UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-22895
OMEGA RESEARCH, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2223464
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8700 WEST FLAGLER STREET, MIAMI, FLORIDA 33174
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(Address of principal executive offices)
(Zip Code)
(305) 551-9991
-----------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X *]
* REGISTRANT BECAME SUBJECT TO THE FILING REQUIREMENTS ON SEPTEMBER 30, 1997.
AS OF NOVEMBER 7, 1997 THERE WERE 22,238,108 SHARES OF THE REGISTRANT'S
COMMON STOCK OUTSTANDING.
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OMEGA RESEARCH, INC.
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Balance Sheets
December 31, 1996 (audited), September 30, 1997
(unaudited) and Pro Forma September 30, 1997 (unaudited) 3
Statements of Income
Three and Nine months ended September 30, 1996
and 1997 (unaudited) 4
Statements of Cash Flows
Nine months ended September 30, 1996 and 1997 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Signature 15
Exhibit Index 16
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMEGA RESEARCH, INC.
BALANCE SHEETS
PRO FORMA
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997
------------ ------------ ------------
ASSETS (Audited) (Unaudited) (Unaudited)
(Note 3)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 141,633 $ 114,228 $ 12,539,673
Accounts receivable, net 4,357,048 10,015,150 10,015,150
Inventories 92,188 154,073 154,073
Prepaid and other current assets 5,690 709,734 44,734
Deferred income taxes -- 2,967,000 2,967,000
------------ ------------ ------------
Total current assets 4,596,559 13,960,185 25,720,630
PROPERTY AND EQUIPMENT, net 1,085,112 1,016,468 1,016,468
OTHER ASSETS 121,657 90,311 90,311
------------ ------------ ------------
TOTAL ASSETS $ 5,803,328 $ 15,066,964 $ 26,827,409
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 482,662 $ 1,244,557 $ 574,557
Accrued expenses 485,189 539,425 539,425
Income taxes payable -- 1,800,000 1,800,000
Note payable to bank -- 15,000,000 --
------------ ------------ ------------
Total current liabilities 967,851 18,583,982 2,913,982
------------ ------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 25,000,000 shares
authorized, none issued and outstanding -- -- --
Common stock, $.01 par value; 100,000,000
shares authorized, 19,480,000 issued and
outstanding (22,238,108 shares pro forma) 194,800 194,800 222,381
Additional paid-in capital 2,517 (3,711,818) 23,691,046
Retained earnings 4,638,160 -- --
------------ ------------ ------------
Total shareholders' equity (deficit) 4,835,477 (3,517,018) 23,913,427
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,803,328 $ 15,066,964 $ 26,827,409
============ ============ ============
The accompanying notes to financial statements are an integral part of these balance sheets.
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3
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OMEGA RESEARCH, INC.
STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Licensing fees $ 3,870,233 $ 7,017,901 $10,192,357 $19,110,327
Other revenues 1,098,190 1,234,670 2,884,668 3,761,230
----------- ----------- ----------- -----------
Total revenues 4,968,423 8,252,571 13,077,025 22,871,557
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of licensing fees 462,094 547,351 1,342,923 1,402,934
Product development 322,135 507,399 698,657 1,350,316
Sales and marketing 1,542,629 3,034,349 4,145,726 7,980,317
General and administrative 568,401 1,317,972 1,566,249 3,913,477
----------- ----------- ----------- -----------
Total operating expenses 2,895,259 5,407,071 7,753,555 14,647,044
----------- ----------- ----------- -----------
Income from operations 2,073,164 2,845,500 5,323,470 8,224,513
OTHER INCOME, net 38,738 181 47,251 17,845
----------- ----------- ----------- -----------
Income before income taxes 2,111,902 2,845,681 5,370,721 8,242,358
BENEFIT FOR INCOME TAXES -- (1,167,000) -- (1,167,000)
----------- ----------- ----------- -----------
Income before proforma income taxes 2,111,902 4,012,681 5,370,721 9,409,358
PRO FORMA TAX ADJUSTMENTS (Note 1):
Pro forma income taxes 834,201 1,124,044 2,121,435 3,255,731
Nonrecurring tax credit -- 1,167,000 -- 1,167,000
----------- ----------- ----------- -----------
Pro forma net income $ 1,277,701 $ 1,721,637 $ 3,249,286 $ 4,986,627
=========== =========== =========== ===========
PRO FORMA NET INCOME PER SHARE $ 0.06 $ 0.09 $ 0.16 $ 0.25
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 20,220,670 20,220,670 20,220,670 20,220,670
=========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements.
