 )%     4 %     (18 )%
                                         
Income tax expense
                             
                                         
Net income (loss)
    (9 )%     (27 )%     (33 )%     4 %     (18 )%
                                         
 
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
 
Revenue
 
Total revenue increased $2.2 million, or 26%, from $8.5 million in the three months ended March 31, 2005 to $10.7 million in the three months ended March 31, 2006. Of our total revenue in the 2006 three-month period, 91% was attributable to sales to or through our distribution partners, which was an increase from 89% of our total revenue attributable to sales to or through our distribution partners in the 2005 three-month period. Of our total revenue in the 2006 three-month period, 9% was attributable to direct sales to end users, a decrease from 11% of our total revenue attributable to end users in the 2005 three-month period.
 
Software License Revenue.  Software revenue increased $1.1 million, or 21%, from $5.3 million in the 2005 three-month period to $6.4 million in the 2006 three-month period. The increase in software revenue was primarily the result of broader demand for, and acceptance of, our software and increased revenue from our expanding base of existing customers, as well as a price increase that was effective on August 1, 2005.
 
Maintenance and Professional Services Revenue.  Maintenance and professional services revenue increased $1.1 million, or 35%, from $3.2 million in the 2005 three-month period to $4.3 million in the 2006 three-month period. Maintenance and professional services revenue represented 38% of our total revenue in the 2005 three-month period and 40% of our total revenue in the 2006 three-month period. The increase in maintenance and professional services revenue was primarily due to an increase in maintenance revenue generated by maintenance agreements as a result of sales of software to new customers and renewal agreements purchased by existing software customers.

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Cost of Revenue
 
Total cost of revenue increased $0.3 million, or 32%, from $1.0 million in the 2005 three-month period to $1.3 million in the 2006 three-month period. Total cost of revenue represented 11% of our total revenue in the 2005 three-month period and 12% of our total revenue in the 2006 three-month period. Substantially all of our cost of revenue in these periods represented cost of services revenue.
 
Cost of services revenue represented 30% of our services revenue in the 2005 three-month period and 29% of our services revenue in the 2006 three-month period. The increase in total cost of revenue and cost of services revenue was primarily the result of higher employee compensation resulting from an increase in the number of our customer support and other professional services personnel.
 
Operating Expenses
 
Sales and Marketing.  Sales and marketing expenses increased $0.2 million, or 6%, from $4.1 million in the 2005 three-month period to $4.3 million in the 2006 three-month period. The increase was primarily due to an increase of $0.2 million in commission expense resulting from increased sales.
 
Research and Development.  Research and development expenses increased by a nominal amount from the 2005 three-month period to the 2006 three-month period.
 
General and Administrative.  General and administrative expenses decreased $0.1 million, or 5%, from $2.1 million in the 2005 three-month period to $2.0 million in the 2006 three-month period. The decrease primarily resulted from legal fees of $0.6 million incurred in the 2005 three-month period related to an investigation of expenses attributable to former employees offset by equity compensation charges in 2006. The decrease was also offset in part by an increase of $0.5 million in compensation expense in the 2006 three-month period attributable to an increase in the number of general and administrative personnel and expensing of stock options because of the adoption of SFAS 123R in January 2006.
 
Depreciation and Amortization.  Depreciation and amortization expense increased $0.1 million, or 50%, from $0.2 million in the 2005 three-month period to $0.3 million in the 2006 three-month period. The increase was attributable to increased depreciation expense associated with increased capital expenditures, which were applied primarily for product development and other computer-related equipment.
 
Legal Fees and Settlement Costs.  Legal fees and settlement costs decreased $0.4 million, or 100%, from $0.4 million in the 2005 three-month period to $0.0 million in the 2006 three-month period. This decrease is attributable to the settlement in December 2005 of the legal proceeding between us and a provider of information storage systems regarding certain intellectual property rights.
 
Interest Income
 
Interest income increased $0.1 million from $0.0 million in the 2005 three-month period to $0.1 million in the 2006 three-month period. The increase is attributable to higher cash balances in our deposit accounts and an increase in related interest rates.
 
Income Tax (Expense) Benefit
 
We incurred a nominal tax expense for the 2006 three-month period, which represented an effective tax rate of less than 1%, and no tax expense for the 2005 three-month period. We expect that our effective tax rate will increase in future periods if we are successful in expanding our profitable operations in states where we do not have net operating loss carryforwards available. As of March 31, 2006, we have approximately $68.0 million in net operating loss carryforwards. As a result, we currently only pay alternative minimum taxes and state and local income taxes. Our income tax rate may vary based on the utilization of net operating loss carryforwards and the related tax benefits.


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2005 Compared to 2004
 
Revenue
 
Total revenue increased $10.9 million, or 36%, from $29.8 million in 2004 to $40.7 million for 2005. Of our total revenue in 2005, 93% was attributable to sales to or through our distribution partners, which was an increase from 90% of our total revenue attributable to sales to or through our distribution partners in 2004. Of our total revenue in 2005, 7% was attributable to direct sales to end users, which was a decrease of 10% of our total revenue attributable to end users in 2004.
 
Software License Revenue.  Software revenue increased $6.3 million, or 31%, from $19.9 million in 2004 to $26.2 million in 2005. Software revenue represented 67% of our total revenue in 2004 and 64% of our total revenue in 2005. The increase in software revenue was primarily the result of broader demand for, and acceptance of, our software applications and increased revenue from our expanding base of existing customers.
 
Maintenance and Professional Services Revenue.  Maintenance and professional services revenue increased $4.6 million, or 46%, from $9.9 million in 2004 to $14.5 million in 2005. Maintenance and professional services revenue represented 33% of our total revenue in 2004 and 36% of our total revenue in 2005. Increased maintenance revenue generated by maintenance agreements contributed $3.7 million to the increase in maintenance and professional services revenue as a result of services purchased by new software customers and the renewal of existing maintenance agreements by existing software customers. In addition, increased revenue from professional services contributed $0.9 million to the total increase in maintenance and professional services revenue as a result of increased software sales.
 
Cost of Revenue
 
Total cost of revenue increased $0.1 million, or 3%, from $4.3 million in 2004 to $4.4 million in 2005. Total cost of revenue represented 13% of our total revenue in 2004 and 11% of our total revenue in 2005.
 
Cost of services revenue increased $0.7 million, or 18%, from $3.7 million in 2004 to $4.4 million in 2005. Cost of services revenue represented 37% of our services revenue in 2004 and 30% of our services revenue in 2005. The increase in total cost of revenue and cost of services revenue was primarily the result of higher employee compensation of $0.7 million resulting from an increase in the number of our maintenance and professional services personnel.
 
Operating Expenses
 
Sales and Marketing.  Sales and marketing expenses increased $1.0 million, or 6%, from $16.2 million in 2004 to $17.2 million in 2005. The increase was primarily due to an increase of $1.2 million in commission expense resulting from increased sales, which was offset in part by a decrease of $0.2 million in employee compensation resulting from a decrease in the number of sales and marketing personnel.
 
Research and Development.  Research and development expenses increased $1.0 million, or 12%, from $8.7 million in 2004 to $9.7 million in 2005. The increase was primarily due to an increase in employee compensation resulting from an increase in the number of our research and development personnel.
 
General and Administrative.  General and administrative expenses increased $1.1 million, or 19%, from $5.6 million in 2004 to $6.7 million in 2005. The increase primarily reflected increased legal fees of $0.5 million related to an investigation of expenses attributable to former employees and increased compensation expense attributable to an increase in the number of general and administrative personnel.
 
Depreciation and Amortization.  Depreciation and amortization expense increased $0.3 million, or 53%, from $0.5 million in 2004 to $0.8 million in 2005. The increase was attributable to increased depreciation expense associated with increased capital expenses, which were applied primarily for product development and other computer-related equipment.


38


 

Legal Fees and Settlement Costs.  Legal fees and settlement costs increased $3.9 million, or 223%, from $1.8 million in 2004 to $5.7 million in 2005. This increase is the result of our agreeing in December 2005 to a payment of $3.8 million in connection with the settlement of a legal proceeding between us and a provider of information storage systems regarding certain intellectual property rights.
 
Interest Expense
 
Interest expense decreased $0.8 million, from $0.8 million in 2004 to $0.0 million in 2005. The decrease was primarily attributable to an interest charge of $0.5 million related to the conversion of $2.0 million of convertible notes to shares of our Series C convertible preferred stock in October 2004.
 
Interest Income
 
Interest income increased to $0.1 million in 2005 as a result of higher cash balances in our deposit accounts and an increase in related interest rates.
 
2004 Compared to 2003
 
Revenue
 
Total revenue increased $5.9 million, or 25%, from $23.9 million in 2003 to $29.8 million in 2004. Of our total revenue in 2004, 90% was attributable to sales to or through our distribution partners, which was a decrease from 91% of our total revenue attributable to sales to or through our distribution partners in 2003. Of our total revenue in 2004, 10% was attributable to direct sales to end users, which was an increase from 9% of our total revenue attributable to end users in 2003.
 
Software License Revenue.  Software revenue increased $3.6 million, or 22%, from $16.3 million in 2003 to $19.9 million in 2004. Software revenue represented 68% of our total revenue in 2003 and 67% of our total revenue in 2004. The increase in software revenue was primarily the result of broader demand for, and acceptance of, our software applications and increased revenue from our expanding base of existing customers.
 
Maintenance and Professional Services Revenue.  Maintenance and professional services revenue increased $2.2 million, or 29%, from $7.7 million in 2003 to $9.9 million in 2004. Maintenance and professional services revenue represented 32% of our total revenue in 2003 and 33% of our total revenue in 2004. Increased maintenance revenue generated by maintenance agreements contributed $2.9 million to the increase in services revenue as a result of services purchased by new software customers and the renewal of existing maintenance agreements by existing software customers.
 
Cost of Revenue
 
Total cost of revenue decreased $0.2 million, or 6%, from $4.5 million in 2003 to $4.3 million in 2004. Total cost of revenue represented 19% of our total revenue in 2003 and 13% of our total revenue in 2004.
 
Cost of services revenue increased $0.6 million, or 19%, from $3.1 million in 2003 to $3.7 million in 2004. Cost of services revenue represented 41% of our total services revenue in 2003 and 37% of our total services revenue in 2004. The increase in total cost of revenue and cost of services revenue was primarily the result of higher employee compensation of $0.5 million resulting from an increase in the number of our maintenance and professional services personnel. The increase in total cost of revenue was offset in part by a decreased in cost of software revenue of $0.1 million as a result of decreased distribution costs and improved pricing for manuals and printing.
 
Operating Expenses
 
Sales and Marketing.  Sales and marketing expenses increased $2.5 million, or 19%, from $13.7 million in 2003 to $16.2 million in 2004. The increase was primarily attributable to an increase of $1.5 million in commission expense resulting from increased sales and an increase of $1.5 million in marketing expenses to promote brand awareness through print and web-based advertising and to customize our web site.


39


 

Research and Development.  Research and development expenses increased $2.3 million, or 37%, from $6.4 million in 2003 to $8.7 million in 2004. The increase was primarily due to an increase in employee compensation expenses of $2.3 million resulting from an increase in the number of our research and development personnel.
 
General and Administrative.  General and administrative expenses increased $0.4 million, or 8%, from $5.3 million in 2003 to $5.7 million in 2004. The increase was primarily attributable to an increase in employee compensation expenses of $0.3 million related to an increase in the number of general and administrative personnel.
 
Depreciation and Amortization.  Depreciation and amortization expense decreased $1.1 million, or 67%, from $1.6 million in 2003 to $0.5 million in 2004. The decrease reflects the full depreciation of some of the fixed assets in our development laboratory.
 
Legal Fees and Settlement Costs.  Legal fees and settlement costs increased $1.6 million, or 778%, from $0.2 million in 2003 to $1.8 million in 2004. This increase is due to an increase in legal fees and expenses incurred in 2004 in connection with the legal proceeding between us and a provider of information storage systems regarding certain intellectual property rights, which was settled in December 2005.
 
Interest Expense
 
Interest expense increased $0.5 million, from $0.3 million in 2003 to $0.8 million in 2004. The increase was primarily attributable to an interest charge of $0.5 million related to the conversion of $2.0 million of convertible notes to shares of our Series C convertible preferred stock in October 2004, which was offset in part by lower interest expense related to our line of credit.
 
Critical Accounting Policies
 
In presenting our financial statements in conformity with accounting principles generally accepted in the United States, we are required to make estimates and judgments that affect the amounts reported in our financial statements. Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We formulate these estimates and assumptions based on historical experience and on various other matters that we believe to be reasonable and appropriate. Actual results may differ significantly from these estimates. Of our significant accounting policies described in Note A to the historical financial statements included elsewhere in this prospectus, we believe that the following policies may involve a higher degree of judgment and complexity.
 
Revenue Recognition
 
We derive revenue from two primary sources or elements: software licenses and services. Services include customer support, consulting, installation services and training. A typical sales arrangement includes both of these elements. We apply the provisions of Statement of Position, or SOP, 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and related interpretations to all transactions to determine the recognition of revenue.
 
For software arrangements involving multiple elements, we recognize revenue using the residual method as described in SOP 98-9. Under the residual method, we allocate and defer revenue for the undelivered elements based on relative fair value and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. The determination of fair value of the undelivered elements in multiple element arrangements is based on the price charged when such elements are sold separately, which is commonly referred to as vendor-specific objective-evidence, or VSOE.
 
Our software licenses typically provide for a perpetual right to use our software and are sold on a per copy basis. We recognize software revenue through direct sales channels and resellers upon receipt of a purchase order or other persuasive evidence and when all other basic revenue recognition criteria are met


40


 

as described below. Revenue from software licenses sold through an original equipment manufacturer partner is recognized upon the receipt of a royalty report.
 
Services revenue includes revenue from customer support and other professional services. Customer support includes software updates (including unspecified product upgrades and enhancements) on a when-and-if-available basis, telephone support and bug fixes or patches. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year. To determine the price for the customer support element when sold separately, we use stated renewal rates as established VSOE.
 
