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 JUNE 30, 1999
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
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8700 WEST FLAGLER STREET, MIAMI, FLORIDA 33174
----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(305) 485-7000
----------------------------------------------------
(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 AUGUST 1, 1999 THERE WERE 22,455,334 SHARES OF THE REGISTRANT'S COMMON
STOCK OUTSTANDING.
<PAGE>
OMEGA RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets
June 30, 1999 (unaudited) and December 31, 1998 (audited).................... 3
Statements of Income
Three and six months ended June 30, 1999 and 1998 (unaudited)................ 4
Statements of Cash Flows
Six months ended June 30, 1999 and 1998 (unaudited).......................... 5
Notes to Financial Statements (unaudited).............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 14
Item 2. Changes in Securities and Use of Proceeds.............................................. 14
Item 6. Exhibits and Reports on Form 8-K....................................................... 14
Signature............................................................................................ 15
Exhibit Index........................................................................................ 16
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMEGA RESEARCH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,849,347 $ 7,436,980
Marketable securities 5,485,313 5,736,958
Accounts receivable, net 12,942,921 9,246,474
Inventories 16,112 131,659
Other current assets 439,566 692,273
Deferred income taxes 8,486,000 4,541,000
----------- -----------
Total current assets 34,219,259 27,785,344
PROPERTY AND EQUIPMENT, net 2,108,902 1,670,925
OTHER ASSETS 438,612 185,854
----------- -----------
Total assets $36,766,773 $29,642,123
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,488,428 $ 1,082,521
Accrued expenses 1,385,037 962,464
Deferred revenue 1,334,000 105,035
Income taxes payable 1,785,260 -
----------- -----------
Total current liabilities 5,992,725 2,150,020
----------- -----------
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, 22,426,770 and 22,269,964
issued and outstanding at June 30, 1999
and December 31, 1998, respectively 224,268 222,700
Additional paid-in capital 24,339,268 23,913,877
Retained earnings 6,210,512 3,355,526
----------- -----------
Total shareholders' equity 30,774,048 27,492,103
----------- -----------
Total liabilities and shareholders' equity $36,766,773 $29,642,123
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
3
<PAGE>
OMEGA RESEARCH, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ --------------------------------
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES:
Licensing fees $ 8,564,365 $5,715,496 $16,384,492 $11,361,399
Other revenues 2,412,799 1,936,101 4,033,460 3,320,992
----------- ---------- ----------- -----------
Total net revenues 10,977,164 7,651,597 20,417,952 14,682,391
----------- ---------- ----------- -----------
OPERATING EXPENSES:
Cost of licensing fees 455,389 518,833 938,180 970,085
Product development 1,119,820 835,868 2,184,567 1,550,887
Sales and marketing 4,536,311 3,837,243 8,386,192 7,158,839
General and administrative 2,323,246 1,276,184 4,551,702 2,673,440
----------- ---------- ----------- -----------
Total operating expenses 8,434,766 6,468,128 16,060,641 12,353,251
----------- ---------- ----------- -----------
Income from operations 2,542,398 1,183,469 4,357,311 2,329,140
OTHER INCOME, net 127,972 115,549 237,675 220,832
----------- ---------- ----------- -----------
Income before income taxes 2,670,370 1,299,018 4,594,986 2,549,972
INCOME TAX PROVISION 1,026,000 482,000 1,740,000 931,000
----------- ---------- ----------- -----------
Net income $ 1,644,370 $ 817,018 $ 2,854,986 $ 1,618,972
=========== ========== =========== ===========
EARNINGS PER SHARE (Note 3):
Basic $ 0.07 $ 0.04 $ 0.13 $ 0.07
=========== ========== =========== ===========
Diluted $ 0.07 $ 0.04 $ 0.12 $ 0.07
=========== ========== =========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
4
<PAGE>
OMEGA RESEARCH, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,854,986 $ 1,618,972
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 405,739 178,494
Provision for doubtful accounts 2,300,000 882,835
Compensation expense on stock option grants 77,713 61,168
Deferred income tax benefit (3,945,000) (874,000)
(Increase) decrease in:
Accounts receivable (5,996,447) (1,019,337)
Inventories 115,547 2,398
Other current assets 252,707 (155,564)
Other assets (181,903) -
Increase (decrease) in:
Accounts payable 405,909 181,587
Accrued expenses 422,571 311,508
Deferred revenue 1,228,965 (47,395)
