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, 1998
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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
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OMEGA RESEARCH, INC.
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(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) 485-7000
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(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 X No
----- -----
AS OF NOVEMBER 6, 1998 THERE WERE 22,263,108 SHARES OF THE REGISTRANT'S
COMMON STOCK OUTSTANDING.
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OMEGA RESEARCH, INC.
INDEX
<TABLE>
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997 (audited).......... 3
Statements of Income
Three and nine months ended September 30, 1998 and 1997 (unaudited)..... 4
Statements of Cash Flows
Nine months ended September 30, 1998 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.................................. 14
Item 4. Submission of Matters to a Vote of Security Holders........................ 14
Item 6. Exhibits and Reports on Form 8-K........................................... 15
Signature............................................................................ 16
Exhibit Index........................................................................ 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMEGA RESEARCH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 8,482,056 $12,323,515
Marketable securities 5,032,409 1,014,590
Accounts receivable, net 8,928,459 9,438,218
Inventories 164,738 146,821
Other current assets 966,213 520,537
Deferred income taxes 3,647,500 2,963,000
----------- -----------
Total current assets 27,221,375 26,406,681
PROPERTY AND EQUIPMENT, net 1,736,810 971,511
OTHER ASSETS 308,970 91,626
----------- -----------
Total assets $29,267,155 $27,469,818
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,031,339 $ 1,119,202
Accrued expenses 908,334 561,552
Deferred revenue -- 47,395
Income taxes payable -- 509,000
----------- -----------
Total current liabilities 1,939,673 2,237,149
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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, 22,262,108 and 22,246,108
issued and outstanding at September 30, 1998 and
December 31, 1997, respectively 222,621 222,461
Additional paid-in capital 23,869,811 23,745,251
Retained earnings 3,235,050 1,264,957
----------- -----------
Total shareholders' equity 27,327,482 25,232,669
----------- -----------
Total liabilities and shareholders' equity $29,267,155 $27,469,818
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
3
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OMEGA RESEARCH, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES:
Licensing fees $ 4,980,272 $ 7,017,901 $ 16,341,669 $ 19,110,327
Other revenues 1,489,201 1,234,670 4,810,194 3,761,230
------------ ------------ ------------ ------------
Total net revenues 6,469,473 8,252,571 21,151,863 22,871,557
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of licensing fees 312,564 547,351 1,282,650 1,402,934
Product development 854,512 507,399 2,405,400 1,350,316
Sales and marketing 3,632,281 3,034,349 10,791,122 7,980,317
General and administrative 1,523,555 1,317,972 4,196,995 3,913,477
------------ ------------ ------------ ------------
Total operating expenses 6,322,912 5,407,071 18,676,167 14,647,044
------------ ------------ ------------ ------------
Income from operations 146,561 2,845,500 2,475,696 8,224,513
OTHER INCOME, net 129,042 181 349,875 17,845
------------ ------------ ------------ ------------
Income before income taxes 275,603 2,845,681 2,825,571 8,242,358
INCOME TAX PROVISION (BENEFIT) 59,500 (1,167,000) 990,500 (1,167,000)
------------ ------------ ------------ ------------
Income before pro forma income
tax adjustments 216,103 4,012,681 1,835,071 9,409,358
PRO FORMA TAX ADJUSTMENTS FOR
PERIODS PRIOR TO SEPTEMBER 30,
1997 (Note 1):
Pro forma income taxes 1,124,044 3,255,731
Nonrecurring tax credit -- 1,167,000 -- 1,167,000
------------ ------------ ------------ ------------
Pro forma net income $ 216,103 $ 1,721,637 $ 1,835,071 $ 4,986,627
============ ============ ============ ============
PRO FORMA EARNINGS PER
SHARE (Note 3):
Basic and Diluted $ 0.01 $ 0.09 $ 0.08 $ 0.25
============ ============ ============ ============
</TABLE>
4
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OMEGA RESEARCH, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Pro forma net income $ 1,835,071 $ 4,986,627
Adjustments to reconcile pro forma net income to net
cash provided by operating activities:
Pro forma tax adjustments -- 4,422,731
Depreciation and amortization 292,708 475,356
Provision for doubtful accounts 1,422,835 1,815,422
Compensation expense on stock option grants 87,520 77,756
Deferred income tax benefit (684,500) (2,967,000)
Increase in:
Accounts receivable (913,076) (7,473,524)
Inventories (17,917) (61,885)
Prepaid expenses and other current assets (445,676) (704,044)
Other assets (217,344) (40,000)
Increase (decrease) in:
Accounts payable (87,863) 761,895
Accrued expenses 346,782 54,236
Deferred revenue (47,395) --
Income taxes payable (509,000) 1,800,000
------------ ------------
Net cash provided by operating activities 1,062,145 3,147,570
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,058,007) (812,789)
Purchase of marketable securities (4,017,819) --
Capitalized software development costs -- (29,358)
------------ ------------
Net cash used in investing activities (5,075,826) (842,147)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 37,200 --
Repayment of distributions to shareholders 135,022 --
Distributions to shareholders -- (17,332,828)
Proceeds from note payable to bank -- 15,000,000
------------ ------------
Net cash provided by (used in) financing activities 172,222 (2,332,828)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,841,459) (27,405)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,323,515 141,633
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,482,056 $ 114,228
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 2,413,740 $ --
============ ============
</TABLE>
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.
