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, 1999
OR
[X] 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 NOVEMBER 9, 1999 THERE WERE 24,466,267 SHARES OF THE REGISTRANT'S
COMMON STOCK OUTSTANDING.
<PAGE>
OMEGA RESEARCH, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets
September 30, 1999 (unaudited) and December 31, 1998
(audited).............................................. 3
Statements of Income
Three and nine months ended September 30, 1999 and 1998
(unaudited)........................................... 4
Statements of Cash Flows
Nine months ended September 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...... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 16
Item 2. Changes in Securities and Use of Proceeds....................... 16
Item 4. Submission of Matters to a Vote of Security Holders............. 16
Item 6. Exhibits and Reports on Form 8-K................................ 17
Signature.................................................................. 18
Exhibit Index.............................................................. 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMEGA RESEARCH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,697,071 $ 7,436,980
Marketable securities 4,473,143 5,736,958
Accounts receivable, net 13,666,315 9,246,474
Inventories 86,001 131,659
Other current assets 864,739 692,273
Deferred income taxes 8,279,000 4,541,000
----------- -----------
Total current assets 34,066,269 27,785,344
PROPERTY AND EQUIPMENT, net 2,138,096 1,670,925
OTHER ASSETS 413,535 185,854
----------- -----------
Total assets $36,617,900 $29,642,123
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,426,529 $ 1,082,521
Accrued expenses 1,289,296 962,464
Deferred revenue 1,390,375 105,035
----------- -----------
Total current liabilities 4,106,200 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, 22,463,439 and 22,269,964
issued and outstanding at September 30, 1999
and December 31, 1998, respectively 224,634 222,700
Additional paid-in capital 24,437,214 23,913,877
Retained earnings 7,849,852 3,355,526
----------- -----------
Total shareholders' equity 32,511,700 27,492,103
----------- -----------
Total liabilities and shareholders' equity $36,617,900 $29,642,123
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
3
<PAGE>
OMEGA RESEARCH, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES:
Licensing fees $ 9,192,236 $ 4,980,272 $25,576,728 $16,341,669
Other revenues 1,600,324 1,489,201 5,633,784 4,810,194
----------- ----------- ----------- -----------
Total net revenues 10,792,560 6,469,473 31,210,512 21,151,863
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of licensing fees 459,638 312,564 1,397,818 1,282,650
Product development 1,116,895 854,512 3,301,462 2,405,400
Sales and marketing 4,440,324 3,632,281 12,826,516 10,791,122
General and administrative 2,239,099 1,523,555 6,790,801 4,196,995
----------- ----------- ----------- -----------
Total operating expenses 8,255,956 6,322,912 24,316,597 18,676,167
----------- ----------- ----------- -----------
Income from operations 2,536,604 146,561 6,893,915 2,475,696
OTHER INCOME, net 83,736 129,042 321,411 349,875
----------- ----------- ----------- -----------
Income before income taxes 2,620,340 275,603 7,215,326 2,825,571
INCOME TAX PROVISION 981,000 59,500 2,721,000 990,500
----------- ----------- ----------- -----------
Net income $ 1,639,340 $ 216,103 $ 4,494,326 $ 1,835,071
=========== =========== =========== ===========
EARNINGS PER SHARE (Note 3):
Basic $ 0.07 $ 0.01 $ 0.20 $ 0.08
=========== =========== =========== ===========
Diluted $ 0.07 $ 0.01 $ 0.18 $ 0.08
=========== =========== =========== ===========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,494,326 $ 1,835,071
Adjustments to reconcile net income to net cash
(used in) provided by operating
activities:
Depreciation and amortization 645,183 292,708
Provision for doubtful accounts 3,912,000 1,422,835
Compensation expense on stock option grants 106,644 87,520
Deferred income tax benefit (3,738,000) (684,500)
(Increase) decrease in:
Accounts receivable (8,331,841) (913,076)
Inventories 45,658 (17,917)
Other current assets (172,466) (445,676)
Other assets (135,971) 5,556
Increase (decrease) in:
Accounts payable 344,008 (87,863)
Accrued expenses 326,831 346,782
Deferred revenue 1,285,340 (47,395)
Income taxes payable -- (509,000)
------------ ------------
Net cash (used in) provided by operating activities (1,218,288) 1,285,045
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,084,063) (1,058,007)
Purchase of marketable securities -- (4,017,819)
Proceeds from maturity of marketable securities 1,263,815 --
Acquisition of data rights (120,000) (222,900)
------------ ------------
Net cash provided by (used in) investing activities 59,752 (5,298,726)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 418,627 37,200
Repayment of distributions to shareholders -- 135,022
------------ ------------
Net cash provided by financing activities 418,627 172,222
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (739,909) (3,841,459)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,436,980 12,323,515
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,697,071 $ 8,482,056
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 6,933,366 $ 2,413,740
============ ============
</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 September 30,
1999, the results of operations for the three and nine months ended September
30, 1999 and 1998 and cash flows for the nine months ended September 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 $7.0 million
and $3.7 million at September 30, 1999 and December 31, 1998, respectively, and
allowances for potential returns of approximately $12.2 million and $7.4 million
at September 30, 1999 and December 31, 1998, respectively.