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4
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OMEGA RESEARCH, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before pro forma income taxes $ 5,370,721 $ 9,409,358
Adjustments to reconcile income before pro forma income
taxes to net cash provided by operating activities:
Depreciation and amortization 264,883 475,356
Provision for doubtful accounts 590,721 1,815,422
Compensation expense on stock option grants -- 77,756
Deferred income tax benefit -- (2,967,000)
Write-off of fixed assets 25,000 --
(Increase) decrease in:
Accounts receivable (2,460,794) (7,473,524)
Inventories 57,593 (61,885)
Prepaid expenses and other current assets (5,198) (704,044)
Other assets (46,800) (40,000)
Increase in:
Accounts payable 382,048 761,895
Accrued expenses 31,852 54,236
Income taxes payable -- 1,800,000
----------- ------------
Net cash provided by operating activities 4,210,026 3,147,570
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (136,091) (812,789)
Capitalized software development costs (150,151) (29,358)
----------- ------------
Net cash used in investing activities (286,242) (842,147)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (2,521,561) (17,332,828)
Proceeds from note payable to bank -- 15,000,000
----------- ------------
Net cash used in financing activities (2,521,561) (2,332,828)
----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 1,402,223 (27,405)
CASH AND CASH EQUIVALENTS, beginning of period 311,468 141,633
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,713,691 $ 114,228
=========== ============
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Effective June 30, 1997, the Company declared a dividend
distributing land and a building, with a carrying value of $506,781,
to its shareholders.
The accompanying notes to financial statements are an integral part of these statements.
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5
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OMEGA RESEARCH, INC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying financial statements should be read in conjunction with the
financial statements and notes to financial statements included in the Company's
Prospectus dated September 30, 1997. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position as of September 30, 1997, the results of
operations for the three and nine months ended September 30, 1996 and 1997 and
cash flows for the nine months ended September 30, 1996 and 1997 have been made.
The results of operations and cash flows for an interim period are not
necessarily indicative of the results of operations or cash flows which may be
reported for the year or for any subsequent period.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the
preparation of these financial statements.
ACCOUNTS RECEIVABLE
Accounts receivable are principally from individuals, distributors and
retailers of the Company's products. The Company performs periodic credit
evaluations and maintains allowances for potential credit losses of $830,430 and
$2,593,852 (unaudited) at December 31, 1996 and September 30, 1997,
respectively, and allowances for potential returns of approximately $1,796,859
and $5,075,000 (unaudited) at December 31, 1996 and September 30, 1997,
respectively.
INCOME TAX STATUS
For income tax purposes, the Company was an S corporation prior to September
30, 1997. Accordingly, net income and related timing differences which arise in
the recording of income and expense items for financial reporting and tax
reporting purposes were included in the individual tax returns of the S
corporation shareholders. Effective September 30, 1997, the Company terminated
its S corporation election, and, as a result, adopted Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS No. 109"). SFAS
No. 109 requires that deferred income tax balances be recognized based on the
differences between the financial statement and income tax bases of assets and
liabilities using the enacted tax rates.
Upon adoption of SFAS No. 109 during the third quarter, the Company recorded
a benefit for income taxes which reflects a non-recurring deferred income tax
credit (the "FAS 109 Credit") of approximately $3.0 million partially offset by
a $1.8 million provision for income taxes payable. The FAS 109 Credit recognized
net deferred tax assets arising from book and tax basis differences that arose
primarily as a result of accounts receivable reserves. The $1.8 million in
income taxes payable relate to federal and state income taxes owed by the
Company as a result of an approximate $4.6 million in S corporation taxable
earnings which will be recognized by the Company, for tax purposes, in the
remainder of 1997 and during 1998.