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 Annual Report on Form 10-K dated December 31, 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, 1998, the
results of operations for the three and nine months ended September 30, 1998 and
1997 and cash flows for the nine months ended September 30, 1998 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
approximately $3,652,000 and $3,229,000 at September 30, 1998 and December 31,
1997, respectively, and allowances for potential returns of approximately
$5,300,000 and $4,150,000 at September 30, 1998 and December 31, 1997,
respectively.
INCOME TAXES
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 ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES. 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.
PRO FORMA INCOME TAX ADJUSTMENTS
Upon adoption of SFAS No. 109 during the third quarter of 1997, 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 was recognized by the Company, for tax purposes, in the fourth
quarter of 1997 and during the first nine months of 1998, and the balance of
which will be recognized by the Company, for tax purposes, during the remainder
of 1998.
The pro forma income taxes for the three and nine month periods ended
September 30, 1997 included in the accompanying statements of income is for
informational purposes only. Pro forma income taxes have been provided at an
estimated effective rate of 39.5%.
6
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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 (the "Dividend"). The
Dividend was equal to the Company's estimate at that time of its cumulative
taxable income prior to its conversion to a C corporation to the extent such
taxable income had not been previously distributed. Subsequent to the payment of
the Dividend, the Company preliminarily determined that the actual cumulative
taxable income would be less than was originally estimated. Accordingly, in the
fourth quarter of 1997, the recipients of the Dividend repaid $800,000, plus
interest, to the Company. During the third quarter of 1998, upon finalization of
the Company's 1997 tax returns and final determination of S corporation earnings
at the date of conversion to a C corporation, the recipients of the Dividend
repaid an additional $135,000, plus interest, to the Company, reducing the
Dividend to $14.5 million.
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. PRO FORMA EARNINGS PER SHARE
The computation of weighted average common and common equivalent shares used
to compute basic and diluted pro forma earnings per share is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding 22,262,108 19,480,000 22,253,175 19,480,000
Impact of dilutive options after applying
the treasury stock method 402,833 740,670 585,085 740,670
---------- ---------- ---------- ----------
Shares outstanding (diluted) 22,664,941 20,220,670 22,838,260 20,220,670
========== ========== ========== ==========
Options outstanding which are not included
in the calculation of diluted earnings per share
because their impact is antidilutive 427,075 - 320,750 -
========== ========== ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL NET REVENUES:
Licensing fees 77.0% 85.0% 77.3% 83.6%
Other revenues 23.0 15.0 22.7 16.4
----- ----- ----- -----
Total net revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of licensing fees 4.8 6.6 6.1 6.1
Product development 13.2 6.1 11.4 5.9
Sales and marketing 56.1 36.8 51.0 34.9
General and administrative 23.6 16.0 19.8 17.1
----- ----- ----- -----
Total operating expenses 97.7 65.5 88.3 64.0
----- ----- ----- -----
Income from operations 2.3% 34.5% 11.7% 36.0%
===== ===== ===== =====
AS A PERCENTAGE OF LICENSING FEES:
Operating expenses:
Cost of licensing fees 6.3 7.8 7.9 7.3
Product development 17.2 7.2 14.7 7.1
Sales and marketing 72.9 43.2 66.0 41.7
General and administrative 30.6 18.8 25.7 20.5
----- ----- ----- -----
Total operating expenses 127.0% 77.0% 114.3% 76.6%
===== ===== ===== =====
</TABLE>
QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
NET REVENUES
TOTAL NET REVENUES. The Company's total net revenues were $6.5 million
in the three months ended September 30, 1998 compared to $8.3 million in the
comparable period of 1997.