2. DEFERRED REVENUE
Deferred revenue is comprised of deferrals for (i) licensing fees
revenue for which amounts are not due within the next twelve months and for
obligations which have not yet been fulfilled (such as committed upgrades), 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 each year. Deferred
revenue at September 30, 1999 and December 31, 1998 consists of the following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
Licensing fees revenue $ 1,325,355 $ 48,450
OmegaWorld 65,020 56,585
------------ ------------
$ 1,390,375 $ 105,035
============ ============
3. EARNINGS PER SHARE
Weighted average shares outstanding for the three and nine month
periods ended September 30, 1999 and 1998 are calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding (basic) 22,445,105 22,262,108 22,374,055 22,253,175
Impact of dilutive options after applying
the treasury stock method 1,909,914 402,833 2,049,858 585,085
---------- ---------- ---------- ----------
Weighted average shares outstanding (diluted) 24,355,019 22,664,941 24,423,913 22,838,260
========== ========== ========== ==========
Options outstanding which are not included in
the calculation of diluted earnings per share
because their impact is antidilutive 385,058 427,075 110,558 320,750
========== ========== ========== ==========
</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. SUBSEQUENT EVENTS
Effective on October 26, 1999, the Company acquired by merger privately
held Window On WallStreet Inc. ("Window On WallStreet"), an Internet-based
provider of streaming real-time and historical quotes and a developer of on-line
investment analysis tools. Under the terms of the merger agreement, Window On
WallStreet shareholders received 2 million newly issued shares of the Company's
common stock for all of the issued and outstanding shares of Window On
WallStreet's common stock. In addition, the Company (i) repaid in accordance
with its terms approximately $4.1 million of debt and related accrued interest
and (ii) assumed all outstanding stock options to purchase Window On WallStreet
common stock which, based on an exchange ratio of 0.210974, will be exercisable
for an aggregate of approximately 182,565 shares of the Company's common stock.
Following the merger, which is being accounted for as a pooling of interests,
Window On WallStreet shareholders will own approximately 8 percent of the
Company's outstanding common stock. Window On WallStreet had net revenues of
approximately $2.7 million and a net loss of approximately $2.4 million for the
nine months ended September 30, 1999, on an unaudited basis.
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.
RECENT DEVELOPMENTS
Effective on October 26, 1999, the Company acquired by merger privately
held Window On WallStreet Inc. ("Window On WallStreet"), an Internet-based
provider of streaming real-time and historical quotes and a developer of on-line
investment analysis tools. Under the terms of the merger agreement, Window On
WallStreet shareholders received 2 million newly issued shares of the Company's
common stock for all of the issued and outstanding shares of Window On
WallStreet's common stock. In addition, the Company (i) repaid in accordance
with its terms, approximately $4.1 million of debt and related accrued interest
and (ii) assumed all outstanding stock options to purchase Window On WallStreet
common stock which, based on an exchange ratio of 0.210974, will be exercisable
for an aggregate of approximately 182,565 shares of the Company's common
stock. Following the merger, which is being accounted for as a pooling of
interests, Window On WallStreet shareholders will own approximately 8 percent of
the Company's outstanding common stock. Window On WallStreet had net revenues of
approximately $2.7 million and a net loss of approximately $2.4 million for the
nine months ended September 30, 1999, on an unaudited basis.