Other professional services such as consulting and installation services provided by our are not essential to the functionality of the software and can also be performed by the customer or a third party. Revenues from consulting and installation services are recognized when the services are completed. Training fees are recognized after the training course has been provided. Based on our analysis of such other professional services transactions sold on a stand-alone basis, we establish VSOE for such other professional services when sold in connection with a multiple-element software arrangement.
 
We have analyzed all of the undelivered elements included in our multiple-element arrangements and determined that VSOE of fair value exists to allocate revenues to services. Accordingly, assuming all basic revenue recognition criteria are met, software revenue is recognized upon delivery of the software license using the residual method in accordance with SOP 98-9.
 
We consider the four basic revenue recognition criteria for each of the elements as follows:
 
Persuasive evidence of an arrangement with the customer exists.  Our customary practice is to require a purchase order and, in some cases, a written contract signed by both the customer and us, or other persuasive evidence that an arrangement exists prior to recognizing revenue on an arrangement.
 
Delivery or performance has occurred.  Our software applications are usually physically delivered to customers with standard transfer terms such as FOB shipping point. Software and/or software license keys for add-on orders or software updates are typically delivered via email. Services revenue is recognized when the services are completed, except for customer support, which is recognized ratably over the term of the customer support agreement, which is typically one year.
 
Vendor’s fee is fixed or determinable.  The fee customers pay for software applications, customer support and other professional services is negotiated at the outset of an arrangement. The fees are therefore considered to be fixed or determinable at the inception of the arrangement.
 
Collection is probable.  Probability of collection is assessed on a customer-by-customer basis. Each new customer undergoes a credit review process to evaluate its financial position and ability to pay. If the Company determines from the outset of an arrangement that collection is not probable based upon the review process, revenue is recognized on a cash-collected basis.
 
Our arrangements do not generally include acceptance clauses. However, if an arrangement does include an acceptance clause, revenue for such an arrangement is deferred and recognized upon acceptance. Acceptance occurs upon the earliest of receipt of a written customer acceptance, waiver of customer acceptance or expiration of the acceptance period.
 
Stock-Based Compensation
 
Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation cost for stock options generally is measured as the excess, if any, of the estimated fair value of our stock over the amount an employee must pay to acquire the stock on the date that both the exercise price and the number of shares to be acquired pursuant to the option are fixed. We adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based


41


 

Compensation — Transition and Disclosure,” which was released in December 2002 as an amendment to SFAS No. 123.
 
In December 2004, the Financial Accounting Standards Board, referred to as FASB, issued SFAS No. 123(R), which revised SFAS No. 123 and supersedes the Accounting Principles Board, referred to as APB, Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) focuses primarily on transactions in which an entity obtains employee services in exchange for share-based payments. Under SFAS 123(R), a public entity generally is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, with such cost recognized over the applicable vesting period. In addition, SFAS 123(R) requires an entity to provide certain disclosures in order to assist in understanding the nature of share-based payment transactions and the effects of those transactions on the financial statements. The provisions of SFAS No. 123(R) are required to be applied as of the beginning of the first interim or annual reporting period of the entity’s first fiscal year that begins after June 15, 2005.
 
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R, “Share-Based Payment,” using the prospective transition method, which requires us to apply its provisions only to awards granted, modified, repurchased or cancelled after the effective date. Under this transition method, stock-based compensation expense recognized beginning January 1, 2006 is based on the following: (a) the grant-date fair value of stock option awards granted or modified after January 1, 2006 and (b) the balance of deferred stock-based compensation related to stock option awards granted prior to January 1, 2006 for which the requisite service had not been provided based on the grant date fair value as calculated under SFAS 123. Results for prior periods have not been restated.
 
As a result of adopting SFAS No. 123R on January 1, 2006, in the three months ended March 31, 2006 we recognized compensation expense of $25,000 which is included primarily in general and administrative expense. The grant date fair value of options not yet recognized at March 31, 2006 aggregated $1.3 million. Our income before provision for income taxes and net income for the three months ended March 31, 2006 are each $25,000 less than if we had continued to account for stock-based compensation under APB Opinion No. 25. Basic and diluted net loss per share for the three months ended March 31, 2006 would not have changed if we had not adopted SFAS No. 123R.
 
We account for stock option grants to non-employees in accordance with SFAS No. 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, which require that the fair value of these instruments be recognized as an expense over the period in which the related services are rendered.
 
Income Taxes
 
As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We record this amount as a provision or benefit for taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, and assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. As of December 31, 2005, we had deferred tax assets of approximately $28 million, which were primarily related to federal and state net operating loss carryforwards and federal and state research tax credit carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent that we believe recovery is not likely, we establish a valuation allowance. To the extent that we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in our consolidated statement of operations.
 
Due to the uncertainty of future profitability, we have recorded a valuation allowance equal to the $28 million of deferred tax assets. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. The valuation allowance is based on our estimates of taxable income by


42


 

jurisdiction and the period over which our deferred tax assets will be recoverable. If our actual results differ from these estimates, our provision for income taxes could be materially impacted.
 
Software Development Costs
 
In accordance with SFAS No. 86, we capitalize certain costs associated with the development of our software. Such costs are amortized at the greater of (i) the percentage of sales to date compared to total estimated sales or (ii) amortized using the straight-line method over the software’s estimated useful lives. We periodically evaluate the recoverability of capitalized software development costs and write-downs are taken if required. Costs incurred to develop software programs prior to the achievement of technological feasibility are expensed as incurred. Our current process for developing software is essentially completed concurrently with the establishment of technological feasibility and therefore no software development costs have been capitalized for the years ended December 31, 2005, 2004 and the three months ended March 31, 2006.
 
Liquidity and Capital Resources
 
Overview
 
During the development stages of our business, we incurred significant losses from operating activities. Since the three months ended June 30, 2005, however, our operations have generated sufficient cash flow to meet substantially all of the cash requirements of our business, including our operating, capital and other cash requirements. Our ability to sustain a level of positive cash flow from operations that is sufficient to continue to meet all of our future operating, capital and other cash requirements is subject to the risks associated with our business, including those described under “Risk Factors,” and to changes in our business plan, capital structure and other events.
 
From the start of our operations in 1991 until the three months ended June 30, 2005, we financed our operations primarily through the issuance of preferred stock and common stock. Since the three months ended June 30, 2005, we have primarily financed our operations through internally generated cash flows. As of March 31, 2006, we had cash and cash equivalents of $5.8 million and accounts receivable of $7.2 million.
 
In January 2006, in connection with the settlement of an intellectual property dispute reached in December 2005, we paid $3.8 million to another company. We also agreed to make future payments of $0.5 million in each of January 2007, 2008, 2009 and 2010, which we collateralised by a $2.0 million letter of credit to that company. The letter of credit will be drawn down automatically in increments of $0.5 million at the time of each payment requirement. Our future obligations under the settlement will be reduced on a dollar-for-dollar basis to the extent that we purchase or resell the other company’s products.
 
In May 2006, we paid $1.1 million to the former stockholders of Double-Take EMEA, which was our primary distributor in Europe, the Middle East and Africa as the initial payment for the acquisition of that company. The remaining portion of the total purchase price, which we estimate will range between $10.0 million and $12.0 million, will be payable in monthly increments based upon a specified percentage of the intercompany amounts paid by Double-Take EMEA to us each month in respect of purchases under our intercompany distribution agreement with Double-Take EMEA through December 31, 2007. A portion of our earn-out payments are held in escrow through December 31, 2007, to satisfy claims against the selling shareholders that we may have from time to time as a result of breaches of representations, warranties or covenants.
 
In May 2006, we entered into an amendment to our credit facility with Silicon Valley Bank that extended the term of the facility to April 30, 2007. Under the terms of the amended credit facility, our maximum borrowings are the lesser of 75% of eligible receivables or $4.75 million, including up to $2.5 million available for letters of credit, foreign exchange contracts and cash management services. At March 31, 2006, our maximum borrowings available under this facility were $4.75 million, including our $2.0 million letter of credit relating to our settled legal proceeding. We had no borrowings under this line of credit as of March 31, 2006. The rate of interest for this facility is 0.75% above the prime rate. The facility is collateralised by all of our assets, excluding our intellectual property.


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Our credit facility contains a number of restrictions that will limit our ability, among other things, to do the following: borrow money; enter into transactions outside the ordinary course of business; pledge our accounts receivable, inventory, intellectual property and most of our other assets as security in other borrowings or transactions; pay dividends on stock, redeem or acquire any of our securities; sell certain assets; make certain investments; guaranty obligations of third-parties; undergo a merger or consolidation; or engage in any business other than the business in which we are currently engaged or business that is reasonably related to that business. In addition, all of our assets other than our intellectual property are pledged to collateralised borrowing under our credit facility, and our credit facility has financial covenants related to our earnings and cash balances. At the end of each calendar quarter our earnings for that quarter before interest, income tax expense and, to the extent deducted in the calculation of earnings, depreciation expense and amortization expense, must have exceeded our capital expenditures. We also must maintain a ratio of at least 1.5 to 1 for the sum of our cash, cash equivalents and domestic and Canadian receivables to the sum of our liabilities to Silicon Valley Bank and other liabilities due within one year. Failure to satisfy any of these financial covenants would constitute an event of default under the credit facility, without regard to whether we have the ability to meet our obligations.
 
Sources and Uses of Cash
 
For the three months ended March 31, 2006, cash used in operating activities was $2.1 million. We used cash in investing activities in the amount of $0.4 million and a nominal amount of cash was generated from financing activities. Our net decrease in cash and cash equivalents from December 31, 2005 to March 31, 2006 was $2.6 million. We currently expect to experience positive cash flow from operations in future periods.
 
The following table sets forth cash flow data for the periods indicated:
 
                                         
          Three Months
 
    Year ended December 31,     ended March 31,  
    2005     2004     2003     2006     2005  
    (in thousands)  
 
Cash flow data:
                                       
Net cash provided by (used in) operating activities
  $ 3,605     $ (464 )   $ (4,351 )   $ (2,145 )   $ (308 )
Cash used by investing activities
    (1,096 )     (1,218 )     (497 )     (448 )     (208 )
Net cash provided by financing activities
    1       6,837       1,680       2       0  
                                         
Net increase (decrease) in cash and equivalents
    2,510       5,155       (3,168 )     (2,591 )     (516 )
Cash and cash equivalents, beginning of period
    5,831       676       3,844       8,341       5,831  
                                         
Cash and equivalents, end of period
  $ 8,341     $ 5,831     $ 676     $ 5,750     $ 5,315  
                                         


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Cash Requirements
 
We have various contractual obligations and commercial commitments. The following table sets forth our future contractual obligations and commercial commitments as of December 31, 2005:
 
                                         
    Payments Due by Period  
          Less Than
    1 to 3
    3 to 5
       
    Total     1 Year     Years     Years     5+ Years  
    (in thousands)  
 
Contractual obligations
                                       
As of December 31, 2005
                                       
Capital (finance) lease obligations
  $ 36     $ 36                    
Operating lease obligations
    7,309       1,552     $ 2,940     $ 2,529     $ 288  
Purchase obligations
    2,000       500       1,000       500          
                                         
Total
  $ 9,345     $ 2,088     $ 3,940     $ 3,029     $ 288  
 
We have entered into various non-cancelable operating lease agreements, with expiration dates through 2011, for office space and computer equipment. Some of these leases have free or escalating rent payment provisions. We recognize rent expense under these leases on a straight-line basis. Our purchase obligations as of December 31, 2005 represent non-cancelable contractual obligations for equipment and services. The foregoing table does not reflect any contractual obligations and commercial commitments that we entered into after December 31, 2005, including our obligations to make additional acquisition-related payments to Double-Take EMEA on a monthly basis through December 31, 2007.
 
Pursuant to the terms of our Series B convertible preferred stock, we have a mandatory payment obligation of approximately $10.2 million to the holders of our Series B convertible preferred stock in connection with the conversion of the outstanding shares of our Series B convertible preferred stock immediately before the completion of this offering.
 
Given our current cash and cash equivalents, our accounts receivable, the expected net proceeds from this offering, available borrowings under our revolving loan agreement and our expectation of continued positive cash flow from operations, we believe that we will have sufficient liquidity to fund our business and meet our contractual obligations over a period beyond the next 12 months. However, we may need to raise additional funds in the future, including for acquisitions or investments in complementary businesses or technologies or if we experience operating losses that exceed our expectations. In the event that additional financing is required, we may not be able to obtain it on acceptable terms or at all. Additional sources may include equity and debt financing and other financing arrangements. If we raise additional funds through the issuance of equity or convertible securities, our stockholders may experience dilution. We may not be able to generate sufficient cash flow from operations according to our planned schedule, or to obtain any additional financing arrangements we may require or seek on terms acceptable to us. Any inability by us to generate or obtain the sufficient funds that we may require could limit our ability to increase our revenue or to enhance our profitability.
 
Off-Balance Sheet Arrangements
 
As of March 31, 2006, other than our operating leases described above under “— Liquidity and Capital Resources — Cash Requirements,” we do not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.
 
Qualitative and Quantitative Disclosures About Market Risk
 
We do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.


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Historically, our exposure to foreign currency exchange rates was limited as our international sales were denominated in the United States dollar. As a result of our acquisition of Double-Take EMEA in May 2006, we now have international sales that are denominated in foreign currencies, and we face exposure to adverse movements in foreign currency exchange rates. Depending on the amount of our revenue generated from Double-Take EMEA, adverse movement in foreign currency exchange rates could have a material adverse impact on our financial results. Our primary exposures are to fluctuations in exchange rates for the United States dollar versus the Euro and to a lesser extent, the United States dollar versus the British Pound. Changes in currency exchange rates could adversely affect our reported revenue and could require us to reduce our prices to remain competitive in foreign markets, which could also materially adversely affect our results of operations. We have not historically hedged exposure to changes in foreign currency exchange rates and, as a result, we could incur unanticipated gains or losses.
 
Exchange Rate Information
 
The consolidated financial statements of Double-Take EMEA that are set forth in this prospectus are denominated in Euros. The table below shows the average noon buying rate of a Euro from 2004 through March 31, 2006 and the actual noon buying rate as of December 31, 2004, December 31, 2005 and March 31, 2006. As used in this prospectus, the term “noon buying rate” refers to the rate of exchange for the Euro, expressed in U.S. dollars per Euro, as announced by the Federal Reserve Bank of New York for customs purposes as the rate in The City of New York for cable transfers in foreign currencies.
 