LICENSING FEES. Licensing fees were $5.0 million in the three months
ended September 30, 1998 compared to $7.0 million in the comparable period of
1997, primarily due to a decrease in sales of the Company's products. The
Company believes that licensing fees in 1998 are being impacted by slower than
anticipated demand for its products, which was first experienced during the
fourth quarter of 1997. Management believes that the slower demand is due in
part to customer delays in decision making (in anticipation of the release of
the next versions of TRADESTATION and OPTIONSTATION expected during the first
quarter of 1999 and the release of the next version of SUPERCHARTS following the
release of the Company's
8
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premier products). Management also believes that product sales will be adversely
impacted to a greater extent until the next versions of such products are
released and accepted by the marketplace, however, no assurances can be given
that the marketplace will accept the next versions of such products.
OTHER REVENUES. Other revenues increased 21% from $1.2 million in the
three months ended September 30, 1997 to $1.5 million in the comparable period
of 1998, primarily due to an increase in minimum royalties under the Company's
license agreement with Dow Jones Markets, Inc., which was recently acquired by
Bridge Information Systems, Inc. ("Bridge Telerate").
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
decreased from $547,000 in the three months ended September 30, 1997 to $313,000
in the comparable period of 1998, primarily due to a decrease in the number of
the Company's shipments. Cost of licensing fees as a percentage of licensing
fees decreased from 8% in the three months ended September 30, 1997 to 6% in the
comparable period of 1998, primarily due to the mix of product 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 increased from $507,000 in the
three months ended September 30, 1997 to $855,000 in the comparable period of
1998, primarily due to an increase in the number of individuals employed in
product development and recruiting fees related to the hiring of such employees.
Product development expenses as a percentage of licensing fees increased from 7%
in the three months ended September 30, 1997 to 17% in the comparable period of
1998, primarily due to increased personnel and related expenses as well as
decreased licensing fees. The Company anticipates that the absolute dollar
amount of product development expense will increase for the foreseeable future
as the Company seeks to develop new products and enhance existing products.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
marketing programs, including advertising, brochures, direct mail programs and
seminars to promote the Company's products to investors, sales commissions,
salaries for the customer support center and marketing personnel, other
personnel costs and shipping expenses. Sales and marketing expenses increased
from $3.0 million in the three months ended September 30, 1997 to $3.6 million
in the comparable period of 1998, primarily due to increased personnel and
related costs for the customer support center, increased promotional costs
(including the use of sales seminars and the participation in, and sponsorship
of, industry events), and increased shipping costs, offset by decreased
communications expense. Sales and marketing expenses as a percentage of
licensing fees increased from 43% in the three months ended September 30, 1997
to 73% in the comparable period of 1998 as a result of the increased marketing
expenses and decreased licensing fees. The Company expects the level of sales
and marketing expenses, including advertising and promotional costs, to depend
on the level of sales. Sales and marketing expenses are expected to increase in
connection with the release of the next versions of the Company's products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee-related costs for administrative personnel such as
executive, human resources, finance and information systems employees, as well
as professional fees, rent and other facilities expense, and provision for bad
debt. General and administrative expenses were $1.5 million in three months
ended September 30, 1998 as compared to $1.3 million in the comparable period of
1997. General and administrative expenses as a percentage of licensing fees
increased from 19% in the three months ended September 30, 1997 to 31% in the
comparable period of 1998 primarily as a result of increased professional fees
and costs of being a public company, as well as decreased licensing fees.
Management believes that the absolute dollar amount of its general and
9
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administrative expenses in the future will depend, to a large extent, on the
levels of provision required for bad debt and for the defense of the class
action lawsuit against the Company, as well as the hiring of additional
personnel to support the expected growth of the Company and the extent, if any,
to which the Company enters new markets or related businesses.