On November 8, 1999, the Company announced its expected launch early
next year of TradeStation.com, the Internet's first streaming real-time
decision support portal for the active trader. TradeStation.com is expected to
provide subscribers with a wide array of content, educational tools and
community forums, in addition to access to a streaming real-time decision
support tool. In addition to providing free content to visitors,
TradeStation.com is expected to generate revenues from subscribers (both direct
and through its business to business offerings) and advertising. The Company
also announced it expects to re-launch WindowOnWallStreet.com, which will
include streaming real-time quotes, charts and news on a subscription basis, in
approximately one month.
As a result of the foregoing Internet initiative, revenue and expenses
will be impacted in the future. As the Company migrates from a software product
company to a service provider utilizing a subscription-based model, the Company
expects a transition in the revenue stream to occur. The Company anticipates
that it will begin to recognize subscription revenue on a monthly basis as
opposed to recognizing net licensing fee revenue upfront as in the case of a
product sale. This change is expected to create a short-term decrease in net
revenues as the Company builds its subscriber base. The Company expects to
benefit from the change to the subscription-based model and the resulting
recurring revenue stream. The Company also expects to begin making significant
investments which will include an increase in research and development spending
and infrastructure outlays to add server capacity and development personnel as
well as increased marketing and advertising expenditures to launch these
initiatives and increase the Company's subscriber base. In addition, it is
expected that the Company will record a one-time charge of approximately $1.3
million related to transaction costs associated with the Window On WallStreet
acquisition. As a result of the acquisition of Window On WallStreet and the
contemplated execution of the Company's Internet strategy, the Company expects
to incur losses near-term through at least the next several quarters.
It should be noted that the results of operations and liquidity and
capital resources discussions below do not give effect to the merger or the
impact of the Company's Internet initiative. See Item 6 in Part II of this
report for the current reports on Form 8-K filed by the Company with respect to
the Window on WallStreet acquisition and the Company's Internet initiative.
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 net
revenues and as a percentage of licensing fees:
8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL NET REVENUES:
Licensing fees 85.2 % 77.0 % 81.9 % 77.3 %
Other revenues 14.8 23.0 18.1 22.7
----- ----- ----- -----
Total net revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of licensing fees 4.3 4.8 4.5 6.1
Product development 10.4 13.2 10.6 11.4
Sales and marketing 41.1 56.1 41.1 51.0
General and administrative 20.7 23.6 21.7 19.8
----- ----- ----- -----
Total operating expenses 76.5 97.7 77.9 88.3
----- ----- ----- -----
Income from operations 23.5 % 2.3 % 22.1 % 11.7 %
===== ===== ===== =====
AS A PERCENTAGE OF LICENSING FEES:
Operating expenses:
Cost of licensing fees 5.0 6.3 5.5 7.9
Product development 12.1 17.2 12.9 14.7
Sales and marketing 48.3 72.9 50.1 66.0
General and administrative 24.4 30.6 26.6 25.7
----- ----- ----- -----
Total operating expenses 89.8 % 127.0 % 95.1 % 114.3 %
===== ===== ===== =====
</TABLE>
QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998
NET REVENUES
TOTAL NET REVENUES. The Company's total net revenues increased 67% from
$6.5 million in the three months ended September 30, 1998 to $10.8 million in
the comparable period of 1999.
LICENSING FEES. Licensing fees increased 85% from $5.0 million in the
three months ended September 30, 1998 to $9.2 million in the comparable period
of 1999, primarily due to an increase in net revenues resulting from the
release, on February 22, 1999, of the Company's 2000I software products. As a
result of the Company's recent announcement regarding its Internet strategy, it
is not expected that in the short-term the current level of licensing fees will
continue and no assurance can be given as to what extent the new business model
will impact licensing fees. 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, particularly due to the Company's announcement
regarding its Internet initiative.