The pro forma adjustment to reflect income taxes included in the accompanying
statements of income is for informational purposes only. Income taxes have been
provided at the estimated effective rate of 39.5%.
6
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PRO FORMA NET INCOME PER SHARE
Pro forma net income per common share and common share equivalents have
been computed by dividing net income by the weighted average number of common
shares and common share equivalents outstanding. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, common share and common
share equivalents issued at prices below the assumed public offering price
during the 12-month period prior to the proposed public offering having been
included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method and the initial public offering price
of $11.00 per share).
2. NOTE PAYABLE TO BANK AND DIVIDENDS PAID TO SHAREHOLDERS
On September 29, 1997, the Company borrowed $15,000,000 from a bank at a
variable interest rate of 6.25%. Such amount was borrowed in order to fund a
$15.4 million dividend paid to the Company's S corporation shareholders just
prior to terminating the Company's S corporation election. This amount
represented the Company's best estimate of undistributed tax earnings and will
be adjusted once the actual amount of S corporation undistributed tax earnings
is determined.
The $15.0 million note payable to bank, which was payable on October 22,
1997, was repaid on October 6, 1997 with proceeds from the Company's initial
public offering.
3. SUBSEQUENT EVENTS
On October 6, 1997, the Company closed on its initial public offering (the
"Offering") of 3.7 million shares of common stock of the Company. Of the shares
of common stock offered to the public 2.6 million shares of common stock were
sold by the Company and 1.1 million shares of common stock were sold by the
selling shareholders.
On November 5, 1997, the Company closed on the underwriters' purchase of
225,000 additional shares of common stock pursuant to the exercise of a portion
of their over-allotment option granted in the Offering. Of the shares exercised,
158,108 shares of common stock were sold by the Company and 66,892 shares of
common stock were sold by the selling shareholders.
UNAUDITED PRO FORMA BALANCE SHEET
The accompanying unaudited pro forma balance sheet at September 30, 1997,
assumes the effects, on a pro forma basis, of the following transactions:
(a) the receipt of approximately $28.2 million received from the sale of
approximately 2.8 million shares of the Company's common stock, (b) the
repayment of the $15 million short term note payable to the bank, and (c) the
repayment of expenses of the Offering.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the Financial Statements
and the Notes to Financial Statements contained herein. The results of
operations for an interim period may not give a true indication of results for
the year, or for any subsequent period.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in the
Company's statement of income reflected as a percentage of total revenues and as
a percentage of licensing fees:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1996 1997 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Licensing fees 77.9% 85.0% 77.9% 83.6%
Other revenues 22.1 15.0 22.1 16.4
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of licensing fees 9.3 6.6 10.3 6.1
Product development 6.5 6.1 5.3 5.9
Sales and marketing 31.1 36.8 31.7 34.9
General and administrative 11.4 16.0 12.0 17.1
----- ----- ----- -----
Total operating expenses 58.3 65.5 59.3 64.0
----- ----- ----- -----
Income from operations 41.7% 34.5% 40.7% 36.0%
===== ===== ===== =====
AS A PERCENTAGE OF LICENSING FEES:
Operating expenses:
Cost of licensing fees 11.9% 7.8% 13.2% 7.3%
Product development 8.3 7.2 6.9 7.1
Sales and marketing 39.9 43.2 40.6 41.7
General and administrative 14.7 18.8 15.4 20.5
----- ----- ----- -----
Total operating expenses 74.8% 77.0% 76.1% 76.6%
===== ===== ===== =====
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QUARTERS ENDED SEPTEMBER 30, 1996 AND 1997
REVENUES
TOTAL REVENUES. The Company's total revenues increased 66% from $5.0
million in the three months ended September 30, 1996 to $8.3 million in the
comparable period of 1997.