Income taxes payable 1,785,260 (419,500)
----------- -----------
Net cash (used in) provided by operating activities (273,953) 721,166
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (829,571) (511,533)
Purchase of marketable securities - (2,321,972)
Proceeds from maturity of marketable securities 251,645
Acquisition of data rights (85,000) (22,900)
----------- -----------
Net cash used in investing activities (662,926) (2,856,405)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 349,246 13,200
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (587,633) (2,122,039)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,436,980 12,323,515
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,849,347 $10,201,476
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 3,900,000 $ 2,224,500
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
5
<PAGE>
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 for the year ended December 31, 1998. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position as of June 30,
1999, the results of operations for the three and six months ended June 30, 1999
and 1998 and cash flows for the six months ended June 30, 1999 and 1998 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. ACCOUNTS RECEIVABLE
Accounts receivable are principally from individuals and distributors of
the Company's products. The Company performs periodic credit evaluations and
maintains allowances for potential credit losses of approximately $6.0 million
and $3.7 million at June 30, 1999 and December 31, 1998, respectively, and
allowances for potential returns of approximately $13.9 million and $7.4 million
at June 30, 1999 and December 31, 1998, respectively.
2. DEFERRED REVENUE
Deferred revenue is comprised of deferrals for (i) licensing fees revenue
for which obligations have not yet been fulfilled (such as committed upgrades)
and amounts not due within the next twelve months, and (ii) registration fees
and sponsorship and exhibitor deposits for OmegaWorld, the Company's annual
conference, designed to highlight the benefits of system trading and
development, held during the second quarter of 1999. Deferred revenue at June
30, 1999 and December 31, 1998 consists of the following:
JUNE 30, DECEMBER 31,
1999 1998
---------- --------
Licensing fees revenue $1,334,000 $ 48,450
OmegaWorld - 56,585
---------- --------
$1,334,000 $105,035
========== ========
3. EARNINGS PER SHARE
Weighted average shares outstanding for the three and six month periods
ended June 30, 1999 and 1998 are calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding (basic) 22,373,533 22,249,575 22,338,531 22,247,863
Impact of dilutive options after applying
the treasury stock method 2,160,682 769,467 2,119,828 651,083
---------- ---------- ---------- ----------
Weighted average shares outstanding (diluted) 24,534,215 23,019,042 24,458,359 22,898,946
=========== ========== =========== ==========
Options outstanding which are not included in
the calculation of diluted earnings per share
because their impact is antidilutive 122,435 273,500 122,435 380,000
=========== ========== =========== ==========
</TABLE>
6
<PAGE>
4. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in a business enterprise's
equity during a period arising from transactions, events or circumstances
relating to non-owner sources, such as foreign currency translation adjustments
and unrealized gains or losses on available-for-sale securities. It includes all
changes in equity during a period except those resulting from investments by, or
distributions to, owners. Comprehensive income is equal to net income for all
periods presented.
5. CONTINGENCIES
On January 28, 1998, a class action lawsuit, captioned RICHARD M. RHODES V.
WILLIAM R. CRUZ; RALPH L. CRUZ; OMEGA RESEARCH, INC.; BANCAMERICA ROBERTSON
STEPHENS; LEHMAN BROTHERS; AND HAMBRECHT & QUIST (Case No. 98-0174-CIV-Lenard),
was filed in the United States District Court for the Southern District of
Florida. The suit alleged that the defendants violated Sections 11 and 12 of the
Securities Act of 1933 by allegedly making misrepresentations and omissions of
material facts in connection with the initial public offering of the Company's
Common Stock.
On March 1, 1999, the court dismissed all of the claims in the suit, most
with prejudice. The plaintiffs were granted the right to replead, within ten
days following the date of the order, the claims that were dismissed without
prejudice. The plaintiffs did not replead any claims, but filed a notice of
appeal with the United States Court of Appeals for the Eleventh Circuit (the
"Court of Appeals"). On July 1, 1999, pursuant to the stipulation of the
parties, the Court of Appeals issued a final order which dismissed with
prejudice all claims against the Company and all other defendants.