         
Period
  Average Rate(1)  
 
Year ended December 31, 2004
  $ 1.2478  
Year ended December 31, 2005
  $ 1.2400  
Three Months ended March 31, 2006
  $ 1.2033  
     
         
         
As of
 
Actual Rate
 
 
December 31, 2004
  $ 1.3538  
December 31, 2005
  $ 1.1842  
March 31, 2006
  $ 1.2139  
 
 
(1)  The average of the noon buying rate for a Euro on the last business day of each month during the period.


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BUSINESS
 
Overview
 
Double-Take Software develops, sells and supports affordable software that reduces downtime and protects data for business-critical systems. We believe that we are the leading supplier of replication software for Microsoft server environments and that our business is distinguished by our focus on software license sales, our productive distribution network and our efficient services infrastructure. Organizations of all sizes increasingly rely on application systems and stored electronic data to conduct business, new regulations have increased data protection requirements for businesses in many industries, and threats of business disruptions from events such as 9/11 and Hurricane Katrina are causing more organizations to re-examine their data and server recovery strategies. Our software responds to these needs by continuously replicating changes made to application data on a primary operating server to a duplicate server located on- or off-site. Because the duplicate server can commence operating in place of the primary server at almost any time, our software facilitates rapid failover and application recovery in the event of a disaster or other service interruption.
 
Our success has been driven in large part by our software technology, which was first released in 1995 and has been enhanced by years of customer feedback. Residing on the server operating system, our software continuously monitors and captures file system activity. Intercepting file system changes enables our software to replicate only those changes that are being written to files. Our hardware- and application-independent software efficiently protects data created by any application on almost any type or brand of disk storage on any brand of server running Windows file systems.
 
We sell our software through multiple channels, including a global distribution network that is supported by an experienced direct sales force. Our distribution partners include leading server manufacturers, such as Dell Computer Corporation and Hewlett-Packard Company, leading distributors, such as Bell Microproducts Inc. and Tech Data Corporation, and over 120 value-added resellers that we believe are generally well-connected with small- and medium-sized enterprises. Our direct sales force augments the revenue generated by our distribution partners and actively supports them in their third-party sales efforts.
 
Our broad distribution network, coupled with affordable price points, feature-rich proven software, modest implementation costs and dependable support, makes our software accessible and scalable from small enterprises of a dozen people to Fortune 500 companies. As of March 31, 2006, our customer base of more than 10,000 organizations included over half of the Fortune 500 companies, as well as a large number of law firms, financial institutions, hospitals, school districts and government entities. We believe that we have a highly satisfied customer base. Many of our customers provide references that help us to generate new sales opportunities and to shorten sales cycles. Our sales personnel often enlist the assistance of satisfied customers to recommend our software to potential customers in similar industries or that have similar applications or server configurations. The breadth and diversity of our customers frequently allows us to refer to a similar configuration when making a new sale. The satisfaction of our customer base also contributes to reduced support costs.
 
Market Opportunity
 
The storage replication market is large and growing. In 2006, International Data Corp., or IDC, a market research firm, estimated that the worldwide storage replication software market would grow from $2.1 billion in sales in 2005 to $4.2 billion in 2010, representing a compound annual growth rate of approximately 15%. IDC further estimated in its Worldwide Storage Replication Software 2006-2010 Forecast, Mar 2006 Doc #200998, that sales in the Windows server sub-segment of this market, which our software currently addresses, would increase at a compound annual growth rate of approximately 25%, from $310 million in 2005 to $940 million in 2010. In addition, we believe that our software is particularly attractive to businesses in the small-and medium-sized enterprise information technology market, which we believe has been growing at a faster rate than the large enterprise information technology market.


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Critical Need for Data and Application Availability.  The importance of recovery solutions for files, data and applications has grown as organizations increase their reliance on digital data for their businesses and critical processes. For many organizations, it is no longer possible to conduct business without access to key applications, such as email and other enterprise applications, and the information they provide. As a result, server, storage or site failures have the capacity to bring business operations to a halt until the server, application and up-to-date data are recovered and made available to users. This downtime and any associated data loss can have a high, perhaps unacceptable, cost, including lost revenue, decreased productivity and unsatisfactory customer relations. Problems with information availability and reliability can be extremely visible and potentially a competitive differentiator for many businesses, particularly for those businesses that share information with their partners and customers. Recent disasters, including Hurricane Katrina and 9/11, created critical data availability problems for many businesses and increased the awareness of the need for prompt and reliable data and application recovery. We believe that these factors are causing organizations to re-evaluate the amount of downtime and data loss that they are willing or able to tolerate, as well as the type of disruptions they must anticipate.
 
Limitations of Traditional Data Protection Systems.  We believe that many organizations using traditional data protection systems continue to face critical data recovery problems. Recovery of data, files and applications historically has been a time-consuming and error-prone process in which data is stored to tape backup or other media and then retrieved in the event of a system failure. It can take hours or even days to resume operations. Before user access to applications and data can be restored, administrators must rebuild existing servers or acquire replacement servers, re-install and configure the operating systems, applications and the remainder of the network computing environment and, finally, reload the data from the backup tape or off-site servers. We believe that organizations can no longer afford to wait for days until off-site servers or backup tapes are made available. Even where a continuously updated, off-site backup is available, time delays in the recovery process keep organizations from functioning efficiently when the backup is needed.
 
Traditional solutions that protect data only on a scheduled or periodic basis leave critical data unprotected between cycles and put significant loads on servers when they are running. Other solutions designed to assure that sufficient backup of data occurs require organizations to procure expensive, proprietary hardware. Server and storage consolidation and infrastructure virtualization can save organizations money on acquisition and management costs but magnify these availability challenges, as a single failure can impact an even greater number of users and information technology services.
 
Limitations of More Recent Solutions.  To address the problems associated with traditional data protection systems, enterprises have looked to a number of potential solutions, such as server clustering and hardware disk mirroring. These solutions, in turn, have resulted in a number of their own limitations, including the following:
 
  •  Complexity.  The lack of complete, integrated solutions have forced some enterprises to try to develop specialized skills to integrate and manage piecemeal solutions. For example, some organizations have explored complex server clustering solutions to reduce downtime caused by application and server hardware failure, but have often found those solutions only provided redundancy for server hardware and did not protect against storage or site level disasters. These solutions generally are customized to a specific server environment and require complex alterations before they can be applied in other environments.
 
  •  Cost.  Many organizations have considered or tried existing solutions that are overly expensive as a result of their complexity or because of costly technologies. For example, some organizations have developed proprietary hardware disk mirroring solutions that require costly dedicated high speed links to provide off-site data redundancy, but have found that those solutions generally only protect the stored data and require them to recover servers’ operating systems and applications separately. This generally results in significant downtime in the event of a disaster or other service interruption, as well as additional expenditures to recover the affected operating systems and applications.


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  •  Inflexibility and Inability to Scale.  Many available solutions are not flexible, meaning they are designed to work with a limited number of applications or storage architectures. Similarly, many available solutions are not scalable, meaning that they cannot efficiently capture changes, optimize data transmissions or distinguish files and changes that need to be replicated from those that do not contain important information.
 
Although some of these recent solutions may be combined to address most or all of an organization’s requirements, the resulting architecture often is complex to manage, expensive and may still leave significant gaps in protection.
 
We believe that companies will continue to experience these problems while they also experience exponential growth in the volume of business-critical data. As a result, we expect that the market opportunity for a cost-effective, scalable and flexible solution for replicating this data is significant and will continue to expand.
 
Double-Take Advantages
 
By combining efficient, continuous, remote and local data replication with the ability to monitor and quickly switch critical applications to alternate servers, we believe that we have designed our software to provide an affordable, easy to implement and scalable approach to reduce downtime and enhance data recovery for business-critical applications.
 
Our software provides organizations ranging from small enterprises to Fortune 500 companies with data and system recovery solutions that we believe meet their needs by providing the following:
 
  •  Fast and Reliable Data Recovery.  Our software provides fast recovery for the server and application itself, creating a server ready to take over substantially on command and provide rapid access or failover to the replicated data to meet the new availability requirements of business-critical applications, such as Microsoft Exchange Server, SQL Server, SharePoint Server and Oracle Database. This avoids the time required to rebuild or mount a replicated disk data volume as required by some other approaches.
 
  •  Simple and Affordable Software.  Our software can be easily installed on new or existing file or application servers, can work with most existing storage and network infrastructure and is hardware and application independent. This makes it possible to install and begin protecting an existing server easily and quickly and makes the solution more cost effective than some other approaches. Once installed, our application recovery tools automate failover and user redirection. In addition to being easy to deploy, with a median selling price of approximately $4,000, our software is affordable for a wide variety of organizations.
 
  •  Flexible and Scalable Software.  Our software offers flexibility and scalability. Flexibility means software that is optimized to work with a variety of key applications within the Windows server environment and almost any type of storage architecture from almost any mix of vendors. Scalability means not only efficiently capturing changes and optimizing data transmission, but being able to control which files and which changes need to be replicated, rather than blindly copying disk block changes. Our software offers enterprise solutions that are easily deployed and centrally managed across any number of machines, including across “virtual machines” partitioned with software such as VMware.
 
  •  Continuous Backup of Data.  Our software minimizes or eliminates data loss by continuously and efficiently replicating data changes to one or more protected, local or remote locations. Even open applications and files can be mirrored and changes replicated, which enables our software to protect 24x7 applications, such as email and databases, without shutting down the application or affecting users.
 
  •  Efficient, Optimized Protection.  Software running on the server operating system has the advantage of capturing the exact changes an application is generating before those changes are abstracted into generic “disk blocks.” This allows for “intelligent protection” — our software can distinguish between a new email being sent to an Exchange mailbox that needs to be immediately


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  replicated versus a temporary file that does not need to be protected. Because the cost of network bandwidth to transmit changes to a remote site can be a measurable part of the ongoing solution cost, efficiently transmitting the minimum amount of data to maintain protection is a significant architectural advantage.
 
  •  Significant Expertise and Experience.  Our software incorporates our years of experience protecting critical Windows servers and applications like Exchange Server, SQL Server, SharePoint Server and Oracle Database. Although market dynamics have rewarded us for focusing on the Windows server environment to date, we anticipate that we can apply our technology in other server environments to the extent market dynamics shift.
 
Our Strategy
 
Our goal is to provide affordable software that will reduce our customers’ downtime for business-critical systems to as close to zero as possible and offer effective protection and recovery for less critical systems. In striving for this goal, we seek to be the leading provider of software for application availability and data protection. We are pursuing the following key initiatives:
 
  •  Expand our Customer Base within our Current Markets.  We plan to gain additional customers in the markets we currently serve by expanding our distribution network to reach more customers and by leveraging our existing customer base. We believe our customers are very satisfied and will continue to provide references across multiple industries, multiple configurations and multiple applications. In addition, we plan to continue to offer enhancements to our current software to broaden its appeal.
 
  •  Cross-sell Existing and New Software to our Customer Base.  We plan to sell software for additional applications to our current customers and believe that many of our existing customers will acquire more licenses to the software that they are already using. We also believe that a large majority of our customers will renew in the future because of their satisfaction with our software and customer support. We plan to offer new software that complements our existing software and applications and achieves additional customer objectives. For example, in February 2006, we introduced a new software line for virtual servers and have already sold it to some existing customers. We expect that our new offerings primarily will be developed internally, but we anticipate that we may in some instances hire third-party developers to develop software on our behalf or acquire new offerings through strategic transactions.
 
  •  Enter New Markets.  We plan to enter into new markets and grow our presence in markets where we currently have a small presence. We expect to do this through expansion of our channel by creating or expanding relationships with partners that serve different markets. We also plan to continue to grow our presence in the larger enterprise market by leveraging our supportive customer base. We believe that small- and medium-sized enterprises frequently lead in the adoption of cost effective technology solutions out of necessity and that large institutions follow by replacing more expensive solutions with cost effective solutions. We have seen organizations in the larger enterprise market adopt our software, and we expect this trend to continue.
 
  •  Expand Globally.  We believe that the market potential outside the United States is at least as large as the market within and offers us significant growth potential. We plan to extend our global reach though the expansion of our direct and channel sales efforts and through strategic acquisitions. For example, we recently acquired our main European distributor, Sunbelt System Software S.A.S., which is now known as Double-Take Software S.A.S., or Double-Take EMEA, with offices in France, the United Kingdom and Belgium. We also work closely with Hewlett-Packard, which has a strong international presence and is our largest OEM, and we plan to continue our increased focus and sales support on international sales.
 
  •  Continue to Innovate.  We plan to continue to focus on enhancing our existing software and to develop new, innovative software. For example, we recently released a front-end application manager for Microsoft Exchange Server (Double-Take Application Manager) to facilitate the protection of Exchange servers, and we plan to offer additional front-end managers for other


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  applications in the future. We believe that software innovations will also help us to expand our addressable market, and we have software in the development pipeline that we expect will help us to scale up to serve larger entities and to scale down to serve even smaller enterprises. For example, we have recently released software for support of Microsoft’s Small Business Server and have announced a partnership with another company that will allow us to restore whole servers (so-called “Bare Metal Restore”). We also plan to continue to monitor market dynamics and to prepare to apply our technology to other server operating systems to the extent significant market opportunities exist.
 
Our Software and Services
 
Software.  Our software provides continuous protection of data to reduce or eliminate data loss, as well as the ability to recover rapidly the application and server needed to utilize that data through automatic or manually initiated failover. This combination of data protection with high availability failover provides significantly higher levels of availability than solutions that address only data protection or that provide local failover clustering but that do not provide data redundancy or protection across multiple locations.
 
Our software is easily installed on each protected “source” server as well as on each “target” server that will store copies of the protected data and be prepared to take over for the protected server and its applications. This software-based approach provides several important features and benefits:
 
  •  Real-time Byte Level Change Capture.  Our file system filtering technology monitors all file input and output (I/O) to files selected for protection and captures changes as they occur, without the overhead of additional disk reads to compare file content. This approach captures only the bytes written to the file system, rather than full files or disk blocks, and allows Double-Take to replicate any application data, including open files such as databases, messaging systems or other transactional applications. As a result, data can be protected continuously with very little system impact or overhead.
 