LICENSING FEES. Licensing fees increased 81% from $3.9 million in the
three months ended September 30, 1996 to $7.0 million in the comparable period
of 1997, primarily due to an increase in TRADESTATION sales and the introduction
of OPTIONSTATION in September 1996. The Company believes that the increased net
unit shipments of TRADESTATION were due to new marketing efforts, an emphasis on
providing customers with the ability to pay for products monthly over a 12-month
period and growth in the Company's sales and marketing organization.
8
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OTHER REVENUES. Other revenues increased 12% from $1.1 million in the
three months ended September 30, 1996 to $1.2 million in the comparable period
of 1997, primarily due to an increase in minimum royalties under the Company's
license agreement with Dow Jones Markets offset by the impact of certain one
time payments received during the 1996 third quarter.
OPERATING EXPENSES
COST OF LICENSING FEES. Cost of licensing fees consists primarily of
product media, packaging and storage and inventory costs. Cost of licensing fees
as a percentage of licensing fees improved from 12% in the three months ended
September 30, 1996 to 8% in the comparable period of 1997, primarily due to
increased unit sales of higher-priced products as a percentage of total unit
sales.
PRODUCT DEVELOPMENT. Product development expenses include expenses
associated with the development of new products, enhancements to existing
products, testing of products and the creation of training manuals, and consist
primarily of salaries, other personnel costs and depreciation of computer and
related equipment. Product development expenses were $322,000 in the three
months ended September 30, 1996 as compared to $507,000 in the comparable period
of 1997, primarily due to an increase in the number of individuals employed in
product development. The Company believes that a significant level of product
development expenditures will be required to remain competitive, particularly as
it enters the institutional investor market. Accordingly, the Company
anticipates that the dollar amount of product development expense will increase
for the foreseeable future.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries for the customer support center and marketing personnel, commissions
and other personnel costs, shipping costs and marketing programs, including
advertising, brochures, direct mail programs and seminars to promote the
Company's products to investors. Sales and marketing expenses were $1.5 million
in the three months ended September 30, 1996 as compared to $3.0 million in the
comparable period of 1997, primarily due to increased advertising (including
print advertising, the use of sales seminars, television advertising and direct
mailers) of $855,000, personnel costs for the customer support center and
commissions of $507,000, telephone expenses of $91,000 and shipping costs of
$47,000. Sales and marketing expenses as a percentage of licensing fees
increased from 40% in the three months ended September 30, 1996 as compared to
43% in the comparable period of 1997. The Company expects to continue hiring
additional personnel and anticipates that sales and marketing expenses will
increase in absolute dollar amount at least through the remainder of 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee related costs for support functions such as executive,
human resources, finance, information systems and administrative personnel as
well as external professional fees, rent and other facilities expense and
provision for bad debts. General and administrative expenses were $568,000 in
the three months ended September 30, 1996 as compared to $1.3 million in the
comparable period of 1997, primarily due to increases in the provision for bad
debts associated with increased revenues and increases in personnel, contract
labor and professional fees necessary to manage the growth of the Company. The
Company believes that the dollar amount of its general and administrative
expenses will increase as the Company incurs additional costs (including
directors' and officers' liability insurance, investor relations costs and
increased professional fees) related to being a public company.
OTHER INCOME, NET
Other income, net consists primarily of interest income from cash and cash
equivalents offset by interest expense related to the short term note payable to
bank during 1997 and also includes sales tax refunds received during 1996. The
Company generally invests in interest-bearing accounts and overnight
investments. The amount of interest income fluctuates based on the amount of
funds available for investment and the prevailing interest rates. Other income,
net decreased from $39,000 in the three months ended September 30, 1996 as
compared to an immaterial amount in the comparable period of 1997 primarily due
to the receipt of approximately $25,000 in sales tax refunds during August 1996
and interest expense related to the $15 million short term note payable to a
bank obtained during the last week of the quarter ended September 30, 1997. See
Note 2 to Notes to Financial Statements.
9
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NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
REVENUES
TOTAL REVENUES. The Company's total revenues increased 75% from $13.1
million in the first nine months of 1996 to $22.9 million in the comparable
period of 1997.