In addition to the above, from time to time the Company may become engaged
in ordinary routine litigation incidental to its business. The Company does not
believe that such ordinary routine litigation would have a material adverse
effect on its financial position or results of operations.
7
<PAGE>
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL NET REVENUES:
Licensing fees 78.0% 74.7% 80.2% 77.4%
Other revenues 22.0 25.3 19.8 22.6
----- ----- ----- -----
Total net revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of licensing fees 4.1 6.8 4.6 6.6
Product development 10.2 10.9 10.7 10.6
Sales and marketing 41.3 50.1 41.1 48.7
General and administrative 21.2 16.7 22.3 18.2
----- ----- ----- -----
Total operating expenses 76.8 84.5 78.7 84.1
----- ----- ----- -----
Income from operations 23.2% 15.5% 21.3% 15.9%
===== ===== ===== =====
AS A PERCENTAGE OF LICENSING FEES:
Operating expenses:
Cost of licensing fees 5.3 9.1 5.7 8.5
Product development 13.1 14.6 13.3 13.7
Sales and marketing 53.0 67.2 51.2 63.0
General and administrative 27.1 22.3 27.8 23.5
----- ----- ----- -----
Total operating expenses 98.5% 113.2% 98.0% 108.7%
===== ===== ===== =====
</TABLE>
QUARTERS ENDED JUNE 30, 1999 AND 1998
NET REVENUES
TOTAL NET REVENUES. The Company's total net revenues increased 43% from
$7.7 million in the three months ended June 30, 1998 to $11.0 million in the
comparable period of 1999.
LICENSING FEES. Licensing fees increased 50% from $5.7 million in the three
months ended June 30, 1998 to $8.6 million in the comparable period of 1999,
primarily due to an increase in gross sales resulting from the release, on
February 22, 1999, of the Company's 2000I software products. No assurances can
be given that such increases will continue or that a trend of any kind has been
established. The Company has provided what it believes are appropriate
provisions for returns, in light of its 30-day right of return policy, but no
assurance can be given that the rate of returns will not increase beyond the
reserved levels.
OTHER REVENUES. Other revenues increased 25% from $1.9 million in the three
months ended June 30, 1998 to $2.4 million in the comparable period of 1999,
primarily due to an increase in revenues generated from OmegaWorld, the
Company's annual conference, and an increase in minimum royalties under the
Company's license agreement with Telerate, Inc. ("Bridge Telerate"), a
subsidiary of Bridge Information Systems, Inc.
8
<PAGE>
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
was approximately $455,000 in the three months ended June 30, 1999 and $519,000
in the comparable period of 1998. Cost of licensing fees as a percentage of
licensing fees decreased from 9% in the three months ended June 30, 1998 to 5%
in the comparable period of 1999, primarily due to a shift in product mix to
higher-priced products during 1999.
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 documentation, and consist
primarily of salaries, other personnel costs and depreciation of computer and
related equipment. Product development expenses increased 34% from $836,000 in
the three months ended June 30, 1998 to $1.1 million in the comparable period of
1999, primarily due to an increase in the number of individuals employed in
product development. Product development expenses as a percentage of licensing
fees decreased from 15% in the three months ended June 30, 1998 to 13% in the
comparable period of 1999 primarily as a result of increased license fees
partially offset by increased expenses. 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, web site design and administration costs, and shipping
expenses. Sales and marketing expenses increased from $3.8 million in the three
months ended June 30, 1998 to $4.5 million in the comparable period of 1999,
primarily due to increased personnel expenses related to increased sales and
marketing personnel and increased commissions as well as increased costs related
to OmegaWorld, partially offset by decreased advertising (including print
advertising, television advertising and direct mailers). Sales and marketing
expenses as a percentage of licensing fees decreased from 67% in the three
months ended June 30, 1998 to 53% in the comparable period of 1999, primarily as
a result of increased licensing fees partially offset by increased expenses. The
Company expects the level of sales and marketing expenses, including advertising
and promotional costs, to vary with the level of sales; however, in the near
term, sales and marketing expenses are expected to increase as the Company
continues to promote its 2000I product line.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of provision for bad debt, employee-related costs for administrative
personnel such as executive, human resources, finance and information technology
employees, as well as professional fees, rent and other facility expenses.