OTHER INCOME, NET
Other income, net consists primarily of investment income from cash and
cash equivalents. The Company generally invests in overnight investments, tax
exempt commercial paper and investment grade short-term municipal bonds. The
amount of interest income fluctuates based on the amount of funds available for
investment and the prevailing interest rates. Other income, net was $129,000 in
the three months ended September 30, 1998 primarily due to income earned on the
proceeds from the Company's initial public offering which closed in October
1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET REVENUES
TOTAL NET REVENUES. The Company's total revenues were $21.2 million in
the nine months ended September 30, 1998 compared to $22.9 million in the
comparable period of 1997.
LICENSING FEES. Licensing fees were $16.3 million in the nine months
ended September 30, 1998 as compared to $19.1 million in the comparable period
of 1997, primarily due to a decrease in sales of all of the Company's principal
products. The Company believes that licensing fees in 1998 are being impacted by
slower than anticipated demand for its products, which was first experienced
during the fourth quarter of 1997. Management believes that the slower demand is
due in part to customer delays in decision making (in anticipation of the
release of the next versions of TRADESTATION and OPTIONSTATION expected during
the first quarter of 1999 and the release of the next version of SUPERCHARTS
following the release of the Company's premier products). Management also
believes that product sales will be adversely impacted to a greater extent until
the next versions of such products are released and accepted by the marketplace,
however, no assurances can be given that the marketplace will accept the next
versions of such products.
OTHER REVENUES. Other revenues increased 28% from $3.8 million in the
nine months ended September 30, 1997 to $4.8 million in the comparable period of
1998, due to revenues generated from OMEGAWORLD, the Company's first annual
conference for users of Omega Research products, and an increase in minimum
royalties under the Company's license agreement with Bridge-Telerate.
OPERATING EXPENSES
COST OF LICENSING FEES. Cost of licensing fees decreased from $1.4
million in the nine months ended September 30, 1997 to $1.3 million in the
comparable period of 1998, primarily due to decreased sales offset by a one-time
payment made to a third party in conjunction with the development of certain
technology for the Company. Cost of licensing fees as a percentage of licensing
fees increased from 7% in the nine months ended September 30, 1997 to 8% in the
comparable period of 1998, primarily due to this one-time royalty payment.
PRODUCT DEVELOPMENT. Product development expenses increased from $1.4
million in the nine months ended September 30, 1997 to $2.4 million in the
comparable period of 1998, primarily due to an increase in the number of
individuals employed in product development and recruiting fees related to the
hiring of such employees. Product development expenses as a percentage of
licensing fees increased from 7% in the nine months ended September 30, 1997 to
15% in the comparable period of 1998, primarily due to increased personnel and
related expenses as well as decreased licensing fees. The Company anticipates
that the absolute dollar amount of product development expense will increase for
the foreseeable future as the Company seeks to develop new products and enhance
existing products.
10
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SALES AND MARKETING. Sales and marketing expenses were $10.8 million in
the nine months ended September 30, 1998 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), increased personnel and related costs for the customer support center,
costs related to OmegaWorld and increased shipping costs, offset by decreased
communication expense. Sales and marketing expenses as a percentage of licensing
fees increased from 42% in the nine months ended September 30, 1997 to 66% in
the comparable period of 1998 as a result of the increased marketing expenses
and decreased licensing fees. The Company expects the level of sales and
marketing expenses, including advertising and promotional costs, to depend on
the level of sales. Sales and marketing expenses are expected to increase in
connection with the release of the next versions of the Company's products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$4.2 million in the nine months ended September 30, 1998 compared to $3.9
million in the comparable period of 1997. General and administrative expenses as
a percentage of licensing fees increased from 21% in the nine months ended
September 30, 1997 to 26% in the comparable period of 1998 primarily as a result
of increased professional fees related to the defense of the class action
lawsuit against the Company and costs of being a public company offset by a
decrease in provision for bad debt, as well as decreased licensing fees.