LICENSING FEES. Licensing fees increased 88% from $10.2 million in the
first nine months of 1996 to $19.1 million in the comparable period of 1997,
primarily due to an increase in TRADESTATION sales and, to a lesser extent, the
introduction of OPTIONSTATION in September 1996. The Company believes that the
increased net unit shipments of TRADESTATION were due to new marketing efforts,
an emphasis on providing customers with the ability to pay for products monthly
over a 12-month period and growth in the Company's sales and marketing
organization. The Company has increased its returns reserves during the first
nine months of 1997 to provide for the impact that its new marketing efforts may
have on returns.
OTHER REVENUES. Other revenues increased 30% from $2.9 million in the
first nine months of 1996 to $3.8 million in the comparable period of 1997,
primarily due to an increase in minimum royalties under the Company's license
agreement with Dow Jones Markets.
OPERATING EXPENSES
COST OF LICENSING FEES. Cost of licensing fees as a percentage of
licensing fees improved from 13% in the first nine months of 1996 to 7% in the
comparable period of 1997, primarily due to increased unit sales of
higher-priced products as a percentage of total unit sales.
PRODUCT DEVELOPMENT. Product development expenses were $699,000 in the
first nine months of 1996 as compared to $1.4 million in the comparable period
of 1997, primarily due to an increase in the number of individuals employed in
product development. Product development expenses as a percentage of licensing
fees did not change significantly in the first nine months of 1996 as compared
to the comparable period of 1997.
SALES AND MARKETING. Sales and marketing expenses were $4.1 million in
the first nine months of 1996 as compared to $8.0 million in the comparable
period of 1997, primarily due to increased advertising (including print
advertising, the use of sales seminars, television advertising and direct
mailers) of $2.3 million, personnel costs for the customer support center and
commissions of $1.1 million, shipping costs of $117,000, and telephone expenses
of $231,000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.6
million in the first nine months of 1996 as compared to $3.9 million in the
comparable period of 1997, primarily due to increases in the provision for bad
debts associated with increased revenues, increases in personnel, contract labor
and professional fees necessary to manage the growth of the Company and rent
related to the Company's new corporate headquarters.
OTHER INCOME, NET
Other income, net decreased from $47,000 in the first nine months of
1996 to $18,000 in the comparable period of 1997 primarily due to the receipt of
approximately $25,000 in sales tax refunds during August 1996.
INCOME TAXES
The benefit for income taxes in the third quarter of 1997 reflects a
non-recurring deferred income tax credit (the "FAS 109 Credit") of approximately
$3.0 million partially offset by a $1.8 million provision for income taxes
payable. Since 1988, and until September 1997, the Company elected for its
earnings to be taxed directly to the Company's shareholders as an S corporation
under the Internal Revenue Code of 1986, as amended. On September 30, 1997, the
Company terminated its S corporation election, and, as a result, recognized the
FAS 109 Credit to record net deferred tax assets arising from book and tax basis
differences that arose primarily as a result of accounts receivable reserves.
The $1.8 million in income
10
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taxes payable relate to federal and state income taxes owed by the Company as a
result of an approximate $4.6 million in S corporation taxable earnings which
will be recognized by the Company, for tax purposes, in the remainder of 1997
and during 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $3.1 million for the nine
months ended September 30, 1997 compared to $4.2 million for the nine months
ended September 30, 1996. The decrease in cash provided by operations in the
first nine months of 1997 was primarily attributable to an increase in the
growth of accounts receivable balances during the first nine months of 1997.
Accounts receivable growth increased during this period as a result of increased
sales generated by expanded marketing and sales efforts. Although the Company
has, since 1992, granted its customers extended payment terms, only recently
have they been extended from 10 to 12 months.
The Company's investing activities used cash of $842,000 and $286,000 in
the first nine months of 1997 and 1996, respectively. The principal use of cash
in investing activities was for capital expenditures related to the acquisition
of computer and related equipment and software required to support expansion of
the Company's operations. Capital expenditures in 1997 also include purchases of
furniture and fixtures and leasehold improvements related to the Company's move
to a new corporate headquarters in February 1997.