General and administrative expenses increased from $1.3 million in the three
months ended June 30, 1998 to $2.3 million in the comparable period of 1999,
primarily due to increased bad debt expense and increased personnel and related
costs. General and administrative expenses as a percentage of licensing fees
increased from 22% in the three months ended June 30, 1998 to 27% in the
comparable period of 1999, primarily as a result of the increase in the
above-described expenses partially offset by increased licensing fees. The
Company believes that the absolute dollar amount of its general and
administrative expenses in the future will depend, to a large extent, on the
level of provision required for bad debt, the level of 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 and marketable securities. 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 increased from $116,000 in the three months ended June 30,
1998 to $128,000 in the comparable period of 1999.
9
<PAGE>
INCOME TAXES
The Company recorded a provision for income taxes of $1.0 million and
$482,000 for the three months ended June 30, 1999 and 1998, respectively, based
upon the effective annual income tax rate. The effective tax rates for three
months ended June 30, 1999 and 1998 were 38% and 37%, respectively, and are
below the 39% statutory rate as a result of the impact of tax-free investment
income.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
NET REVENUES
TOTAL NET REVENUES. The Company's total net revenues increased 39% from
$14.7 in the six months ended June 30, 1998 to $20.4 million in the comparable
period of 1999.
LICENSING FEES. Licensing fees increased 44% from $11.4 million in the six
months ended June 30, 1998 to $16.4 million in the comparable period of 1999,
primarily due to an increase in gross sales resulting from the release, on
February 22, 1999, of the Company's 2000I software products. No assurances can
be given that such increases will continue or that a trend of any kind has been
established. The Company has provided what it believes are appropriate
provisions for returns, in light of its 30-day right of return policy, but no
assurance can be given that the rate of returns will not increase beyond the
reserved levels.
OTHER REVENUES. Other revenues increased 21% from $3.3 million in the six
months ended June 30, 1998 to $4.0 million in the comparable period of 1999,
primarily due to an increase in minimum royalties under the Company's license
agreement with Bridge Telerate, and, to a lesser extent, an increase in revenues
generated from OmegaWorld.
OPERATING EXPENSES
COST OF LICENSING FEES. Cost of licensing fees was approximately $938,000
in the six months ended June 30, 1999 and $970,000 in the comparable period of
1998. Cost of licensing fees as a percentage of licensing fees decreased from 9%
in the six months ended June 30, 1998 to 6% in the comparable period of 1999,
primarily due to a shift in product mix to higher-priced products during 1999
and to the impact of a one-time payment made to a third party in conjunction
with the development of certain technology for the Company during the comparable
period of 1998.
PRODUCT DEVELOPMENT. Product development expenses increased 41% from $1.6
million in the six months ended June 30, 1998 to $2.2 million in the comparable
period of 1999, primarily due to an increase in the number of individuals
employed in product development. Product development expenses as a percentage of
licensing fees was consistent in the six months ended 1999 and 1998,
respectively. 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 increased from $7.2
million in the six months ended June 30, 1998 to $8.4 million in the comparable
period of 1999, primarily due to increased personnel expenses related to
increased sales and marketing personnel and increased commissions, increased
costs related to OmegaWorld and increased travel costs, partially offset by
decreased advertising (including print advertising, television advertising and
direct mailers). Sales and marketing expenses as a percentage of licensing fees
decreased from 63% in the six months ended June 30, 1998 to 51% in the
comparable period of 1999, primarily as a result of increased licensing fees
partially offset by increased expenses. The Company expects the level of sales
and marketing expenses, including advertising and promotional costs, to vary
with the level of sales; however, in the near term, sales and marketing expenses
are expected to increase as the Company continues to promote its 2000I product
line.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $2.7 million in the six months ended June 30, 1998 to $4.6 million in the
comparable period of 1999, primarily due to increased bad debt expense and
increased personnel and related costs. General and administrative expenses as a
percentage of licensing fees increased from 24% in the six months ended June 30,
1998 to 28% in the comparable period
10
<PAGE>
of 1999, primarily as a result of the increase in the above-described expenses
partially offset by increased licensing fees. The Company believes that the
absolute dollar amount of its general and administrative expenses in the future
will depend, to a large extent, on the level of provision required for bad debt,
the level of 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 $221,000 in the six months ended June 30,
1998 to $238,000 in the comparable period of 1999.