Management believes that the absolute dollar amount of its general and
administrative expenses in the future will depend, to a large extent, on the
levels of provision required for bad debt and for the defense of the class
action lawsuit against the Company, as well as the hiring of additional
personnel to support the expected growth of the Company and the extent, if any,
to which the Company enters new markets or related businesses.
OTHER INCOME, NET
Other income, net increased from $18,000 in the nine months ended September
30, 1997 to $350,000 in the comparable period of 1998, primarily due to income
earned on the proceeds from the Company's initial public offering which closed
in October 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $1.1 and $3.1 million for the
nine months ended September 30, 1998 and 1997, respectively. The decrease in net
cash provided by operations in the nine months ended September 30, 1998 was
primarily attributable to lower net income of the Company in the first nine
months of 1998 as well as $2.4 million in payments for income taxes during 1998.
Such payments for income taxes were not required during the same period of 1997
when the Company was an S corporation.
The Company's investing activities used cash of $5.1 million and $842,000
in the nine months ended September 30, 1998 and 1997, respectively. The
principal use of cash in investing activities was for investments in marketable
securities and capital expenditures related to the acquisition of computer and
related equipment and software required to support expansion of the Company's
operations. During 1997 investing activities also used cash as a result of
purchases of furniture and fixtures and leasehold improvements related to the
Company's move to a new corporate headquarters in February 1997 and the
amortization of capitalized software development costs.
The Company's financing activities provided cash of $172,000 for the nine
months ended September 30, 1998 and used cash of $2.3 million for the nine
months ended September 30, 1997. Cash provided during the nine months ended
September 30, 1998 was from the issuance of common stock from the Company's 1997
Employee Stock Purchase Plan and the exercise of stock options. Cash was also
provided by the repayment, with interest, of $135,000 of S corporation dividends
paid to the Company's shareholders prior to the Company's initial public
offering. Such dividends were equal to the Company's estimate, at that time, of
its cumulative taxable income prior to its conversion to a C corporation to the
extent such taxable income had not been previously distributed, which actual
cumulative taxable income was finally determined upon the finalization and
filing of the Company's 1997 tax returns. Cash used during the nine months ended
September 30, 1997 was due to cash distributions to the Company's shareholders
prior to the Company's initial public offering.
11
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As of September 30, 1998, the Company had cash and cash equivalents of
approximately $8.5 million and working capital of approximately $25.3 million.
Assuming there is no significant change in the Company's business, the Company
believes that existing cash balances and investments and cash flow from
operations will be sufficient to meet its normal working capital and capital
expenditure requirements for at least the next 12 months. In connection, with
the installation of a new telephone system, the Company entered into a 4 year
operating lease with monthly lease payments of approximately $12,000. The lease
will commence upon installation of the telephone system which is expected to
occur during the fourth quarter of 1998.
YEAR 2000 COMPLIANCE
The next versions of the Company's products, which include TradeStation 5,
OptionStation 5 and Omega Research ProSuite 5, a product which integrates
TradeStation 5 and OptionStation 5 (all of which are currently scheduled to be
released in the first quarter of 1999), and SuperCharts 5 (which is scheduled to
be released sometime after the releases of the above-named products), will be
year 2000 compliant. This will be the case because both the Omega Research
GlobalServer on which such applications run, and the applications themselves,
will recognize and utilize century mark or 3 or 4-digit, rather than 2-digit,
dates.
The current shipping versions of the Company's products, TradeStation 4,
OptionStation 1.2, TradeStation ProSuite 4 and SuperCharts 4, all utilize Julian
dating, in which each day is identified sequentially, as opposed to being
identified as a 2-digit date for a particular year. The use of Julian dating,
accordingly, does not raise any year 2000 issues. However, these current
shipping versions do permit users to enter dates using the 2-digit year format.
Therefore, 2-digit years, such as 01 and 02, that are input are currently read
by the software as 1901 and 1902, even though 2001 and 2002 is what is likely
intended. Further, futures contracts with expiration dates beyond December 31,
1999 are not currently identified as post year 2000 dates by the programs. The
Company expects to offer, on or before June 30, 1999, to all registered
customers in good-payment standing of the current shipping versions, an
appropriate solution to such year 2000 issues. It is possible that such solution
may eliminate a user's ability to analyze data prior to 1920. Interim solutions
that may be useful to the Company's customers until such final solution is
delivered (commonly referred to as "work-arounds") are available for customers.