  •  Storage Architecture Independence.  Double-Take can replicate to or from almost any storage type supported by the host operating system. Not only can replication occur between storage types such as Fibre Channel or iSCSI Storage Area Networks and directly attached disks, but source and target disks that have completely different geometries or multiple source volumes can be consolidated onto a single large capacity target volume. As a result, customers can use their existing storage systems and even replicate between storage systems of different types. Only solutions that run along with the applications and replicate logical file system structures can provide this level of flexibility and performance.
 
  •  Integrated Application and Server Availability.  Software replicating between servers can easily monitor and failover other functions such as server name, IP addresses or integrated applications between servers. As a result, not only is data protected, but the applications that use that data to provide services to users can be activated quickly and automatically. Double-Take provides application managers a variety of the business-critical applications that companies rely on to run their businesses.
 
  •  Standards-Based IP Networking Support.  Double-Take utilizes standard IP networking for data replication, monitoring and failover, allowing data to be protected and servers to be managed remotely over great distances. In addition to capturing the smallest byte level changes possible, our software is optimized for long-distance, wide-area network communications providing built-in data compression and flow control capabilities, as well as leveraging advanced functionality such as encryption, wide area network optimizations and quality of service controls provided by existing IP infrastructure.


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Double-Take Features and Benefits
 
         
Feature   Description   Customer Benefit
 
         
Continuous, Real-time Data Replication
  File system changes are captured as they are made on the source server(s) and transmitted immediately according to system policies.   Potential for data loss is reduced and sometimes eliminated.
         
Delta File Replication
  Only file changes or ‘‘deltas” (not whole files or disk blocks) are captured and transmitted across the network.   The amount of network bandwidth required to keep a secondary copy of data synchronized is minimized, and data can be replicated to a remote target server across any IP connection.
         
Replicates Open Files
  Even open files can be mirrored and changes replicated almost immediately.   Applications can be protected while they are in use providing increased availability and reducing potential for data loss.
         
Many to One Replication
  Data from many source servers may be replicated to a single target server.   Shares the cost of a target server among many source machines, and allows centralized data protection.
         
Automatic Failover
  Can stand in for multiple servers simultaneously; the target server assumes the IP addresses and names of failed servers and restarts applications.   Users can automatically access data on the target server, reducing down-time associated with a source (production) server failure.
         
File Selection
  Users can define which files are to be replicated at a volume, directory, file and wildcard level. The location of data on the target can also be specified.   Allows exact control of which files are replicated and where they are stored for maximum flexibility.
         
Flow Control
  Automatically queues transactions on the source server if network resources are not available or are restricted by policy.   Runs reliably in spite of network disruptions or peak loads, without severely affecting the performance of the source server.
         
Transmission Limiting
  The amount of bandwidth available for replication, as well as start and stop conditions, may be defined by the network administrator.   Allows replication to share a network link with other applications, preserving bandwidth for other applications.
         
Data Compression
  Data transmitted between the source and target may be compressed, using various industry-standard algorithms.   Allows user to minimize the amount of network bandwidth used to protect data, especially in wide area network configurations.


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Feature   Description   Customer Benefit
 
         
Centralized Enterprise Management
  A graphical management interface is provided which can be run from anywhere on the network and allows the user to control all of the servers running our software in their environment.   Allows user to monitor a large number of servers running our software from a single central location, minimizing management costs.
         
Extensive Reporting/
Verification
  An extensive collection of events, alerts and statistics are made available through standard mechanisms, including SNMP, Log Files and Windows NT/ 2000 Event Viewer/ Performance Monitor.   Prevents silent failures by confirming that your data protection systems are working properly.
 
Software Editions.  Our suite of software has the features and benefits that are described above and is offered in a variety of versions that are aligned to operating system capabilities. Additional versions include those that have been specifically crafted to run within virtual systems and to perform replication only, as well as versions designed to run within Microsoft Cluster Services called GeoCluster. Some versions are also available from OEM partners under different brand names.
 
     
Software Products   Supported Systems
 
Double-Take for Windows — Server Edition Windows Server 2003 Standard Edition, Windows Server 2003 Web Edition and Windows 2000 Server
 
Double-Take for Windows — Advanced Edition Windows Server 2003 Enterprise Edition, Windows 2000 Advanced Server and Windows Powered Appliances
 
Double-Take for Virtual Systems Supports up to five Windows guest operating systems running on a single virtual server host
 
Double-Take for Windows — Datacenter Edition Windows Server 2003 Datacenter Edition and Windows 2000 Datacenter Server
 
Double-Take for Windows — Storage Server Edition (SSE) Windows Storage Server 2003 and Windows Powered NAS devices
 
Double-Take for Windows — Small Business Server Edition Windows Small Business Server 2000 Edition and Windows Small Business Server 2003 Edition
 
GeoCluster for Windows — Advanced Edition Microsoft Cluster Service (MSCS) that runs on Windows Server 2003 Enterprise Edition and Windows 2000 Advanced Server
 
GeoCluster for Windows — Datacenter Edition MSCS that runs on Windows Server 2003 Datacenter Edition and Windows 2000 Datacenter Server
 
Customer Support Services.  We provide comprehensive customer support, which we consider to be both a critical asset and a source of competitive advantage. We have developed our support organization to be a key differentiator for our company and our customers. Unlike the increasing number of software companies that seek to cut costs attributable to customer support, we have chosen to invest in the customer support experience and take pride in our personal interaction with our customers. We view our customer support function as a means to drive renewals, increase licenses with existing customers and acquire new customers. As part of our focus on customer support, we staff our front line support team with senior technicians with the goal of solving customer issues within the first call. We aim to provide an

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exceptional post-sales product experience for each customer. We believe this support effort will be scalable as our customer base continues to grow.
 
Product support is offered on an annual basis and can be either purchased in advance or at annual renewal points based on the date of initial software purchase. We have support centers in London, Paris, Brugge and Indianapolis. In addition to our support organization, primary product support for channel and OEM customers is sometimes provided directly by our partners, and we provide escalated engineering support for those partners when needed.
 
Deployment Services.  We have a professional services organization to help our customers with large scale and complex deployments. These offerings give our customers access to our best-practices and knowledge of the surrounding infrastructure to ensure a clean implementation. However, we do not consider our professional services to be strategic to our overall direction, and we try to design and build our software with the idea that it should be simple to install and operate without the need for extensive training or associated services. For those clients that meet the scale and complexity requirements, our professional services offerings consist of assessment and design services and implementation and deployment services.
 
Training.  We provide a series of training courses. Training is provided both on-site and off-site to fit the wide variety of needs of our customers and partners. The training courses include both instructor-led as well as computer-based class formats.
 
Our Customers
 
As of March 31, 2006, we had more than 10,000 customers in a variety of industries. Our customers use our software for a variety of purposes in terms of the applications they protect and the configuration of their servers. Our customers deploy our software in installations ranging from two servers to several hundred servers. Our customers include Bank of Montreal, the Boston Celtics, Brattleboro Memorial Hospital, Hatch Mott MacDonald, Hershey Entertainment & Resorts Company, infoUSA Inc., McGuireWoods LLP, MidAmerica Bank, Morgan Stanley, Shorenstein Realty Services, L.P., Suffolk University, The E.W. Scripps Company, The Pentagon, The United States Securities and Exchange Commission, United States Department of Defense and the United States Department of State. Our customers include over half of the Fortune 500 companies, 20 of the 25 largest U.S. law firms in the 2006 The American Lawyer AmLaw 100, over 1,000 financial institutions, over 1,100 hospitals and healthcare service providers and over 1,000 school districts and educational institutions.
 
Our Technology
 
Our software is based on flexible and efficient file system replication technology and advanced server and application failover technology. Most client/server applications have not been designed to provide for data redundancy or application failover to a different server or a different geographic location. Consequently, we had to develop solutions outside of standard application frameworks, utilizing different approaches to ensure that business-critical applications can be moved and restarted in different locations in a way that is as fast and transparent to users as possible. Many years of experience across a large installed base have given us a mature base of data protection and availability technologies that we believe represent a significant competitive advantage.
 
We believe that our patented architecture allows our software to be easily adapted to almost any operating system. The software’s functionality is built into the user-mode components (source and target) of the software, which remain largely consistent across operating systems.
 
The driver component is responsible for intercepting file system modifications, determining if the modifications are selected for replication and passing this information to the source component. The driver has been optimized to produce high-throughput with minimal resource requirements and to minimize file system latency to the end user.
 
The source component packages these transactions and transmits them to one or more target machines. The source component queues transactions when the target server or network is either slow or


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unavailable and uses patented compression techniques to minimize the system overhead required for this queuing. The source component also controls transmission and initial mirroring, as well as verification, replication set maintenance and connection management.
 
File system transactions are transmitted to the target machine using standard networking mechanisms to provide interoperability between various operating systems and high-throughput. The target component then receives replication transactions from the source component and applies these transactions to the target file system. The target component is multi-threaded to handle efficiently simultaneous transactions from multiple source servers to multiple target files. The target component also monitors the source server’s health and performs server failover (via name, network address and share/mount point aliasing) when the source is unavailable.
 
Management of our software is supported through various client interfaces, including a Win32 graphical interface, a full-screen text client, and a command-line interface. All client platforms are based on the same set of common application interface commands, and these functions are available to all third-party developers.
 
Our GeoCluster software combines our core replication technology with the application failover capabilities of Microsoft Cluster Services (MSCS). GeoCluster eliminates the need for clustered nodes to share access to the same physical disk, providing data redundancy and allowing cluster nodes to be placed at different locations, providing geographic redundancy for the cluster nodes as well as the data. With GeoCluster, mission critical data is stored on each cluster node’s local drives and then replicated to the other nodes in the cluster using our patented real-time replication. GeoCluster can also provide quorum capability, acting as an arbitrator for the cluster in the event that the cluster nodes are running but cannot communicate.
 
Marketing and Sales
 
We market and sell our software primarily to or through distributors, value-added resellers and OEMs, supported by an inside and field-based direct sales force located in the United States and Europe. Our selling model is based on building a strong distribution network through which customers can purchase the software. To date, we believe that this selling model has created an advantage for us. We currently have more than 130 selling partners within our distribution and value-added reseller program, and we are adding more to this group to meet regional and technology related needs. To support our partners in our sales channels, our sales group has been organized in an overlay format so that our sales teams are working with our partners within any geography to pursue sales jointly.
 
In addition, our distribution partners complement our marketing and sales campaigns through seminars, trade shows and joint advertising. We leverage our customers and distribution partners to provide references and recommendations that we use in our various promotional and sales activities. These partners include Dell Computer Corporation, IBM Corporation, Microsoft Corporation, Hewlett-Packard Company and VMware, Inc.
 
The goal of our marketing effort is to develop sales opportunities by increasing the awareness of our software’s functionality and business need within our target markets and segments. We plan to continue to invest in building greater Double-Take brand recognition in the United States and internationally through expansion of the use of our brand, public relations programs, interactions with industry analysts, trade shows, web search optimization, regional seminars and speaking engagements.
 
In 2005, we received approximately 19% of our total revenue from sales of software and services to Dell Computer Corporation, which is the largest reseller of our software and services, approximately 13% of our total revenue from sales of software and services through Sunbelt Software Distribution, Inc., which is a reseller of our software and services, and approximately 17% of our total revenue from sales to Double-Take EMEA, which we acquired in May 2006 and is a distributor of our software and services primarily in Europe, the Middle East and Africa. No other resellers or distributors and no customer accounted for 10% or more of our total revenue in 2005.


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Competition
 
The markets in which we compete are competitive and rapidly changing. Our primary competitors include EMC (Legato), Neverfail, Symantec (Veritas) and CA, Inc. (XOsoft). All of our competitors offer a variety of data protection and recovery solutions, some of which may offer features that we do not offer or have more attractive pricing.
 
The principal competitive factors in our industry include:
 
  •  technology;
 
  •  price;
 
  •  product functionality and effectiveness;
 
  •  product reliability;
 
  •  product integration;
 
  •  capacity for sales support;
 
  •  scope and quality of customer support;
 
  •  relationships with OEMs; and
 
  •  reputation.
 
In addition to these factors, we also compete with alternative approaches for data protection and recovery. Alternative approaches include the following technologies:
 
  •  Tape Backup.  Tape backup solutions run on a scheduled basis, usually nightly or weekly, backing up all files to tape or scanning for files that have changed since the last backup and copying those files to tape. Full recovery from tape usually requires that the operating system and recovery software first be re-installed and re-configured on identical hardware before the data recovery component can begin. Examples of companies and products in this category include Symantec NetBackup and Backup Exec, IBM Tivoli Storage Manager, CA Brightstor Enterprise Backup, Legato Networker and CommVault Galaxy.
 
  •  Snapshots.  Hardware array based and operating system provided snapshots are tools that can reduce the time for recovering data, applications and servers. Snapshots operate on a disk volume basis by copying disk blocks that are about to be overwritten by changes before allowing new blocks to be written to disk. Because many snapshots are just differences from one point in time to another and not full copies of the volume, they are dependent on the survival of the original volume and exist in the same geographic location as the original volume. Therefore snapshots alone do not provide a complete solution, but can be used in conjunction with continuous data replication solutions like Double-Take to address many of the above limitations. Snapshot functionality is usually specific to a particular operating system volume manager or disk storage array. Examples of companies and products in this category include Microsoft Volume Shadow Copy Service, EMC TimeFinder and Snapview.
 
  •  Clustering.  Server clustering can improve the availability of data by providing one or more additional servers to resume processing in the event of a hardware or software failure. These systems are expensive, requiring matched server hardware and certified shared disk subsystems. In addition, server clusters are generally restricted to very short distances, making offsite disaster protection difficult. Shared disk clustering systems continue to have a single point of failure in the shared disk subsystem. Examples of companies and products in this category include Microsoft Cluster Service, Symantec Cluster Server, Steeleye LifeKeeper and Legato AutoStart.
 