INCOME TAXES
The Company recorded a provision for income taxes of $1.7 million and
$931,000 for the six months ended June 30, 1999 and 1998, respectively, based
upon the effective annual income tax rate. The effective tax rates for six
months ended June 30, 1999 and 1998 were 38% and 37%, respectively, and are
below the 39% statutory rate as a result of the impact of tax-free investment
income.
VARIABILITY OF RESULTS
The operating results for any quarter are not necessarily indicative of
results for any future period or for the full year. This is particularly
important in the first six months of 1999 when licensing fees revenue reflects
what the Company believes is some pent-up demand for its 2000I line of products
as well as significant upgrade revenue. The Company's quarterly revenues and
operating results have varied in the past and are likely to vary from quarter to
quarter in the future. Such fluctuations may result in volatility in the price
of the Common Stock. As budgeted expenses are based upon expected revenues, if
actual revenues on a quarterly basis are below management's expectations, then
results of operations are likely to be adversely affected because a relatively
small amount of the Company's expenses varies with its revenues in the short
term. In addition, operating results may fluctuate based upon the timing, level
and rate of acceptance of releases of new products and/or enhancements,
increased competition, variations in the mix of sales, announcements of new
products and/or enhancements (such as the 2000I products) by the Company or its
competitors, entry by the Company into new markets or related businesses and
other factors. Such fluctuations may result in volatility in the price of the
Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash and cash equivalents of
approximately $6.8 million, investments in short-term marketable securities of
$5.5 million, and working capital of approximately $28.2 million. Marketable
securities consist of investment grade municipal bonds maturing, on average,
within a year.
Cash used by operating activities totaled $274,000 in the six months ended
June 30, 1999, while cash provided by operating activities totaled $721,000 in
the six months ended June 30, 1998. The decrease in net cash provided by
operations in the six months ended June 30, 1999 was primarily attributable to
an increase in accounts receivable, net of deferred revenue, partially offset by
higher net income and the timing of certain payments for liabilities.
The Company's investing activities used cash of $663,000 and $2.9 million
in the six months ended June 30, 1999 and 1998, respectively. The principal use
of cash in investing activities in the six months ended June 30, 1999 and 1998
was for capital expenditures related to the acquisition of computer and related
equipment and software required to support expansion of the Company's
operations, as well as for the purchase of marketable securities in 1998.
The Company's financing activities provided cash of $349,000 and $13,000 in
the six months ended June 30, 1999 and 1998, respectively. Cash provided was
from the issuance of Common Stock from the exercise of stock options under the
Company's Amended and Restated 1996 Incentive Stock Plan and the Company's 1997
Employee Stock Purchase Plan.
11
<PAGE>
Assuming there is no significant change in the Company's business, the
Company believes that existing cash and liquid asset balances and cash flows
from operations will be sufficient to meet its normal working capital and
capital expenditure requirements for at least the next 12 months.
YEAR 2000 COMPLIANCE
The 2000I versions of the Company's products are year 2000 compliant.
Consistent with the Company's expectations in its previous reports, a Year 2000
solution for the most recent prior shipping versions of the Company's products,
TRADESTATION 4, OPTIONSTATION 1.2, TRADESTATION PROSUITE 4 and SUPERCHARTS 4
(which is the current shipping version until SUPERCHARTS 2000I is released) was
made available at no charge on June 30, 1999 to all registered customers in
good-payment standing of those versions. A Year 2000 solution for Portfolio
Maximizer is expected to be made available at no charge prior to the end of this
summer. The Company's Year 2000 solutions are being made available subject to
certain assumptions, limitations and disclaimers stated in the Year 2000 section
of the Company's web site, which is accessible through the web site home page,
omegaresearch.com. Such assumptions, limitations and disclaimers relate to,
among other things, hardware, operating system and communications system
requirements, datafeeds and data files with which the products are compatible,
possible future improvements or refinements, and certain date limitations.
Further, there can be no assurance that the modifications made are or will be
error free or do not or will not adversely affect functionality of the products
in ways not currently anticipated by the Company.