The Company's financing activities used cash of $2.3 million and $2.5
million in the first nine months of 1997 and 1996, respectively. Dividends to
the Company's S corporation shareholders increased by approximately $14.8
million, and were offset by the $15.0 million note payable obtained from a bank
during the third quarter of 1997 to finance the dividend paid on September 29,
1997. See Note 2 to Notes to Financial Statements.
Assuming there is no significant change in the Company's business, the
Company believes that existing cash balances, including proceeds received from
the Company's initial public offering, and cash flow from operations will be
sufficient to meet its normal working capital and capital expenditure
requirements for at least the next twelve months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 128, EARNINGS PER SHARE
("SFAS 128") which changes the method of calculating earnings per share. SFAS
128 requires the presentation of "basic" earnings per share and "diluted"
earnings per share on the face of the income statement. Basic earnings per share
is computed by dividing the net income available to common shareholders by the
weighted average shares of outstanding common stock. The calculation of diluted
earnings per share is similar to basic earnings per share except that the
denominator includes dilutive common stock equivalents such as stock options and
warrants. The statement is effective for financial statements for periods ending
after December 15, 1997. The Company will adopt SFAS 128 in the fourth quarter
of 1997, as early adoption is not permitted. The following table presents pro
forma earnings per share amounts calculated in accordance with SFAS 128.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1996 1997 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Pro forma earnings per share:
Basic earnings per share $0.07 $0.09 $0.17 $0.26
Diluted earnings per share $0.06 $0.09 $0.16 $0.25
</TABLE>
11
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FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains statements that are forward
looking within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such forward looking
statements are made pursuant to the safe harbor provisions of the Security
Litigation Reform Act of 1995. When used in this quarterly report on Form 10-Q,
the words "believes," "estimates," "plans," "expects," "intends," "anticipates,"
"may," "prospect" and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements. These statements
are based on current expectations and beliefs concerning future events that are
subject to risks and uncertainties. Actual results may differ materially from
the results suggested herein and from the results historically experienced.
Factors that may cause or contribute to such differences and impact future
events include, but are not limited to, those discussed in the Company's filings
with the Securities and Exchange Commission including the risk factors set forth
in the Company's Prospectus dated September 30, 1997.
12
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDINGS
(C) SALES OF UNREGISTERED SECURITIES
The Company has not issued or sold any unregistered securities during the
quarter ended September 30, 1997 except that, pursuant to the Company's Amended
and Restated 1996 Incentive Stock Plan, the Company granted (i) on July 21,
1997, non-qualified stock options to purchase an aggregate of 5,000 shares of
the Company's Common Stock to one employee; (ii) on August 4, 1997,
non-qualified stock options to purchase an aggregate of 3,000 shares of the
Company's Common Stock to one employee; (iii) on August 14, 1997, non-qualified
stock options to purchase an aggregate of 15,000 shares of the Company's Common
Stock to three employees; (iv) on August 18, 1997, non-qualified stock options
to purchase an aggregate of 17,500 shares of the Company's Common Stock to one
employee; (v) on September 29, 1997, incentive stock options to purchase an
aggregate of 76,925 shares of the Company's Common Stock to seventy-eight
employees; and (vi) on September 30, 1997, non-qualified stock options to
purchase an aggregate of 5,000 shares of the Company's Common Stock to a
consultant of the Company. The exercise price of the stock options granted on
July 21 and August 4, 14 and 18, 1997 was $7.25 per share and on September 29
and 30, 1997 was $11.00 per share (the initial public offering price of the
Company's Common Stock). All the foregoing stock options vest at the rate of
twenty (20%) percent per annum commencing on the first anniversary of the date
of grant (except that the 5,000 options granted to the consultant vest 100% six
months from the date of grant) and are exercisable through, but no later than,
ten years from the date of grant. The foregoing stock options were granted by
the Company in reliance upon the exemption from registration available under
Section 4(2) of the Securities Act of 1933, as amended.