The Company does not believe that its anticipated development of year 2000
modifications will involve material expenditures of funds or material use of
internal resources.
The Company intends to use commercially reasonable efforts to complete the
year 2000 solution for the current shipping versions of the above-specified
products no later than June 30, 1999. However, there can be no assurance that
unanticipated difficulties will not delay the Company's year 2000 efforts, or
that modifications made will not adversely affect existing functionality of the
products in ways not currently anticipated by the Company. There will be no year
2000 modifications or solutions for any versions of the Company's products
introduced prior to the current shipping versions, or for any products not
specifically named above.
The Company implemented a new customer integrated support and general
ledger system at the beginning of the fourth quarter of 1998 which complies with
year 2000 requirements. In addition, the Company is in the process of
implementing a new telephone system which is also year 2000 compliant. Although
the Company has not undertaken an evaluation of year 2000 compliance issues with
respect to its vendors, the Company does not believe that it will encounter
significant difficulties with respect to year 2000 compliance issues that its
major vendors may experience because the products that the Company obtains from
its major vendors are generally not year 2000 date sensitive. Nevertheless, to
the extent the Company's vendors experience year 2000 difficulties with their
internal billing and shipping systems, the Company may face delays in obtaining
certain products and services. The Company does not expect that its vendors'
year 2000 difficulties, to the extent they exist, will have a significant effect
on the Company's business or operations.
12
<PAGE>
Beyond what has been discussed herein, the Company has not undertaken an
analysis of (nor does it currently intend to analyze) the effect of a worst case
year 2000 scenario on the Company's business, operations or financial condition
and, accordingly, the materiality of such effect, if any, is uncertain and the
Company does not have a contingency plan and currently does not intend to create
one.
FORWARD-LOOKING STATEMENTS
This report contains statements that are forward-looking within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended. Such forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, as amended. When used in this report, 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 the forward-looking statements. These statements, including but not
limited to the Company's statements regarding expected growth, 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, the Company meeting its timetable for the anticipated
upgrade releases of its premium products, the extent to which potential
customers will delay purchasing the Company's products pending the release of
the upgrades, customer acceptance of such upgraded products, technical
difficulties or errors in the upgraded products, unfavorable critical reviews of
such upgraded products, Omega Research's ability to market effectively such
upgraded products, the introduction of competitive products in the market or
increased customer acceptance of recently-introduced competitive products,
failure of the Company to achieve anticipated sales volumes relating to its
principal products in future periods and to achieve anticipated sales volumes
relating to additional products and services intended to be marketed in future
periods, delays in the development and/or marketing of such additional products
and services, the Company's ability to market effectively such additional
products and services, customer acceptance of such additional products and
services, the ability of Omega Research and various data vendors to develop the
requisite technical compatibility between Omega Research's software and the
respective data services in a timely fashion, if at all (and the quality and
customer acceptance of such combined offerings), the execution of a definitive
agreement with FutureSource Information Systems, Inc. regarding technical
compatibility and payment to Omega Research of commissions and royalties,
unanticipated higher variable expenses (such as bad debt), increases in product
returns, decisions by Omega Research to enter into new markets or expand into
related businesses (and the various possible effects and consequences thereof),
the Company's ability to effectively manage growth (if, as and when it occurs),
volatility or other adverse conditions in the securities markets, and Omega
Research's ability to attract and retain high-quality product development
personnel, as well as those discussed in the Company's press releases and
filings with the Securities and Exchange Commission, including but not limited
to its Annual Report on Form 10-K for the year ended December 31, 1997
(including in the section titled "Forward Looking Statements; Business Risks" in
Item 7 thereof), any of which could have a material adverse effect on the
results of operations and financial condition of the Company.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDINGS
(c) SALES OF UNREGISTERED SECURITIES
During the three months ended September 30, 1998, the Company issued to 7
employees options to purchase an aggregate of 36,500 shares of Common Stock. All
such options vest ratably over a five-year period and are exercisable at prices
ranging from $2.25 through $4.25 per share, which was the fair market value of
the Company's Common Stock on the respective dates on which the options were
granted. The options issued to these employees were granted under the Company's
Amended and Restated 1996 Incentive Stock Plan, as amended, and expire, if they
remain unexercised, on the tenth anniversary of the date on which they were
granted.