  •  Remote Disk Mirroring.  Disk mirroring is typically implemented as software within a proprietary storage array or as a software driver or appliance between the server and the primary data storage. Changes are captured at the disk block level, with entire blocks of data being mirrored for any size change and any physical changes to the disk such as temporary files or defragmentation causing


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  replication traffic. Typically, an operating system must boot and then “mount” the remotely mirrored drive in order to make the data accessible, which requires the operating system and applications to be installed and correctly configured to use the replicated volume, as well as extensive integrity checks. Examples of companies and products in this category include EMC SRDF and Mirrorview, Symantec Volume Replicator, FalconStorIPStor, DataCore SANmelody and Hitachi TrueCopy.
 
  •  Continuous Data Protection (CDP).  Although we have been providing continuous protection of data in our software for over 10 years, some new vendors have attempted to redefine this term to refer to solutions that capture and store a sequenced log of I/O changes or otherwise allow a data set to be recovered by “rolling back” to a previous point in time. These solutions typically focus exclusively on the data “rollback” aspects and do not consider the need to recover servers and applications as well as data in order to resume providing services to users. Examples of companies and products in this category include Revivio CPS, Mendocino Software RecoveryONE, TimeSpring TimeData, Kashya KBX5000 Data Protection Platform and Microsoft Data Protection Manager.
 
In addition, our software competes with companies that also use host-based asynchronous replication, which relies on software running on the host operating system to intercept small changes being made to files as those changes are made. In addition to our products, examples of products that use host-based asynchronous replication include Symantec Replication Exec, Legato Replistor, Neverfail and XOsoft WANSync.
 
Some of our competitors have greater financial, technical, sales, marketing and other resources than we do, as well as greater name recognition and a larger overall customer base for their products. Additionally, some of these competitors have research and development capabilities that may allow them to develop new or improved products that may compete with our software. As this market continues to develop, a number of companies with greater resources than ours could attempt to enter the market or increase their presence in this market by acquiring or forming strategic alliances with our competitors or business partners or by introducing their own competing products.
 
Our success will depend on our ability to adapt to these competing forces, to develop more advanced products more rapidly and less expensively than our competitors, to continue to develop a global sales and support network and to educate potential customers about the benefits of using our software rather than our competitors’ products. Our competitors could introduce products with superior features, scalability and functionality at lower prices than our software. In addition, some of our customers and potential customers may buy other software or services from our competitors, and to the extent that they prefer to consolidate their software purchasing from fewer vendors, may choose not to continue to purchase our software and support services.
 
We expect additional competition from other established and emerging companies. Increased competition could result in price reductions, reduced gross margins and loss of market share, any of which could harm our business.
 
Research and Development
 
Our successful software is a result of our significant investment in product development for over 10 years. Our development team has specific core competencies in Windows development including drivers, file systems, storage, clustering, networking and applications such as Exchange, SQL Server, Oracle Database and SharePoint server. Our developers average 10 years of experience and our testers average 81/2 years of experience. Our engineering organization, located in Indianapolis, Indiana, is responsible for product development, quality assurance, product management and documentation.
 
Intellectual Property
 
Our success as a company depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary contractual protections.


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We have been granted two United States patents relating to our Real Time Backup System which is a component of all of our products. The granted United States patents will expire in October 2015. These patents and, to the extent any future patents are issued, may be contested, circumvented or invalidated over the course of our business, and we may not be able to prevent third-parties from infringing these patents. Therefore, the exact effect of having patents cannot be predicted with certainty.
 
Furthermore, we have registered the Double-Take® and GeoCluster® trademarks in the United States and have applied for registration for a variety of other trademarks including Balancetm, Double-Take for Virtual Systemstm and Double-Take for Virtual Serverstm. A third party may contest the registration of our trademark applications or may bring a claim for infringement of any of our registered or non-registered trademarks.
 
Employees
 
As of June 30, 2006, we had 286 employees in offices across the United States, Europe and Canada. None of our employees are represented by labor unions, and we consider our current employee relations to be good.
 
Facilities
 
We maintain office space in Southborough, Massachusetts, Hoboken, New Jersey, and Indianapolis, Indiana, where we have our development operations and principal call center. We have 45,429 square feet of office space in Indianapolis pursuant to a lease that expires in 2010. We also maintain sales offices in multiple locations worldwide. We believe that our current facilities are suitable and adequate to meet our current needs, and we intend to add new facilities or expand existing facilities as we add employees.
 
Legal Proceedings
 
From time to time, we have been and may be involved in various legal proceedings. We currently have no legal proceedings pending.


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MANAGEMENT
 
Directors and Executive Officers
 
The table below shows information about our directors and executive officers as of August 1, 2006:
 
             
Name
 
Age
  Position
 
Dean Goodermote
  53   President, Chief Executive Officer and Chairman of the Board of Directors
Robert L. Beeler
  40   Vice President of Engineering
David J. Demlow
  38   Chief Technology Officer
S. Craig Huke
  44   Chief Financial Officer
Daniel M. Jones
  38   Vice President of Sales and Marketing
Michael Lesh
  62   Vice President of Professional Services and Support
Jo Murciano
  55   Vice President of EMEA and President of Double-Take EMEA
Ashoke (Bobby) Goswami
  43   Director
Laura L. Witt
  38   Director
John W. Young
  53   Director
 
Dean Goodermote joined Double-Take Software in March of 2005 as President, Chief Executive Officer and Chairman of the board of directors. Since July 2004 he has also served as Chief Executive Officer of Grid-Analytics LLC, a concept-stage company he founded focused on aggregated research. From September 2001 to March 2005, Mr. Goodermote served as a Venture Partner of ABS Capital Partners. From September 2000 to August 2001, Mr. Goodermote was Chairman and Chief Executive Officer of Clinsoft Corporation, a developer of software for clinical research. From 1997 to August 2001, Mr. Goodermote was Chairman and President of Domain Solutions Corporation, a software developer for enterprise applications and the parent of Clinsoft. From May 2000 until December 2001, Mr. Goodermote founded and was Chief Executive Officer and then the Chairman of IPWorks, Inc., a developer of internet address management software. From August 1996 to May 2000, Mr. Goodermote was Chief Executive Officer and President of Process Software Corporation, a developer of Internetworking software. From August 1986 to February 1997, Mr. Goodermote served in various positions, including eventually President and Chairman, of Project Software and Development Corporation, now known as MRO Software, Inc., a provider of software-based asset and service management solutions.
 
Robert L. Beeler joined Double-Take Software in July 1995 as Vice President of Engineering. From 1996 to 2001, Mr. Beeler served as a member of our board of directors. From July 1991 to July 1995, Mr. Beeler served as Project Manager, Project Engineer and System/Software Engineer at the Naval Air Warfare Center, where he supervised and provided technical leadership to a development team in support of the Navy Airborne Electronic Warfare Platform. From 1988 to 1991, Mr. Beeler served as a Software Developer for National Field Service Inc.
 
David J. Demlow joined Double-Take Software in 1997 as Vice President of Product Management and, since January 2005, has served as our Chief Technology Officer. From 1991 to 1997, Mr. Demlow held the following positions at Seagate Software: 1994 to 1997, Senior Product Manager, Enterprise Storage Management; 1993 to 1994, Systems Engineer, Sales and Channel Support; 1991 to 1993, Account Rep, Direct and Channel Sales. From 1990 to 1991, Mr. Demlow served as a Sales Manager at Business Technology Associates, Inc.
 
S. Craig Huke joined Double-Take Software in June 2003 as Chief Financial Officer. From May 2001 to May 2003, Mr. Huke served as Chief Financial Officer for Apogee Networks Systems and Consulting LLC, Inc., a privately held software company specializing in network cost visibility and containment. From April 1999 to May 2001, Mr. Huke served as Chief Financial Officer at Bluestone Software, Inc., an Internet infrastructure software company. From April 1998 to April 1999, Mr. Huke


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served as Vice President, Finance at Metronet Communications Corp., a communications company. From November 1994 to April 1998, Mr. Huke held the following positions at Seer Technologies, Inc., a software development company: September 1997 to April 1998, Vice President & Corporate Controller; November 1996 to September 1997, Corporate Controller; November 1995 to November 1996, Director of Financial Reporting and Analysis; and November 1994 to November 1995, Manager of Financial Reporting and Analysis.
 
Daniel M. Jones joined Double-Take Software in October 2001 as Eastern Region Sales Director and, since May 2005, has served as our Vice President of Sales and Marketing. From January 2000 to October 2001, Mr. Jones served as National Director of Sales at StorageNetworks, a provider of data storage software services to major and global businesses. From January 1998 to January 2000, Mr. Jones served as Vice President of North American Sales of Net-tel Inc., a provider of internet protocol data and voice services. From June 1996 to December 1997, Mr. Jones served as Director of Sales at MidCom Communications Inc., a facility-based telecommunications company. From February 1991 to June 1996, Mr. Jones held the following positions at ALLNET/Frontier Communications: May 1993 to June 1996, Area Manager, July 1992 to May 1993, District Manager; and July 1991 to July 1992, Sales Representative.
 
Michael Lesh joined Double-Take Software in June of 2001 as Vice President of Professional Services and Support. From October 2000 to June 2001, Mr. Lesh served as Director, Professional Services at Openpages, Inc., a provider of enterprise compliance management software. From February 1973 to October 2000, Mr. Lesh held the following positions at Data General, a division of EMC Corporation: January 1998 to October 2000, Director, Professional Services; February 1996 to January 1998, Director, Eastern Operations Professional Services; March 1995 to February 1996, Director, Technology Deployment Services; March 1990 to March 1995, Manager, Northeast Professional Services; and May 1984 to March 1990, Manager, Regional Systems Engineering.
 
Jo Murciano joined Double-Take Software in May 2006 as Vice President of EMEA and President of Double-Take EMEA. Mr. Murciano is also Chief Executive Officer and a director of Sunbelt Software Distribution, Inc., one of our resellers, which he joined in 1994. From October 1983 until May 2006, Mr. Murciano served as Chairman of Sunbelt System Software S.A.S., a software distributor that he founded in 1983 and which we acquired in May 2006. From September 1982 to October 2000, Mr. Murciano served as Chief Executive Officer of RMH Group, a provider of development and communication tools for the IBM AS/400 market that Mr. Murciano founded in 1982.
 
Ashoke (Bobby) Goswami has served on the board of directors of Double-Take Software since 2002. Mr. Goswami is a general partner of ABS Capital Partners, a private equity firm that he joined in 2001. Prior to joining ABS Capital Partners, Mr. Goswami served as an investment banker with Alex. Brown, Merrill Lynch and Goldman Sachs. Previously, Mr. Goswami spent four years in the systems practice at Andersen Consulting.
 
Laura L. Witt has served on the board of directors of Double-Take Software since 2002. Ms. Witt is a general partner of ABS Capital Partners, a private equity firm that she joined in 1997. Prior to joining ABS Capital Partners, Ms. Witt served as a consultant with Monitor Company Group LP and with Oliver Wyman & Company, both strategy consulting firms. She currently serves as a director of Familymeds Group, Inc.
 
John W. Young has served on the board of directors of Double-Take Software since June 2003. Mr. Young currently serves as Executive Vice President, Products & Technology for MRO Software, Inc. and has held that position since 1998. From 1995 to 1998 he served as Vice President of Research and Development at MRO Software and from 1992 to 1995 he was Director of Product Management at MRO Software. From 1988 to 1992, Mr. Young served as Vice President of Sales for Comac Systems Corporation, an application software company.
 
Membership of the Board of Directors
 
Our board of directors currently consists of four directors. Nominees for director are elected for a term of one year. Each of our directors was appointed to our board of directors pursuant to a stockholders’ agreement.


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For additional information concerning the stockholders’ agreement, which will terminate upon the closing of this offering, see “Certain Relationships and Related Transactions — Series B Convertible Preferred Stock and Series C Convertible Preferred Stock — Amended and Restated Stockholders’ Agreement.”
 
Board Committees
 
The board of directors has a standing audit committee, a standing compensation committee and a standing nominating and corporate governance committee.
 
Audit Committee.  The audit committee is responsible, among its other duties and responsibilities, for engaging, overseeing, evaluating and replacing our independent registered public accounting firm, pre-approving all audit and non-audit services by that firm, reviewing the scope of the audit plan and the results of each audit with management and our independent registered public accounting firm, reviewing the internal audit function, reviewing the adequacy of our system of internal accounting controls and disclosure controls and procedures, reviewing the financial statements and related financial information we will include in our SEC filings, and exercising oversight with respect to our code of conduct and other policies and procedures regarding adherence with legal requirements. The members of our audit committee are Mr. Goswami, who serves as chair of the committee, Ms. Witt and Mr. Young. Both Mr. Goswami and Ms. Witt are “audit committee financial experts,” as that term is currently defined under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002. Subject to the NASDAQ Global Market’s transition rules, we believe that the composition of our audit committee will meet the requirements for independence under the listing standards of the NASDAQ Global Market and SEC rules within a year following this offering.
 
Compensation Committee.  The compensation committee is responsible, among its other duties and responsibilities, for establishing the compensation and benefits of our executive officers and other key employees, monitoring compensation arrangements applicable to management employees for consistency with corporate objectives and stockholders’ interests, and administering our stock incentive plans. The members of our compensation committee are Laura Witt, who serves as chair of the committee, and Messrs. Goswami and Young.
 
Nominating and Corporate Governance Committee.  The nominating and corporate governance committee is responsible for recommending candidates for election to the board of directors. The committee is also responsible, among its other duties and responsibilities, for making recommendations to the board of directors or otherwise acting with respect to corporate governance matters, including board size and membership qualifications, recommendations with respect to director resignations tendered in the event a director fails to achieve a majority of votes cast in favor of his or her election, new director orientation, committee structure and membership, non-employee director compensation, succession planning for officers and key executives, and communications with stockholders. The members of our nominating and corporate governance committee are          , who serves as chair of the committee,          and          .
 
Director Compensation
 
Directors who are not our employees receive annual fees of $14,000, fees of $2,000 for each board or committee meeting attended in person and fees of $1,000 for each board or committee meeting attended by conference telephone. The chair of the audit committee will receive an additional annual fee of $5,000.  All such fees will be paid in cash. Directors who are our employees will receive no fees for their services on the board of directors. All directors are entitled to reimbursement for their reasonable out-of-pocket travel expenditures.
 