OTHER REVENUES. Other revenues increased 7% from $1.5 million in the
three months ended September 30, 1998 to $1.6 million in the comparable period
of 1999, primarily due to an increase in minimum royalties under the Company's
license agreement with Telerate, Inc. ("Bridge Telerate"), a subsidiary of
Bridge Information Systems, Inc.
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 $460,000 in the three months ended September 30, 1999 and
$313,000 in the comparable period of 1998. Cost of licensing fees as a
percentage of licensing fees decreased from 6% in the three months ended
September 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.
9
<PAGE>
Product development expenses increased 31% from $855,000 in the three months
ended September 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 17% in the three months ended September 30, 1998 to 12% 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 expenses will increase for the
foreseeable future as the Company seeks, among other things, to expand into the
Internet market and, in conjunction therewith, develop new products and services
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 $3.6 million in the three
months ended September 30, 1998 to $4.4 million in the comparable period of
1999, primarily due to increased personnel expenses related to increased sales
and marketing personnel and commissions and increased travel expenses, partially
offset by a decline in advertising (including print advertising, television
advertising and direct mailers). Sales and marketing expenses as a percentage of
licensing fees decreased from 73% in the three months ended September 30, 1998
to 48% 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 begins to market its
Internet strategy.
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 $1.5 million in the three
months ended September 30, 1998 to $2.2 million in the comparable period of
1999, primarily due to increased bad debt expense offset by decreased consulting
and professional fees. General and administrative expenses as a percentage of
licensing fees decreased from 31% in the three months ended September 30, 1998
to 24% in the comparable period of 1999, primarily as a result of increased
licensing fees partially offset by increased expenses. 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 and other expenses
associated with the Company entering into the Internet product market and the
integration of the Company's existing business with the operations of Window On
WallStreet.
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 was $84,000 and $129,000 in the three months ended September
30, 1999 and 1998, respectively.
INCOME TAXES
The Company recorded a provision for income taxes of $981,000 and
$60,000 for the three months ended September 30, 1999 and 1998, respectively,
based upon the effective annual income tax rate. The effective tax rates for
three months ended September 30, 1999 and 1998 were 37% and 22%, respectively,
and are below the 39% statutory rate as a result of the impact of tax-free
investment income.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NET REVENUES
TOTAL NET REVENUES. The Company's total net revenues increased 48% from
$21.2 in the nine months ended September 30, 1998 to $31.2 million in the
comparable period of 1999.
10
<PAGE>
LICENSING FEES. Licensing fees increased 57% from $16.3 million in the
nine months ended September 30, 1998 to $25.6 million in the comparable period
of 1999, primarily due to an increase in net revenues resulting from the
release, on February 22, 1999, of the Company's 2000I software products. As a
result of the Company's recent announcement regarding its Internet strategy, it
is not expected that in the short-term the current level of licensing fees will
continue and no assurance can be given as to what extent the new business model
will impact licensing fees. 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, particularly due to the Company's announcement
regarding its Internet initiative.
OTHER REVENUES. Other revenues increased 17% from $4.8 million in the
nine months ended September 30, 1998 to $5.6 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 $1.4
million in the nine months ended September 30, 1999 and $1.3 million in the
comparable period of 1998. Cost of licensing fees as a percentage of licensing
fees decreased from 8% in the nine months ended September 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 37% from
$2.4 million in the nine months ended September 30, 1998 to $3.3 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 nine months ended
September 30, 1998 to 13% in the comparable period of 1999, primarily as a
result of increased licensing fees partially offset by increased expenses. The
Company anticipates that the absolute dollar amount of product development
expenses will increase for the foreseeable future as the Company seeks, among
other things, to expand into the Internet market and, in conjunction therewith,
develop new products and services and enhance existing products.