(D) USE OF PROCEEDS
(1) The effective date of the Securities Act registration statement for which
the use of proceeds is being disclosed is September 30, 1997, and the
Securities and Exchange Commission file number assigned to the Company's
Registration Statement on Form S-1 is 333-32077 (the "Registration
Statement").
(2) The initial public offering of the Company (the "Offering") in connection
with the Registration Statement commenced on October 1, 1997.
(3) The Offering did not terminate before any securities were sold.
(4) (i) The Offering terminated with the closing on November 5, 1997
of the purchase by the several underwriters of 225,000 shares of the
Company's Common Stock (158,108 shares from the Company and 66,892
shares from the selling shareholders) pursuant to a partial exercise
by the several underwriters of their over-allotment option. The
Offering terminated before the sale of all of the 4,255,000 shares of
Common Stock registered pursuant to the Registration Statement
(including the 555,000 shares of Common Stock registered solely to
cover over-allotments).
(ii) The names of the managing underwriters are BancAmerica Robertson
Stephens (formerly known as Robertson, Stephens and Company LLC),
Lehman Brothers Inc. and Hambrecht & Quist LLC.
(iii) The Registration Statement covered shares of Common Stock, $.01 par
value, of the Company.
(iv) The total number of shares of Common Stock registered for the account
of the Company was 2,990,000 shares with an aggregate offering price
of $32,890,000 and for the account of the selling shareholders was
1,265,000 shares with an aggregate offering price of $13,915,000. Of
such total number of shares registered for the account of the
Company, 2,758,108 shares
13
<PAGE>
of Common Stock were sold with an aggregate offering price of
$30,339,188. Of the total number of shares registered for the account
of the selling shareholders, 1,166,892 shares of Common Stock were
sold with an aggregate offering price of $12,835,812.
(v) Since the effective date of the Registration Statement was September
30, 1997 (the last day of the Company's reporting period with respect
to this Form 10-Q) and the initial closing of the Offering was not
until October 6, 1997, the following information is provided through
November 5, 1997 (the date of the closing of the purchase of a
portion of the over-allotment option shares by the several
underwriters). The amount of expenses incurred for the Company's
account in connection with the issuance and distribution of the
shares of Common Stock registered pursuant to the Registration
Statement are as follows:
(1) Underwriters discounts and commissions $2,123,743.16
(2) Finder's fees 0.00
(3) Expenses paid to or for underwriters 8,673.00*
(4) Other expenses 776,327.00*
--------------
(5) Total Expenses $2,908,743.16*
==============
The expenses above marked with an asterisk (*) represent a reasonable
estimate of the amount of expenses incurred instead of the actual
amount of expenses. None of the foregoing expenses were paid to
directors or officers of the Company or their associates or to
persons owning ten (10%) percent or more of any class of equity
securities of the Company or to any affiliates of the Company.
Accordingly, all of the foregoing expenses were payments to third
parties.
(vi) The estimated net offering proceeds to the Company after deducting
the total expenses described in paragraph (v) above is
$27,430,444.84.
(vii) The net offering proceeds used by the Company through November 5,
1997, were $15,017,979 to repay a short-term bank loan (both
principal and interest) which the Company obtained in order to pay
immediately prior to the effective date of the Registration Statement
a cash dividend to the Company's then existing shareholders equal to
the Company's then estimate of the undistributed accumulated earnings
during the period the Company was an S corporation. The balance of
the net offering proceeds have been temporarily invested in tax-free,
short-term, interest bearing instruments pending the use by the
Company for working capital and other general corporate purposes.