Each non-employee director who joins our board will be entitled to receive          options to purchase shares of common stock upon that director’s initial election or appointment to the board of directors. In addition, each non-employee director will be entitled to receive annual grants of options to purchase           shares of common stock. All options granted as fees to our non-employee directors will be issued under our 2006 Incentive Plan.


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Mr. Goswami and Ms. Witt, who are general partners of ABS Capital Partners, have waived receipt of compensation for board service.
 
Executive Compensation
 
The following summary compensation table shows the compensation paid for 2005 to our chief executive officer, one other individual who served as our chief executive officer during a portion of 2005, and to each of our other four most highly compensated executive officers for 2005. We sometimes refer to these executive officers in this prospectus as the “named executive officers.”
 
                                         
                      Long Term
       
    Annual
    Compensation        
    Compensation     Securities
       
                Other Annual
    Underlying
    All Other
 
    Salary
    Bonus
    Compensation
    Options
    Compensation
 
Name and Principal Position
  ($)     ($)     ($)     (#)     ($)  
 
Dean Goodermote(1)
  $ 249,771     $ 15,000             1,862,895        
President, Chief Executive Officer and Chairman of the Board of Directors
                                       
Donald E. Beeler, Jr.(2)
  $ 78,352     $ 41,498 (3)           32,521        
Former Chief Executive Officer
                                       
S. Craig Huke
  $ 197,917     $ 165,573 (4)           598,146     $ 73,852 (5)
Chief Financial Officer
                                       
Daniel M. Jones
  $ 150,000     $ 95,963 (6)   $ 257,520 (7)     808,082        
Vice President of Sales and Marketing
                                       
David Demlow
  $ 160,000     $ 112,458 (8)           19,479        
Chief Technology Officer
                                       
Robert Beeler
  $ 160,000     $ 110,778 (9)           23,712        
Vice President of Engineering
                                       
 
 
(1)  Mr. Goodermote was appointed as our President, Chief Executive Officer and Chairman effective March 22, 2005.
 
(2)  Mr. Beeler ceased to serve as our Chief Executive Officer effective March 21, 2005.
 
(3)  Of the amount shown, $13,833 represents amounts payable in shares of our Series C convertible preferred stock, valued at $0.98 per share, pursuant to our executive bonus program. After withholding to satisfy tax obligations of the executive, 8,166 shares of Series C convertible preferred stock were issued.
 
(4)  Of the amount shown, $46,858 represents amounts payable in shares of our Series C convertible preferred stock, valued at $0.98 per share, pursuant to our executive bonus program. After withholding to satisfy tax obligations of the executive, 28,407 shares of Series C convertible preferred stock were issued.
 
(5)  Including amounts reimbursed as moving expenses.
 
(6)  Of the amount shown, $34,789 represents amounts payable in shares of our Series C convertible preferred stock, valued at $0.98 per share, pursuant to our executive bonus program. After withholding to satisfy tax obligations of the executive, 20,147 shares of Series C convertible preferred stock were issued.
 
(7)  Represents commissions of $257,520 paid to Mr. Jones pursuant to our sales compensation plan.
 
(8)  Of the amount shown, $37,486 represents amounts payable in shares of our Series C convertible preferred stock, valued at $0.98 per share, pursuant to our executive bonus program. After withholding to satisfy tax obligations of the executive, 22,732 shares of Series C convertible preferred stock were issued.


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(9)  Of the amount shown, $36,926 represents amounts payable in shares of our Series C convertible preferred stock, valued at $0.98 per share, pursuant to our executive bonus program. After withholding to satisfy tax obligations of the executive, 22,288 shares of Series C convertible preferred stock were issued.
 
Stock Option Grants in Last Fiscal Year
 
The following table sets forth information concerning all stock options granted during 2005 to the named executive officers:
 
                                                 
                            Potential Realizable
 
    Individual Grants           Value at Assumed
 
          Percent of Total
                Annual Rates of
 
    Number of
    Options Granted
    Exercise
          Stock Price Appreciation for
 
    Shares Underlying
    to Employees in
    Price
    Expiration
    Option Term(2)  
    Options Granted (#)(1)     Fiscal Year     ($/Share)     Date     5%     10%  
 
Dean Goodermote
    1,862,895       46.0 %   $ 0.31       3/22/2015     $ 159,552     $ 352,568  
Donald E. Beeler, Jr. 
    32,521       0.8 %   $ 0.31       1/1/2015     $ 2,785     $ 6,155  
S. Craig Huke
    598,146       14.8 %   $ 0.31       2/2/2015     $ 51,230     $ 113,204  
Daniel M. Jones
    808,082       19.9 %   $ 0.31       2/2/2015     $ 69,210     $ 152,936  
David Demlow
    19,479       0.5 %   $ 0.31       1/1/2015     $ 1,668     $ 3,687  
Robert Beeler
    23,712       0.6 %   $ 0.31       1/1/2015     $ 2,031     $ 4,488  
 
 
(1)  These options were granted pursuant to our 2003 Employee Stock Option Plan. Upon the consummation of this offering, 100% of Mr. Goodermote’s option to purchase 1,862,895 shares and 25% of all other options Mr. Goodermote holds will vest in full. Each of the awards for the other named executive officers vests in equal quarterly amounts over four years from the date of grant.
 
(2)  Pursuant to SEC rules, these columns show gains that might exist for the options over the term of the options at 5% and 10% annual compounded appreciation in the stock price. These are assumed rates of appreciation prescribed the SEC rules and are not intended to forecast future appreciation of our common stock. The potential realizable values at 5% and 10% appreciation are calculated by using the fair value at the date of grant, and assuming that the per share price appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. Actual gains, if any, on option exercises and share holdings are dependent on the future performance of our stock price.


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Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year-End Option Values
 
The following table sets forth information regarding exercises of options to purchase common stock by the named executive officers during 2005 and the value of all unexercised options held at December 31, 2005:
                                                 
                Number of
             
    Number of
          Shares Underlying
    Value of Unexercised
 
    Shares Acquired
          Unexercised Options at
    In-the-Money Options at
 
    on
    Value
    December 31, 2005     December 31, 2005 ($)(1)  
Name
  Exercise (#)     Realized ($)     Exercisable     Unexercisable     Exercisable     Unexercisable  
 
Dean Goodermote
                      1,862,895           $ 167,661  
Donald E. Beeler, Jr. 
                1,578,544       828,308     $ 215,257     $ 170,774  
S. Craig Huke
                285,774       866,961     $ 46,554     $ 123,743  
Daniel M. Jones
                267,860       680,010     $ 28,934     $ 64,014  
David Demlow
                293,815       594,716     $ 56,234     $ 122,991  
Robert Beeler
                404,926       600,536     $ 56,695     $ 123,801  
 
 
(1)  Represents the difference between the exercise price and the fair market value of our common stock on December 31, 2005, as determined by our board of directors.
 
Employment, Severance and Related Agreements
 
Employment Terms for Dean Goodermote.  In August 2006, we entered into an employment agreement with Mr. Goodermote setting forth the terms of his employment, which employment agreement amended and restated an agreement dated March 22, 2005, entered into in connection with the commencement of his employment. Pursuant to the current employment agreement, upon the consummation of this offering, Mr. Goodermote is entitled to receive a grant of shares of our common stock equivalent to 1.45% of the fully diluted shares of our common stock outstanding immediately prior to this offering, which assuming the grant was made on June 30, 2006 would be a grant of 1,336,852 shares in the aggregate. These shares will be fully vested upon grant and will be granted under our 2006 Omnibus Incentive Plan. In order to satisfy certain tax withholding obligations, 371,933 of these shares are expected to be withheld from the grant.
 
On March 22, 2005 Mr. Goodermote was granted stock options to acquire 1,862,895 shares of our common stock with 25% vesting on the one year anniversary of the start of his employment and with the remainder vesting in equal quarterly installments over the following three years, and he received a grant of stock options on the first anniversary of the start of his employment to acquire 745,158 shares of our common stock with 25% vesting on the one year anniversary of the grant date and the remainder vesting in equal quarterly installments over the following three years. In addition, on January 4, 2006, Mr. Goodermote was granted stock options to acquire 186,290 shares of our common stock with 25% vesting on the one year anniversary of the grant date and the remainder vesting in equal quarterly installments over the following three years. Pursuant to his employment agreement, upon the consummation of this offering all of the options granted on March 22, 2005 will vest in full and an additional 25% of the other stock options held by Mr. Goodermote will vest in full, which, assuming the offering occurred on June 30, 2006, would have represented the acceleration of options to acquire 1,513,602 shares in the aggregate. In addition, in the event of a change of control as a result of the closing of a merger, acquisition or the purchase of all or substantially all of our assets, all stock options held by Mr. Goodermote will accelerate in full.
 
Mr. Goodermote’s employment agreement also provides for the following: a base salary of at least $340,000 per year; five weeks of vacation per year; major medical insurance for his family; and life, long-term disability and other insurance in accordance with our current benefits policies. Mr. Goodermote has also entered into the form of non-disclosure and non-solicitation agreement described below.
 
Employment Terms for S. Craig Huke.  In          , 2006, we entered into an employment agreement with S. Craig Huke setting forth the terms of his employment, which employment agreement amended and restated an agreement originally entered into in May 2003, upon the commencement of his employment as our Chief Financial Officer. Mr. Huke’s employment agreement provides for a base salary


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of at least $200,000 per year, and major medical insurance for his family. Pursuant to the terms of Mr. Huke’s employment agreement, in the event his employment is terminated without cause in connection with a change of control transaction, Mr. Huke will continue to receive his base salary for a period of twelve months from the date of termination of his employment. Pursuant to his employment agreement, in the event of a change of control as a result of the closing of a merger, acquisition or the purchase of all or substantially all of our assets, all of Mr. Huke’s stock options will immediately vest. Mr. Huke also entered into the form of non-disclosure and non-solicitation agreement described below.
 
Employment Terms for Daniel M. Jones.  In          , 2006, we entered into an employment agreement with Daniel M. Jones setting forth the terms of his employment as our Vice President of Sales and Marketing, which employment agreement amended and restated an agreement originally entered into in connection with the commencement of his employment in February 2005. Mr. Jones’ employment agreement provides for the following: a base salary of at least $           per year; major medical insurance for his family; and participation in our commission plan for sales employees and bonus plan for executives. Pursuant to his employment agreement, in the event of a change of control as a result of the closing of a merger, acquisition, the purchase of all or substantially all of our assets, 50% of Mr. Jones’ stock options will immediately vest.
 
Mr. Jones’ employment agreement provides that in the event his employment is terminated without cause, as defined below, he will continue to receive his base salary for a period of twelve months from the date of termination of his employment. Mr. Jones will also be eligible for these severance payments if he is required to relocate outside of a 100 mile radius from his current home. For purposes of Mr. Jones’ employment agreement, “cause” means (i) willful disobedience of a material and lawful instruction of the Chief Executive Officer or our Board of Directors, (ii) conviction for any misdemeanor involving fraud or embezzlement or similar crime, or any felony, (iii) conduct amounting to fraud, dishonesty, willful misconduct or recurring insubordination, (iv) inattention to his duties, or (v) excessive absences from work for any reason. Mr. Jones also entered into the form of non-disclosure and non-solicitation agreement described below.
 
Non-Disclosure and Non-Solicitation Agreement.  It was a condition to the terms of employment for each of Messrs. Goodermote, Huke, Jones and Lesh, that the executive sign a standard form of non-disclosure and non-solicitation agreement. This agreement provides that in the event of the expiration or termination of the executive’s employment he will not use our information to develop, or participate with any other party that is developing, products based on our confidential information. In addition, the agreement provides that for a period of two years after the end of his employment that he will not solicit our existing or proposed customers for competing products, services and/or solutions, and during that period he will not encourage or induce any of our employees to leave our employ.
 
Noncompetition and Severance Agreements.  In           2006, we entered into noncompetition and severance agreements with two of our executive officers, Robert L. Beeler and David J. Demlow, which agreements amended and restated prior agreements. These agreements provide that, for a period of one year after the termination of employment, each executive officer will not enter into or become associated with any business in direct competition with us, and for a period of two years after the termination of employment, each executive officer will not solicit any customer or employee who was our customer or employee during his term of employment. Assuming continued compliance by Messrs. Beeler and Demlow with the noncompetition and nonsolicitation covenants, these agreements provide for the payment of a cash payment equal to twelve months base salary calculated at the highest annualized rate of the executive officer’s base compensation in effect at any time during the ninety day period prior to his termination. The executive officer will not be entitled to any portion of this severance package if the termination is for cause. If the executive officer is terminated for cause or if he violates the noncompetition and nonsolicitation covenants, his employment stock options, whether vested or unvested, will immediately terminate, and he will not be entitled to exercise such options. For purposes of these noncompetition and severance agreements, “cause” means (i) willful disobedience of a material and lawful instruction of the Chief Executive Officer or our Board of Directors, (ii) conviction for any misdemeanor involving fraud or embezzlement or similar crime, or any felony, (iii) breach of any material provisions of


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the agreements, (iv) conduct amounting to fraud, dishonesty, willful misconduct or recurring insubordination, or (v) excessive absences from work for any reason.
 
Agreement with Jo Murciano.  The share purchase agreement we entered into in connection with our acquisition of Double-Take EMEA in May 2006 also contained terms relating to Mr. Murciano’s employment. As a result of the acquisition, Mr. Murciano became our Vice President of EMEA and remained President of Double-Take EMEA. Pursuant to the share purchase agreement, Mr. Murciano will remain as President of Double-Take EMEA and through December 31, 2007 will continue to be entitled to the same compensation plan after the acquisition as before, including an annual salary of €49,048, payment of 7% of the operating profits of Double-Take EMEA, pension plan contributions equivalent to approximately €350 per month, the full-time use of an automobile, the use of a fuel credit card and the payment of certain club memberships.
 