SALES AND MARKETING. Sales and marketing expenses increased from $10.8
million in the nine months ended September 30, 1998 to $12.8 million in the
comparable period of 1999, primarily due to increased personnel expenses related
to increased sales and marketing personnel and commissions, and increased travel
expenses and 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 66% in the nine months ended September 30, 1998 to 50% 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 begins to market its Internet strategy.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased from $4.2 million in the nine months ended September 30, 1998 to $6.8
million in the comparable period of 1999, primarily due to increases in bad debt
expense, personnel and related costs, facility expenses and communications
expenses, offset by decreased consulting and professional expenses. General and
administrative expenses as a percentage of licensing fees increased from 26% in
the nine months ended September 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 and other expenses associated with
the Company entering into the Internet product market and the integration of the
Company's existing business with the operations of Window On WallStreet.
11
<PAGE>
OTHER INCOME, NET
Other income, net was $321,000 and $350,000 in the nine months ended
September 30, 1999 and 1998, respectively.
INCOME TAXES
The Company recorded a provision for income taxes of $2.7 million and
$991,000 for the nine months ended September 30, 1999 and 1998, respectively,
based upon the effective annual income tax rate. The effective tax rates for
nine months ended September 30, 1999 and 1998 were 38% and 35%, 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. The Company expects to
experience significant fluctuations in future quarterly operating results that
may be caused by many factors, including the following: the Company's ability to
successfully effectuate its Internet strategy and to develop and market its
Internet products and services; timing of introductions of these products and
services; market acceptance of these products and services; the level of market
demand for real-time decision support tools; the extent by which the new
business model impacts licensing fees; the impact that the transition to a
subscription-based Internet business model may have on the Company's current
customer base, financial statement (including the level of returns and bad debt
on current receivables) and existing relationships; the Company's ability to
develop relationships with third parties to execute its business-to-business
strategy; the number, timing and significance of additional new product
introductions by the competition, changes in pricing policies by the Company or
its competitors; changes in the securities markets; changes in strategy; the
success of or costs associated with acquisitions or other strategic
relationships; changes in key personnel; seasonal trends; the extent of
international expansion; changes in the level of operating expenses to support
projected growth and/or new product or service launches; and general economic
conditions. The Company's quarterly revenues and operating results are difficult
to forecast, and the Company believes that period-to-period comparisons of its
operating results will not necessarily be meaningful and should not be relied
upon as an indication of future performance. It is possible that the Company's
future quarterly operating results from time to time will not meet the
expectations of securities analysts or investors, which may have an adverse
effect on the market price of the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently anticipates that its available cash resources and
cash flows from operations will be sufficient to meet its presently anticipated
working capital and capital expenditure requirements for at least the next 12
months. However, the Company may need to raise additional funds in order to
execute its Internet strategy, support more rapid expansion, develop new or
enhanced services and products, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities. The Company's future liquidity and capital requirements will
depend upon numerous factors, including costs and timing of expansion of
research and development and marketing efforts and the success of such efforts,
the success of the Company's existing and new product and service offerings,
competing technological and market developments. The Company's forecast of the
period of time through which its financial resources will be adequate to support
its operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary. The factors described earlier in
this paragraph, as well as other factors, will impact the Company's future
capital requirements and the adequacy of its available funds. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of the shareholders of the Company will be reduced, shareholders may
experience additional dilution in net book value per share or such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's common stock.
There can be no assurance that additional financing will be available
when needed on terms favorable to the Company, if at all. If adequate funds are
not available on acceptable terms, the Company may be unable to develop or
enhance its services and products, take advantage of future opportunities or
respond to competitive pressures, any of which could have a material adverse
effect on the Company's business, financial condition and operating results.
12
<PAGE>
As of September 30, 1999, the Company had cash and cash equivalents of
approximately $6.7 million, investments in short-term marketable securities of
$4.5 million, and working capital of approximately $30.0 million. Marketable
securities consist of investment grade municipal bonds maturing, on average,
within a year.
Cash used in operating activities totaled $1.2 million in the nine
months ended September 30, 1999, while cash provided by operating activities
totaled $1.3 million in the nine months ended September 30, 1998. The decrease
in net cash provided by operations in the nine months ended September 30, 1999
was primarily attributable to an increase in accounts receivable due to
increased net sales, net of deferred revenue, partially offset by higher net
income and the timing of payments for income taxes and certain liabilities.