(viii) The use of the net offering proceeds as described in paragraph (vii)
above does not represent a material change in the use of the proceeds
described in the Company's prospectus dated September 30, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 1997, and prior to the Company's
Registration Statement becoming effective and the closing of the Offering, the
Company's shareholders by joint unanimous written consents of the Company's
shareholders and Board of Directors dated July 16, 1997, July 24, 1997, August
14, 1997 and September 22, 1997, authorized and approved various corporate
actions and matters, including, without limitation, the adoption of the Second
Amended and Restated Articles of Incorporation and Second Amended and Restated
Bylaws of the Company, the election of the Company's Board of Directors
comprised of William Cruz, Ralph Cruz, Salomon Sredni, Peter Parandjuk and Marc
Stone, the adoption of the Company's 1997 Nonemployee Director Stock Option
Plan, 1997 Employee
14
<PAGE>
Stock Purchase Plan and the Amended and Restated 1996 Incentive Stock Option
Plan, various matters related to the Offering, the filing of the Registration
Statement and the listing of the Company's Common Stock on the Nasdaq National
Market System, the termination by revocation of the Company's election to be an
S corporation and a dividend of undistributed S corporation earnings to its then
existing shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Report on Form 8-K
No reports on Form 8-K were filed by the Registrant during the three
months ended September 30, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMEGA RESEARCH, INC.
Registrant
NOVEMBER 11, 1997 /S/ SALOMON SREDNI
- -------------------- -----------------------------------
Date Salomon Sredni
Vice President of Operations, Chief Financial
Officer and Treasurer
(Signing both in his capacity as an authorized
officer and as Chief Accounting Officer of the
Registrant)
15
<PAGE>
OMEGA RESEARCH, INC.
EXHIBIT INDEX
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- --------------------
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule
<TABLE>
<CAPTION>
OMEGA RESEARCH, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Pro forma net income $ 1,277,701 $ 1,721,637 $ 3,249,286 $ 4,986,627
=========== =========== =========== ===========
Common stock, beginning of period 19,480,000 19,480,000 19,480,000 19,480,000
Weighted average common shares issued during
the period -- -- -- --
Dilutive effect of stock options (1) 740,670 740,670 740,670 740,670
----------- ----------- ----------- -----------
Weighted average shares of common and
common stock equivalents outstanding 20,220,670 20,220,670 20,220,670 20,220,670
=========== =========== =========== ===========
Pro forma net income per share (2) $ 0.06 $ 0.09 $ 0.16 $ 0.25
=========== =========== =========== ===========
</TABLE>
(1) In accordance with the Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common share and common share equivalents
issued at prices below the Company's initial public offering price
during the 12-month period prior to the initial public offering have
been included in the calculation as if they were outstanding for all
periods presented (using the treasury stock method and the initial
public offering price of $11.00 per share).
(2) Primary and fully diluted pro forma net income per share are the same
for all periods presented.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
OMEGA RESEARCH, INC. FINANCIAL DATA SCHEDULE THE SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION FROM THE COMPANY'S FINANCIAL STATEMENTS AS OF AND FOR THE
NINE-MONTH PERIOD ENDING SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND>
<CIK> 0001042814
<NAME> OMEGA RESEARCH, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 114,228
<SECURITIES> 0
<RECEIVABLES> 17,684,002
<ALLOWANCES> 7,668,852
<INVENTORY> 154,073
<CURRENT-ASSETS> 13,960,186
<PP&E> 2,120,672
<DEPRECIATION> 1,104,204
<TOTAL-ASSETS> 15,066,964
<CURRENT-LIABILITIES> 18,583,982
<BONDS> 0
0
0
<COMMON> 194,800
<OTHER-SE> (3,711,818)
<TOTAL-LIABILITY-AND-EQUITY> 15,066,964
<SALES> 19,110,327
<TOTAL-REVENUES> 22,871,557
<CGS> 1,402,934
<TOTAL-COSTS> 14,647,044
<OTHER-EXPENSES> (17,845)
<LOSS-PROVISION> 1,815,422
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,242,358
<INCOME-TAX> 3,255,731<F1>
<INCOME-CONTINUING> 4,986,627<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,986,627<F1>
<EPS-PRIMARY> 0.25<F1>
<EPS-DILUTED> 0.25<F1>
<FN>
<F1>REFLECTS PRO FORMA PROVISION FOR INCOME TAXES AS IF THE COMPANY WERE A
C CORPORATION SUBJECT TO FEDERAL AND STATE CORPORATE INCOME TAXES. SEE NOTE 1
OF NOTES TO FINANCIAL STATEMENTS.
</FN>
</TABLE>