The share purchase agreement also provides that for three years from the date of the share purchase agreement, Mr. Murciano will not compete with us, solicit or take away the business of our clients, customers or suppliers, or induce our clients, customers, vendors or employees to reduce or cease doing business with us. These non-solicitation and non-competition provisions do not prevent Mr. Murciano from continuing to serve as a director or chief executive officer of Sunbelt Software Distribution, Inc., which is one of our resellers. For more information on the terms of the share purchase agreement, see “Certain Relationships and Related Party Transactions — Double-Take EMEA Acquisition and Relationships with Jo Murciano” below.
 
Executive Bonus Plan.
 
We have adopted an executive bonus plan for purposes of rewarding our senior executives. The plan sets forth quarterly and annual bonus payments based on the achievement of targets related to our quarterly and annual operating income and revenue, and it is subject to change at the discretion of our board of directors. Target bonus amounts are equivalent to 75% of an executive’s base salary, with the exception of the chief executive officer, whose target bonus amount is $160,000. At achievement of 87.5% of target goals, 60% of the applicable bonus is paid, which is increased proportionately to a full payout of bonuses at 100% of target goals. Executives are also entitled to receive an additional amount equal to up to 20% of their bonus awards in the event that we exceed our targets by an equivalent amount. In the event that there is a sale of substantially all of the assets or stock of Double-Take Software, the targets for the quarterly and annual period in which the sale occurs will be deemed to be met. No bonus is due if an executive terminates employment with Double-Take Software prior to the end of a quarter.
 
Compensation Committee Interlocks and Insider Participation
 
None of the members of our compensation committee has ever served as an officer or employee of Double-Take Software or any of our subsidiaries, or serves as a member of the board of directors or compensation committee of any company that has one of its executive officers serving on our board of directors or compensation committee. In addition, none of our executive officers serves or has served as a member of the board of directors, compensation committee or other board committee performing equivalent functions of any company that has one or more executive officers serving on our board of directors or compensation committee.
 
2003 Employee Stock Option Plan
 
Our board of directors adopted the 2003 Employees Stock Option Plan on February 5, 2003 and our stockholders approved it on June 19, 2003. Our board of directors adopted an amendment to the plan on March 15, 2006 to increase the number of shares available for awards under the plan and our stockholders approved the amendment on March 28, 2006.
 
Purpose and Eligibility.  The plan is intended as a performance incentive for officers, employees, consultants and other key persons of Double-Take Software or its subsidiaries to enable the persons to whom options are granted to acquire or increase a proprietary interest in the success of the Company.


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Awards may be granted under the plan to officers, directors, including non-employee directors, and employees of Double-Take Software or any of our subsidiaries; to any consultant or other key person who provides services to Double-Take Software and our subsidiaries; and members of any scientific or other advisory board of Double-Take Software or otherwise. Only employees of Double-Take Software or any of our subsidiaries are eligible to receive incentive stock options.
 
Term.  The plan will expire on February 5, 2013 unless earlier terminated by our board of directors.
 
Administration, Amendment and Termination.  The plan is administered by the compensation committee of the board of directors. The compensation committee has the authority to interpret the plan, determine the terms and conditions of awards and make all other determinations necessary or expedient to promote the best interests of Double-Take Software with respect to the plan.
 
The board of directors may amend or discontinue the plan at any time with respect to any shares of common stock as to which awards have not been made. No such action may amend the plan without the approval of our stockholders, in accordance with applicable law and regulations, including rules of the NASDAQ Global Market, if the amendment increases the number of shares of common stock issuable under the plan, changes the eligibility provision, changes the minimum option exercise price, increases the maximum term of an option or otherwise materially increases benefits accruing to plan participants.
 
Awards.  Awards under the plan may be made in the form of stock options, which may be either incentive stock options or non-qualified stock options. An “incentive stock option” is an option that meets the requirements of Section 422 of the Internal Revenue Code, and a “non-qualified stock option” is an option that does not meet those requirements.
 
Shares Subject to the Plan.  Subject to adjustment as described below, a total of 16,500,000 shares of common stock are available for issuance under the plan. Shares issued under the plan may be authorized but unissued shares. Whenever any outstanding option under the plan expires, is canceled or is otherwise terminated (other than by exercise), the shares of common stock allocable to the unexercised portion of such option may again be the subject of options under the plan.
 
Terms and Conditions of Options.  An option granted under the plan is exercisable only to the extent that it is vested on the date of exercise. No option may be exercisable more than ten years from the option grant date, or five years in the case of an incentive stock option granted to a ten percent stockholder, which is a person who owns more than ten percent of the total combined voting power of all classes of stock of Double-Take Software or our subsidiaries.
 
The exercise price per share under each incentive stock option granted under the plan may not be less than 100%, or 110% in the case of a ten percent stockholder, of the fair market value of the common stock on the option grant date. The exercise price per share under each non-qualified stock option granted under the plan shall be determined by the compensation committee. For so long as the common stock remains listed on the NASDAQ Global Market, the fair market value of the common stock will be the closing price of the common stock as reported on the NASDAQ Global Market on the option grant date. If there is no closing price reported on the option grant date, the fair market value will be deemed equal to the closing price as reported on the NASDAQ Global Market for the last preceding date on which sales of the common stock were reported. If the common stock is not at the time listed on the NASDAQ Global Market or otherwise admitted to trading on a stock exchange, fair market value will be the closing bid price, as provided by either the NASDAQ Global Market or a broker-dealer which regularly furnishes price quotations, as applicable, of the common stock on the date in question in the over-the-counter market. If the common stock is not listed or admitted to trading on any stock exchange or traded in the over-the-counter market, fair market value will be as determined in good faith by the board of directors.
 
Payment of the option price for shares purchased pursuant to the exercise of an option may be made in cash, by certified check or other form of payment acceptable to us, by broker assisted cashless exercise or, to the extent permitted by law and provided in an award agreement, through the tender to us of shares of common stock held for a period of at least six months.
 
Each option will become vested and exercisable at such times and under such conditions as the compensation committee may approve consistent with the terms of the plan.


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In the case of incentive stock options, the aggregate fair market value of the common stock determined on the option grant date, with respect to which such options are exercisable for the first time during any calendar year may not exceed $100,000.
 
Incentive stock options are non-transferable during the optionee’s lifetime. The compensation committee may authorize transfers of non-qualified stock options.
 
Adjustment of Shares Subject to Plan.  If the shares of common stock as a whole are increased, decreased, changed into or exchanged for a different number of kind of shares or securities, whether through merger, consolidation, reorganization, recapitalization, reclassification, stock dividend, stock split, combination of shares, exchange of shares, change in corporate structure or the like, an appropriate and proportionate adjustment shall be made in the number and kind of shares subject to the plan, and in the number, kind and per share exercise price of shares subject to unexercised options or portions thereof granted prior to any such change. In the event of any such adjustment in an outstanding option, the optionee thereafter shall have the right to purchase the number of shares under such option at the per share price, as so adjusted, which optionee could purchase at the total purchase price applicable to the option immediately prior to such adjustment. Adjustments shall be determined by the compensation committee. In conjunction with an adjustment, the compensation committee shall also have the discretion to accelerate the time or times at which any option or portion thereof shall become exercisable.
 
Effect of Mergers and Other Transactions.  Upon the occurrence of transactions specified in the plan, unless otherwise provided in an award agreement, outstanding options will vest unconditionally on the first day following the occurrence of the specified transaction.
 
1996 Employees Stock Option Plan
 
Our board of directors adopted the 1996 Employees Stock Option Plan on October 30, 1996 and our stockholders approved it on November 4, 1996. Our board of directors adopted an amendment and restatement of the plan on January 14, 2000 that was approved by our stockholders on January 28, 2000.
 
Purpose and Eligibility.  The plan is intended to provide an incentive to employees whose present and potential contributions to Double-Take Software and its subsidiaries are or will be important to our success by affording them an opportunity to acquire a proprietary interest in Double-Take Software.
 
Awards may be granted under the plan to employees and officers of Double-Take Software or any of our subsidiaries.
 
Term.  The plan will expire on October 30, 2006 unless earlier terminated by our board of directors.
 
Administration, Amendment and Termination.  The plan is administered by the compensation committee of the board of directors. The compensation committee has the authority to interpret the plan, determine the terms and conditions of awards and make all other determinations necessary or advisable for the administration of the plan.
 
The board of directors may amend, alter, suspend or discontinue the plan at any time with respect to any shares of common stock as to which awards have not been made. No such action may amend the plan without the approval of our stockholders if the amendment increases the number of shares of common stock issuable under the plan, changes the eligibility categories of the plan, extends the duration of the plan or otherwise materially increases benefits accruing to plan participants.
 
Awards.  Awards under the plan may be made in the form of stock options, which may be either incentive stock options or non-qualified stock options. An “incentive stock option” is an option that meets the requirements of Section 422 of the Internal Revenue Code, and a “non-qualified stock option” is an option that does not meet those requirements.
 
Shares Subject to the Plan.  Subject to adjustment as described below, a total of 5,000,000 shares of common stock are available for issuance under the plan. Shares issued under the plan may be authorized but unissued shares or treasury shares. Whenever any outstanding option under the plan expires or is terminated without being exercised, the shares of common stock allocable to the unexercised portion of such option may again be the subject of options under the plan.


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Terms and Conditions of Options.  An option granted under the plan is exercisable only to the extent that it is vested on the date of exercise. No option may be exercisable more than ten years from the option grant date, or five years in the case of an incentive stock option granted to a ten percent stockholder, which is a person who owns more than ten percent of the total combined voting power of all classes of stock of Double-Take Software or our subsidiaries.
 
The exercise price per share under each incentive stock option granted under the plan may not be less than 100%, or 110% in the case of a ten percent stockholder, of the fair market value of the common stock on the option grant date. The exercise price per share under each non-qualified stock option granted under the plan may not be less than 85% of the fair market value of the common stock on the option grant date. For so long as the common stock remains listed on the NASDAQ Global Market, the fair market value of the common stock will be the closing price of the common stock as reported on the NASDAQ Global Market on the option grant date. If there is no closing price reported on the option grant date, the fair market value will be deemed equal to the closing price as reported on the NASDAQ Global Market for the last preceding date on which sales of the common stock were reported. If the common stock is not at the time listed or admitted to trading on a stock exchange, fair market value will be the closing bid price, as provided by either the NASDAQ Global Market or a broker-dealer which regularly furnishes price quotations, as applicable, of the common stock on the date in question in the over-the-counter market. If the common stock is not listed on the NASDAQ Global Market or otherwise admitted to trading on any stock exchange or traded in the over-the-counter market, fair market value will be as determined in good faith by the board of directors.
 
Payment of the option price for shares purchased pursuant to the exercise of an option may be made in cash, by certified check or, at the discretion of compensation committee, in a combination of cash and a promissory note, through delivery of shares of common stock or a combination of any of the above.
 
Each option will become vested and exercisable at such times and under such conditions as the compensation committee may approve consistent with the terms of the plan.
 
In the case of incentive stock options, the aggregate fair market value of the common stock determined on the option grant date, with respect to which such options are exercisable for the first time during any calendar year may not exceed $100,000.
 
Options are non-transferable during the optionee’s lifetime.
 
Adjustment of Shares Subject to Plan.  In the event that dividends are payable in common stock or in the event there are splits, subdivisions or combinations of shares of common stock, the number of shares available under the plan shall be increased or decreased proportionately, as the case may be, and the number of shares delivered upon the exercise thereafter of any option theretofore granted or issued shall be increased or decreased proportionately, as the case may be, without change in the aggregate purchase price.
 
Effect of Mergers and Other Transactions.  Upon the occurrence of transactions specified in the plan, unless otherwise provided in an award agreement, outstanding options will vest unconditionally on the first day following the occurrence of the specified transaction.
 
Non-Executive Director Stock Option Plan
 
Our board of directors adopted the Non-Executive Director Stock Option Plan on October 30, 1996 and our stockholders approved it on November 4, 1996. Our board of director adopted an amendment and restatement of the plan on June 24, 2003 that was approved by our stockholders on July 23, 2003.
 
Purpose and Eligibility.  The plan is intended to provide a means by which each director who is not otherwise a full-time employee of Double-Take Software or any of our subsidiaries will be given an opportunity to purchase common stock. Double-Take Software, by means of the plan, seeks to attract and


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retain the services of qualified independent persons to serve as non-executive directors and to provide incentives for such persons to exert maximum efforts for our success.
 
Awards may be granted solely to non-executive directors of Double-Take Software.
 
Term.  The plan expired on June 1, 2006.
 
Administration, Amendment and Termination.  The plan is administered by the compensation committee of the board of directors. The compensation committee has the authority to interpret the plan.
 
The board of directors may amend, alter, suspend or terminate the plan at any time, but not more frequently than every six months, with respect to any shares of common stock as to which awards have not been made. No such action may amend the plan without the approval of our stockholders, if the amendment materially increases the number of shares of common stock issuable under the plan, extends the term of the Plan, materially increases eligibility requirements or materially increases benefits accruing to plan participants.
 
Awards.  Awards under the plan may be made in the form of non-qualified stock options. A “non-qualified stock option” is an option that does not meet the requirements of Section 422 of the Internal Revenue Code.
 
Shares Subject to the Plan.  Subject to adjustment as described below, a total of 300,000 shares of common stock are available for issuance under the plan. Shares issued under the plan may be authorized but unissued shares or treasury shares. Whenever any outstanding option under the plan expires or terminates (other than by exercise), the shares of common stock allocable to the unexercised portion of such option may again be the subject of options under the plan.
 
Terms and Conditions of Options.  An option granted under the plan is exercisable only to the extent that it is vested on the date of exercise. No option may be exercisable more than five years from the option grant date. The term of each option may terminate sooner than five years if the optionee’s service as a non-executive director terminates for any reason or for no reason. In the event of such termination of service, the option shall terminate on the earlier of five years or the date seven months following the date of termination of service as a director or if termination of service is due to the optionee’s death, the earlier of five years or twelve months following the date of the optionee’s death.
 