All the foregoing options were issued by the Company in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act.
Other than as described above, the Company did not issue or sell any
unregistered securities during the third quarter of 1998.
(d) USE OF PROCEEDS
The Company effected an initial public offering pursuant to a Registration
Statement on Form S-1 (File No. 333-3207) which was declared effective by the
Securities and Exchange Commission on September 30, 1997. See Item 2(d) of the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 1997 for a description of the Company's use of proceeds from such offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On July 24, 1998, the Company held its 1998 Annual Meeting of
Shareholders (the "Annual Meeting").
(b) and (c)
The only matter voted on at the Annual Meeting was the election of all
seven directors of the Company. The seven nominees, who were all existing
directors of the Company and nominees of the Company's Board of Directors, were
re-elected at the Annual Meeting as directors of the Company, receiving the
number and percentage of votes for election and abstentions as set forth next to
their respective names below:
<TABLE>
<CAPTION>
NOMINEE FOR DIRECTOR FOR ELECTION ABSTENTIONS
-------------------- ------------ -----------
NUMBER PERCENTAGE NUMBER PERCENTAGE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
William R. Cruz 21,844,758 99.96% 9,600 .04%
Ralph L. Cruz 21,844,758 99.96% 9,600 .04%
Peter A. Parandjuk 21,844,758 99.96% 9,600 .04%
Salomon Sredni 21,844,758 99.96% 9,600 .04%
Marc J. Stone 21,844,758 99.96% 9,600 .04%
Christos M. Cotsakos 21,844,758 99.96% 9,600 .04%
Brian D. Smith 21,843,758 99.95% 10,600 .05%
</TABLE>
(d) Not applicable
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Amendment to the Omega Research, Inc. 1997 Employee Stock Purchase
Plan
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the three months
ended September 30, 1998.
15
<PAGE>
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 13, 1998 /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 Principal Financial and
Accounting Officer of the Registrant)
16
<PAGE>
OMEGA RESEARCH, INC.
EXHIBIT INDEX
EXHIBIT
NO. DOCUMENT DESCRIPTION
- ------- --------------------
10.1 Amendment to the Omega Research, Inc. 1997 Employee Stock Purchase Plan
27.1 Financial Data Schedule
17
EXHIBIT 10.1
AMENDMENT TO THE OMEGA RESEARCH, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN*
WHEREAS: It is in the best interests of the Company to amend the Omega
Research, Inc. 1997 Employee Stock Purchase Plan adopted by the Board of
Directors and approved by the Shareholders of the Company on July 24, 1997 (the
"Plan").
RESOLVED: That paragraph (m) of Section 2 of the Plan be, and it hereby
is, amended, restated and replaced in its entirety as follows:
""Purchase Price" shall mean an amount equal to eighty-five
percent (85%) of the Fair Market Value of a share of Common
Stock on the Enrollment Date or on the Exercise Date,
whichever is lower, in either event rounded up to the nearest
One ($0.01) Cent."
- ----------------------
* Adopted by the Board of Directors by Unanimous Written Consent dated as of
July 1, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE COMPANY'S FINANCIAL
STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001042814
<NAME> OMEGA RESEARCH, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,482,056
<SECURITIES> 5,032,409
<RECEIVABLES> 17,880,459
<ALLOWANCES> 8,952,000
<INVENTORY> 164,738
<CURRENT-ASSETS> 27,221,375
<PP&E> 3,265,186
<DEPRECIATION> 1,528,376
<TOTAL-ASSETS> 29,267,155
<CURRENT-LIABILITIES> 1,939,673
<BONDS> 0
0
0
<COMMON> 222,621
<OTHER-SE> 27,104,861
<TOTAL-LIABILITY-AND-EQUITY> 29,267,155
<SALES> 16,341,669
<TOTAL-REVENUES> 21,151,863
<CGS> 1,282,650
<TOTAL-COSTS> 15,970,682
<OTHER-EXPENSES> (349,875)
<LOSS-PROVISION> 1,422,835
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,825,571
<INCOME-TAX> 990,500
<INCOME-CONTINUING> 1,835,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,835,071
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