The Company has not incurred any material expenditures to date specifically
to provide Year 2000 solutions for its products. However, during the second
quarter of 1999, the Company utilized internal resources having an approximate
aggregate value under $100,000 to provide its Year 2000 solution for its most
recent prior shipping versions.
There will be no Year 2000 modifications or solutions for any versions of
the Company's products introduced prior to those versions specifically mentioned
above, or for any other products not specifically named above, or any
discontinued products, such as WALL STREET ANALYST and SYSTEM WRITER.
In November 1998, Bridge Telerate expressed to the Company concerns as to
whether the Bridge Telerate subscribers using TRADESTATION would receive, in a
timely fashion, the year 2000 compliant TRADESTATION 2000I upgrade, and made
certain demands in this regard. As a result, the parties discussed in November
1998 that delivery to Bridge Telerate of TRADESTATION 2000I by the end of
January should be sufficient time for the parties to develop and test
compatibility between TRADESTATION 2000I and the latest Bridgefeed technology
("Bridgefeed 4") on which Bridge Telerate data is to be delivered, and for
Bridge Telerate to install such upgrade on all existing Bridge Telerate
terminals using TRADESTATION. The Company in fact delivered the TRADESTATION
2000I upgrade to Bridge Telerate on Monday, February 1, 1999 and, at Bridge
Telerate's request, development of compatibility commenced February 16, 1999.
Final testing of compatibility of the TradeStation 2000I upgrade and Bridgefeed
4 is nearly completed. However, Bridge Telerate recently informed the Company of
its belief that Bridge Telerate could deliver to its TRADESTATION customers a
more effective and timely short-term Year 2000 solution if the Company would
make the prior version of TRADESTATION delivered to Bridge Telerate Year 2000
compliant so that it will work with the existing (i.e., not the Bridgefeed 4)
Bridge Telerate datafeeds currently being used by Bridge Telerate customers
(which Bridge Telerate is in the process of rendering year 2000 compliant). The
parties are currently attempting to conclude discussions as to the best approach
to take to best address the Year 2000 issue with respect to Bridge Telerate
customers using TRADESTATION. Notwithstanding the Company's adherence to Bridge
Telerate's timetable, and its indication that it is open to cooperating with
Bridge Telerate's new approach, no assurances can be given that development or
installation delays, should they occur, would not result in Bridge Telerate
deciding to implement, in whole or in part, an alternative Year 2000 solution
for its TRADESTATION clients (e.g., not implementing the TRADESTATION 2000I
upgrade or the short-term solution recently proposed and replacing TRADESTATION
with Bridge Telerate's or other third-party software), which, if that occurred,
could have a material adverse effect on the Company's financial expectations
under its agreement with Bridge Telerate.
In general, the Company's failure to deliver and/or continue to implement
appropriate Year 2000 solutions in a timely fashion, or at all, would render all
pre-2000I versions of the Company's products, including those for which the
Company has decided to provide no solutions, essentially useless, which could
result in material adverse effects on the Company and its financial condition,
results of operations and prospects. Inasmuch as
12
<PAGE>
the Year 2000 solutions described above are, the Company believes, the only
viable and practical solutions, and are being achieved and/or are achievable in
a timely manner, the Company has no contingency plans.
During the fourth quarter of 1998, the Company implemented a new customer
integrated support and general ledger system and a new telephone system, each of
which, according to the respective vendors, complies or will timely comply with
all known Year 2000 requirements. Although the Company has not undertaken
further evaluation of Year 2000 compliance issues with respect to its vendors,
and does not intend to, the Company does not believe that it will encounter
significant difficulties with respect to Year 2000 compliance issues that its
vendors may experience because the products and services that the Company
obtains from its vendors are generally not Year 2000 date sensitive, other than
telecommunications services. Nevertheless, to the extent the Company's vendors
experience Year 2000 difficulties with their internal billing and shipping
systems or otherwise, the Company may face delays in obtaining certain products
and services. In the event that the Company's telecommunications services are
materially disrupted as a result of Year 2000 difficulties (which would be
applicable to businesses using telecommunications services generally), material
adverse effects to the Company's financial condition and results of operations
would likely be suffered. Other than general Year 2000 compliance failures
relating to telecommunications services, which the Company has no reason to
believe will occur and are, in any event, not within the Company's control, 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. Accordingly, the Company has not developed, and has no current plans
to develop, any contingency plans relating to its vendors' potential Year 2000
difficulties.