The exercise price per share under each option granted under the plan may not be less than 100% of the fair market value of the common stock on the option grant date. For so long as the common stock remains listed on the NASDAQ Global Market, the fair market value of the common stock will be the closing price of the common stock as reported on the NASDAQ Global Market on the option grant date. If there is no closing price reported on the option grant date, the fair market value will be deemed equal to the closing price as reported on the NASDAQ Global Market for the last preceding date on which sales of the common stock were reported. If the common stock is not at the time listed or admitted to trading on a stock exchange, fair market value will be the closing bid price, as provided by either the NASDAQ Global Market or a broker-dealer which regularly furnishes price quotations, as applicable, of the common stock on the date in question in the over-the-counter market. If the common stock is not listed on the NASDAQ Global Market or otherwise admitted to trading on any stock exchange or traded in the over-the-counter market, fair market value will be as determined in good faith by the board of directors.
 
Payment of the option price for shares purchased pursuant to the exercise of an option may be made in cash, through the tender to us of shares of common stock held for a period of at least six months, or a combination of both.
 
Each option will become vested and exercisable at such times and under such conditions as the compensation committee may approve consistent with the terms of the plan.
 
Adjustment of Shares Subject to Plan.  The award agreements evidencing options may contain such provisions as the compensation committee shall determine to be appropriate for the adjustment of the number and class of shares subject to all outstanding options and the option prices thereof in the event of changes in the outstanding common stock by reason of any stock dividend, distribution, split-up,


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recapitalization, combination or exchange of shares, merger, consolidation or liquidation and the like, and, in the event of any such change in the outstanding common stock, the aggregate number and class of shares available under the plan and the number of shares subject to grants pursuant to the plan shall be appropriately adjusted by the compensation committee.
 
2006 Omnibus Incentive Plan
 
Our board of directors adopted the Double-Take Software 2006 Omnibus Incentive Plan on           2006 and our stockholders approved it on           2006.
 
Purpose and Eligibility.  The purpose of the plan is to enhance our ability to attract, retain and motivate highly qualified officers, key employees, outside directors and other persons to serve Double-Take Software and our affiliates and to expend maximum effort to improve our business results and earnings, by providing to such officers, key employees, outside directors and other persons an opportunity to acquire or increase a direct proprietary interest in our operations and future success through ownership of common stock.
 
Awards may be granted under the plan to officers, directors, including non-employee directors, and other employees of Double-Take Software or any of our subsidiaries, to any adviser, consultant or other provider of services to us and any employee of those providers, and to any other individuals who are approved by the board of directors as eligible to participate in the plan. Only employees of Double-Take Software or any of our subsidiaries are eligible to receive incentive stock options.
 
Term.  The plan will expire on          , 2016 unless earlier terminated by our board of directors.
 
Administration, Amendment and Termination.  The plan is administered by the compensation committee of the board of directors. The compensation committee has the authority to interpret the plan, determine the terms and conditions of awards and make all other determinations necessary or advisable for the administration of the plan.
 
The board of directors may amend, suspend or terminate the plan at any time with respect to any shares of common stock as to which awards have not been made. No such action may amend the plan without the approval of our stockholders if the amendment would materially increase the benefits under the plan or if the amendment is required to be submitted for stockholder approval by applicable law, rule or regulation, including rules of the NASDAQ Global Market.
 
Awards.  Awards under the plan may be made in the form of:
 
  •  stock options, which may be either incentive stock options or non-qualified stock options;
 
  •  restricted stock;
 
  •  restricted stock units;
 
  •  stock appreciation rights;
 
  •  unrestricted stock;
 
  •  cash-based awards; or
 
  •  any combination of the foregoing.
 
Any of the foregoing awards may be made subject to attainment of performance goals over a performance period of up to one or more years. We refer to the one-year awards as “annual incentive awards” and to the other awards as “performance awards.”
 
An “incentive stock option” is an option that meets the requirements of Section 422 of the Internal Revenue Code, and a “non-qualified stock option” is an option that does not meet those requirements. “Restricted stock” is an award of common stock on which are imposed restricted periods and restrictions that subject the shares to a substantial risk of forfeiture, as defined in Section 83 of the Internal Revenue Code. “Restricted stock units” are awards that represent a conditional right to receive shares of common stock in the future and that are subject to the same types of restrictions and risk of forfeiture as restricted


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stock. A “stock appreciation right,” or “SAR,” is a right to receive upon exercise, in the form of common stock, cash or a combination of common stock and cash, the excess of the fair market value of one share of common stock on the exercise date over the grant price of the SAR. “Unrestricted stock” is an award of common stock that is free of restrictions other than those imposed under federal or state securities laws.
 
Shares Subject to the Plan.  Subject to adjustment as described below, a total of           shares of common stock are available for issuance under the plan. Shares issued under the plan may be authorized but unissued shares, treasury shares, or issued and outstanding shares that are purchased in the open market.
 
Any shares granted under the plan that are forfeited to us because of the failure to meet an award contingency or condition will again be available for issuance pursuant to new awards. Any shares covered by an award, or portion of an award, granted under the plan that expires or is forfeited, canceled or settled in cash will not be deemed to have been issued for purposes of determining the maximum number of shares available for issuance under the plan.
 
If any stock option is exercised by tendering shares to us, or if we withhold shares to satisfy tax withholding obligations in connection with an exercise, as full or partial payment in connection with the exercise of a stock option under the plan or our prior plans, only the number of shares issued net of the shares tendered will be deemed issued for purposes of determining the maximum number of shares available for issuance under the plan. Shares issued under the plan through the settlement, assumption or substitution of outstanding awards or obligations to grant future awards resulting from the acquisition of another entity will not reduce the maximum number of shares available for issuance under the plan. In the case of an SAR, only the actual number of shares issued upon exercise of the SAR will be deemed issued for purposes of determining the maximum number of shares available for issuance.
 
The number of shares reserved for issuance will be increased by the number of any shares that we repurchase with option proceeds in respect of the exercise of a stock option. The number of shares contributed to the reserved shares in connection with an option exercise, however, may not be greater than the number obtained by dividing the amount of option exercise proceeds by the fair market value of the common stock on the date of exercise. For this purpose, “option exercise proceeds” means, with respect to an option, the sum of the option price paid in cash, if any, to purchase shares under such option, plus the value of all federal, state and local tax deductions to which we are entitled with respect to the exercise of such option, determined using the highest federal tax rate applicable to corporations and a blended tax rate for state and local taxes based on the jurisdictions in which we do business and giving effect to the deduction of state and local taxes for federal tax purposes.
 
The plan includes a number of additional limitations on the number of shares reserved for issuance. A maximum of           shares may be issued pursuant to incentive stock options. No participant may be awarded options or SARs for more than shares in any calendar year, except that the annual limit for newly hired employees is           shares. A maximum of           shares of restricted stock, or shares represented by restricted stock units, that vest based on the achievement of performance objectives may be awarded to any participant in any calendar year, unless the participant is a newly hired employee, in which case the annual limit is           shares. The foregoing share limitations are subject to adjustment as described below.
 
The maximum annual incentive award is $      million per grantee. The maximum performance award is $      million per grantee for each performance period.
 
Terms and Conditions of Options.  An option granted under the plan is exercisable only to the extent that it is vested on the date of exercise. No option may be exercisable more than ten years from the option grant date or 11 years if the optionee terminates employment or other service due to death in the tenth year of the option term, or five years in the case of an incentive stock option granted to a ten percent stockholder, which is a person who owns more than ten percent of the total combined voting power of all classes of stock of Double-Take Software or our subsidiaries.
 
The exercise price per share under each option granted under the plan may not be less than 100%, or 110% in the case of an incentive stock option granted to a ten percent stockholder, of the fair market


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value of the common stock on the option grant date. For so long as the common stock remains listed on the NASDAQ Global Market, the fair market value of the common stock will be the closing price of the common stock as reported on the NASDAQ Global Market on the option grant date. If there is no closing price reported on the option grant date, the fair market value will be deemed equal to the closing price as reported on the NASDAQ Global Market for the last preceding date on which sales of the common stock were reported. If the shares of common stock are listed on more than one established stock exchange, the fair market value will be the closing price of a share of common stock reported on the exchange that trades the largest volume of shares on the option grant date. If the common stock is not at the time listed or admitted to trading on a stock exchange, fair market value will be the mean between the lowest reported bid price and highest reported asked price of the common stock on the date in question in the over-the-counter market, as such prices are reported in a publication of general circulation selected by the board of directors and regularly reporting the market price of common stock in such market. If the common stock is not listed or admitted to trading on any stock exchange or traded in the over-the-counter market, fair market value will be as determined in good faith by the board of directors.
 
Except upon the occurrence of a merger or other transaction described below, no amendment or modification may be made to an outstanding option which reduces the option price, either by lowering the option price or by canceling the outstanding option and granting a replacement option with a lower option price.
 
Payment of the option price for shares purchased pursuant to the exercise of an option may be made in cash or in cash equivalents acceptable to us or, to the extent permitted by law and at the discretion of the compensation committee, either through the tender to us of shares of common stock, including shares issuable on exercise of the option or by a combination of cash payment and tender of shares.
 
Each option will become vested and exercisable at such times and under such conditions as the compensation committee may approve consistent with the terms of the plan.
 
In the case of incentive stock options, the aggregate fair market value of the common stock determined on the option grant date, with respect to which such options are exercisable for the first time during any calendar year may not exceed $100,000.
 
Incentive stock options are non-transferable during the optionee’s lifetime. The compensation committee may authorize transfers of non-qualified stock options in limited circumstances specified in the plan.
 
Terms and Conditions of Restricted Stock and Restricted Stock Units.  Subject to the provisions of the plan, the compensation committee will determine the terms and conditions of each award of restricted stock and restricted stock units, including the restricted period for all or a portion of the award, the restrictions applicable to the award, the purchase price, if any, for the common stock subject to the award, and, with respect to restricted stock units, whether the participant will receive the dividends and other distributions paid with respect to the award as declared and paid to the holders of the common stock during the restricted period. Awards of restricted stock and restricted stock units may be subject to satisfaction of individual performance objectives or one or more of the performance objectives that are described below under “Corporate Performance Objectives.”
 
The restrictions and the restricted period, which generally will be a minimum of three years, may differ with respect to each participant. An award will be subject to forfeiture if certain events specified by the compensation committee occur prior to the lapse of the restrictions.
 
Awards of restricted stock and restricted stock units are nontransferable.
 
Terms and Conditions of Stock Appreciation Rights.  SARs may be granted in conjunction with all or a part of any option granted under the plan. The compensation committee will determine at the SAR grant date or thereafter the time or times at which and the circumstances under which an SAR may be exercised in whole or in part, the time or times at which and the circumstances under which an SAR will cease to be exercisable, the method of exercise, the method of settlement, the form of consideration payable in settlement, whether or not an SAR will be in tandem or in combination with any other grant, and any other terms and conditions of any SAR. Exercisability of SARs may be subject to future service


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requirements or to the achievement of one or more of the performance objectives that are described below under “Corporate Performance Objectives.”
 
Upon exercise of an SAR, the holder will be entitled to receive, in the specified form of consideration, the excess of the fair market value of one share of common stock on the exercise date over the grant price of such SAR, as determined by the compensation committee. The grant price of an SAR may not be less than the fair market value of a share of common stock on the grant date. Except upon the occurrence of a merger or other transaction described below, no amendment or modification may be made to an outstanding SAR which reduces the SAR grant price, either by lowering the SAR grant price or by canceling the outstanding SAR and granting a replacement SAR with a lower SAR grant price.
 
An SAR granted under the plan will terminate upon the expiration of ten years from the grant date, or 11 years if the holder terminates employment or other service due to death in the tenth year of the SAR term, or under such circumstances and on such earlier date as may be fixed by the compensation committee.
 
Awards of SARs are transferable only to the same extent as the related options.
 
Terms and Conditions of Unrestricted Stock.  The compensation committee may award unrestricted stock, or sell unrestricted stock at par value or such other higher purchase price determined by the compensation committee, free of restrictions other than those required under federal or state securities laws. Awards of unrestricted stock may be made in respect of past services or other valid consideration, in lieu of any cash compensation due to eligible persons, or in satisfaction of a performance share award payable in common stock granted to the participant.
 
Dividend Equivalents.  The compensation committee is authorized to grant dividend equivalents to a participant in connection with an award under the plan. Dividend equivalents will entitle the participant to receive cash, common stock or other property equal in value to dividends paid, or other periodic payments made, with respect to a specified number of shares of common stock. Dividend equivalents may be paid or distributed when accrued or will be deemed to have been reinvested in additional common stock, in awards under the plan or in other investment vehicles, and will be subject to such restrictions on transferability and risks of forfeiture as the compensation committee may specify.
 
Adjustment of Shares Subject to Plan.  If any dividend or other distribution, recapitalization, stock split, stock combination or other change in our corporate structure affects the common stock in such a manner that an adjustment is required to prevent dilution or enlargement of the rights of participants, the compensation committee shall adjust, among other award terms, the number and kind of shares that may be delivered in connection with awards and the exercise price, grant price or purchase price relating to any award. In such circumstances, the compensation committee also may make provision for the payment of cash or other property in respect of any outstanding award.
 
Effect of Mergers and Other Transactions.  Upon the occurrence of transactions specified in the plan, except as described below, all outstanding options and SARs will become immediately exercisable for a period of      days immediately before completion of the applicable transaction, and all outstanding awards of restricted stock and restricted stock units will be deemed to have vested, and all restrictions and conditions applicable to such awards will be deemed to have lapsed, immediately before the scheduled completion of the applicable transaction. The foregoing effects will result upon the dissolution or liquidation of Double-Take Software, upon a merger, consolidation or reorganization of Double-Take Software with one or more other entities in which Double-Take Software is not the surviving entity, upon a sale of substantially all of the assets of Double-Take Software to another entity, or upon any transaction (including a merger or reorganization in which Double-Take Software is the surviving entity) approved by the board of directors that results in any person or entity (or person or entities acting as a group or otherwise in concert) owning 80% or more of the combined voting power of all classes of securities of Double-Take Software. The foregoing provisions will not apply to outstanding awards in respect of any transaction if the awards are assumed in the transaction, or new awards made in substitution for outstanding awards, with appropriate adjustments to the exercise prices and other terms of such awards, or if the board of directors determines that the foregoing provisions will not apply to such transaction.


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The compensation committee may provide in any agreement under the plan for accelerated vesting or exercisability of an award upon