The Company's investing activities provided cash of $60,000 in the nine
months ended September 30, 1999, while cash used in investing activities totaled
$5.3 million in the nine months ended September 30, 1998. The principal use of
cash in investing activities in the nine months ended September 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. Such
use of cash was offset by proceeds from the maturity of marketable securities
during 1999.
The Company's financing activities provided cash of $419,000 and
$172,000 in the nine months ended September 30, 1999 and 1998, respectively.
Cash provided in 1999 and 1998 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. During
1998, cash was also provided by the repayment, with interest, of $135,000 of S
corporation dividends previously 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. The actual cumulative taxable income was finally determined upon
the finalization and filing of the Company's 1997 tax returns.
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 and TRADESTATION PROSUITE 4, and the current
shipping version of SUPERCHARTS 4 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 was made available at no charge
during the third quarter of 1999. 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
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, SUPERCHARTS 4 and Portfolio Maximizer.
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
13
<PAGE>
("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 was completed during the third quarter of 1999 and Bridge Telerate began
offering TELERATE TRADESTATION 2000I to its customers in October 1999. In
addition, Bridge Telerate requested an alternate Year 2000 solution which would
make the prior version of TRADESTATION delivered to Bridge Telerate Year 2000
compliant so that it will work with the existing Bridge Telerate datafeeds
(other than the Bridgefeed 4) currently being used by Bridge Telerate customers.
Such alternate solution was delivered to Bridge Telerate in October 1999 and
is also currently being offered by Bridge Telerate to its customers.
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 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. If and when used in this report, the words "believes,"
"estimates," "plans," "expects," "intends," "anticipates," "may," "prospect,"
"will," "should," "looking forward", "could" 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 substantial 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's ability to successfully effectuate its Internet
strategy and develop and market its Internet products and services and the
costs associated therewith, results of operations for the remainder of the 1999
fourth quarter and Year 2000 (and the impact that the Company's Internet
initiative will have on those results), difficulty in integrating the Window On
WallStreet acquisition from both technology and operational aspects, failure of
customer acceptance of the Company's new Internet products and services (due to
technical difficulties or errors in the products or services, their cost,
unfavorable critical reviews, increased competition, or other reasons), the
level of market demand for real-time decision support tools, the scalability and
the reliability of the Financial Data Cast Network acquired in the Window on
WallStreet acquisition, the level of returns and bad debt, the extent by which
the Company's new business
14
<PAGE>
model impacts licensing fees, the impact that the transition to the
subscription-based Internet business model may have on the Company's current
customer base, financial statements and existing relationships, the Company's
ability to develop relationships with third parties to execute its business to
business strategy, the number, timing and significance of additional new product
introductions by the Company's 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 the level of operating
expenses to support projected growth and/or new product or service launches,
attempts by the Company to enter new markets (including the Internet product
market) or expand into related businesses and the cost, timing and success
thereof, the success of or costs associated with acquisitions or other strategic
relationships, the ability of the Company to hire and retain qualified
engineers, the adequacy of working capital, cash flows from operations and
available financing to fund the new business model, 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.
15
<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 the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999, 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 September 30, 1999, the Company issued to
7 employees (including one executive officer of the Company) options to purchase
an aggregate of 106,000 shares of common stock. Such options vest ratably in
annual increments over a five-year period and are exercisable at prices ranging
from $5.54 to $6.10 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.
During the three months ended September 30, 1999, the Company also
issued to 2 non-employee directors options to purchase an aggregate of 28,000
shares of common stock. Such options vest ratably in annual increments over a
three-year period and are exercisable at a price of $5.60 per share, which was
the fair market value of the Company's common stock on the date on which the
options were granted. All of the options were granted under the Company's 1997
Nonemployee Director Stock Option Plan, as amended, and expire, if they remain
unexercised, on the fifth 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 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 through
September 30, 1999, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On August 13, 1999, the Company held its 1999 Annual Meeting of
Shareholders (the "Annual Meeting").