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. When used in this report, the words "believes," "estimates," "plans,"
"expects," "intends," "anticipates," "may," "prospect," "should," "looking
forward" and similar expressions as they relate to the Company or its management
are intended to identify the 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, lower-than-expected upgrade orders over
the next two quarters, lower-than-expected new product orders over future
quarters, failure of customer acceptance of the new products (due to technical
difficulties or errors in the products, increased hardware or software
requirements to use the products, unfavorable critical reviews, increased
competition, or other reasons), the level of returns and bad debt, the
timeliness and success of the Company's marketing of upgrades to its customer
base, the level of benefit to the Company from its increased sales personnel,
the timeliness and success of the expected 1999 release of SUPERCHARTS 2000I,
the number, timing and significance of additional new product introductions by
the Company and its competitors, the level of product and price competition,
changes in the Company's sales incentive or marketing strategies, changes in
demand for the Company's products, changes in operating expenses, attempts by
the Company to enter new markets or expand into related businesses and the cost,
timing and success thereof, general economic and market factors, including
changes in the securities and financial markets, as well as those discussed in
other sections of this report and in the Company's press releases and its
filings with the Securities and Exchange Commission including, but not limited
to, the Company's December 31, 1998 Annual Report on Form 10-K (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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of the favorable final disposition of the lawsuit
captioned RICHARD M. RHODES V. WILLIAM R. CRUZ; RALPH L. CRUZ; OMEGA RESEARCH,
INC.; BANCAMERICA ROBERTSON STEPHENS; LEHMAN BROTHERS; AND HAMBRECHT & QUIST
(Case No. 98-0174-CIV-Lenard), see the first two paragraphs of Note 5 of the
Notes to Financial Statements in Item 1 of Part I of this report, which are
incorporated by reference into this Item 1 of Part II.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(C) SALES OF UNREGISTERED SECURITIES
During the three months ended June 30, 1999, the Company issued to 14
employees options to purchase an aggregate of 263,000 shares of Common Stock, of
which options to purchase an aggregate of 198,000 shares of Common Stock are
subject to the conditions subsequent that the total shares of Common Stock of
the Company reserved for issuance under the Company's Amended and Restated 1996
Incentive Stock Plan, as amended, are, no later than December 28, 1999,
increased with shareholder approval to at least 3,500,000 shares, and, if that
condition does not occur, said grants shall be void. All such options vest
ratably over a five-year period and are exercisable at prices of either $8.57
and $10.25 per share, which was the fair market value of the Company's Common
Stock on the respective dates on which the options were granted. All of the
options 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 second quarter of 1999.
(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. For a description of
the Company's use of proceeds from such offering, see Item 2(d) of Part II of
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three months
ended June 30, 1999.
14
<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
AUGUST 6, 1999 /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)
15
<PAGE>
OMEGA RESEARCH, INC.
EXHIBIT INDEX
EXHIBIT
NO. DOCUMENT DESCRIPTION
- ------- --------------------
27.1 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE COMPANY'S FINANCIAL
STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,849,347
<SECURITIES> 5,485,313
<RECEIVABLES> 32,815,921
<ALLOWANCES> 19,873,000
<INVENTORY> 16,112
<CURRENT-ASSETS> 34,219,259
<PP&E> 4,013,067
<DEPRECIATION> 1,904,165
<TOTAL-ASSETS> 36,766,773
<CURRENT-LIABILITIES> 5,992,725
<BONDS> 0
0
0
<COMMON> 224,268
<OTHER-SE> 30,549,780
<TOTAL-LIABILITY-AND-EQUITY> 36,766,773
<SALES> 16,384,492
<TOTAL-REVENUES> 20,417,952
<CGS> 938,180
<TOTAL-COSTS> 12,822,461
<OTHER-EXPENSES> (237,675)
<LOSS-PROVISION> 2,300,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,594,986
<INCOME-TAX> 1,740,000
<INCOME-CONTINUING> 2,854,986
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,854,986
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.12
</TABLE>