(b) One matter voted on at the Annual Meeting was the election of all seven
directors of the Company. All seven nominees to the Company's Board of
Directors were elected (six of whom were re-elected), receiving the number
and percentage of votes for election and abstentions as set forth next to
the their respective names below:
NOMINEE FOR DIRECTOR FOR ELECTION ABSTENTIONS
-------------------- ------------ -----------
NUMBER PERCENTAGE NUMBER PERCENTAGE
------ ---------- ------ ----------
William R. Cruz 22,211,469 99.46% 121,380 0.54%
Ralph L. Cruz 22,211,469 99.46% 121,380 0.54%
Peter A. Parandjuk 22,211,469 99.46% 121,380 0.54%
Salomon Sredni 22,211,469 99.46% 121,380 0.54%
Marc J. Stone 22,211,469 99.46% 121,380 0.54%
Brian D. Smith 22,211,469 99.46% 121,380 0.54%
Stephen C. Richards 22,211,469 99.46% 121,380 0.54%
16
<PAGE>
(c) The only other matters voted upon at the Annual Meeting were the following:
(i) A proposal to approve an increase in the number of shares of the
Company's common stock, reserved for issuance under the Company's Amended and
Restated 1996 Incentive Stock Plan from 3,000,0000 shares to 4,500,0000 shares,
subject to any further antidilution adjustments, was approved, receiving the
votes of the holders of the number of shares of common stock voted in person or
by proxy at the Annual Meeting and the percentage of total votes cast as
indicated below:
FOR AGAINST OR WITHHELD ABSTENTION
--- ------------------- ----------
19,002,753 (96.12%) 748,133 (3.78%) 19,220 (0.10%)
With respect to the above proposal, there were 2,562,743 broker or
nominee non-votes.
(ii) A proposal to ratify the selection of Arthur Andersen LLP as
independent public accountants for the Company for the fiscal year ending
December 31, 1999 was approved, receiving the votes of the holders of the number
of shares of common stock voted in person or by proxy at the Annual Meeting and
the percentage of total votes cast as indicated below:
FOR AGAINST OR WITHHELD ABSTENTION
--- ------------------- ----------
22,307,459 (99.89%) 14,500 (0.06%) 10,890 (0.05%)
(d) Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Omega Research, Inc. Amended and Restated 1996 Incentive
Stock Plan, as amended through August 13, 1999
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 September 30, 1999. However, (i) the Company has filed a current
report on Form 8-K dated November 8, 1999, reporting in Item 2 thereof the
consumation on October 26, 1999 of the merger with Window On WallStreet and in
Item 7 thereof the filing of a copy of the Agreement and Plan of Merger dated as
of October 25, 1999, among the Company, Window On WallStreet and WOW Acquisition
Corporation and (ii) the Company has filed a current report on Form 8-K dated
November 10, 1999, reporting in Item 5 thereof the announcement on November 8,
1999, of its Internet strategy.
17
<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 12, 1999 /S/ GREGG F. STEWART
- ----------------- --------------------
Date Gregg F. Stewart
Chief Financial Officer, Vice President of Finance
and Treasurer
(Signing both in his capacity as an authorized
officer and as Principal Financial and
Accounting Officer of the Registrant)
18
<PAGE>
OMEGA RESEARCH, INC.
EXHIBIT INDEX
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- --------------------
10.1 Omega Research, Inc. Amended and Restated 1996
Incentive Stock Plan, as amended through August 13, 1999
27.1 Financial Data Schedule
19
EXHIBIT 10.1
OMEGA RESEARCH, INC.
AMENDED AND RESTATED
1996 INCENTIVE STOCK PLAN*
1. PURPOSE. The OMEGA RESEARCH, INC. Amended and Restated 1996
Incentive Stock Plan (the "Plan") is intended to provide incentives which will
attract and retain highly competent persons at all levels as employees of OMEGA
RESEARCH, INC. and its subsidiaries (the "Company"), as well as independent
contractors providing consulting or advisory services to the Company, by
providing them opportunities to acquire the Company's common stock ("Common
Shares") or to receive monetary payments based on the value of such shares
pursuant to the Awards described in Paragraph 4 below.
2. ADMINISTRATION.
(a) Prior to the date, if any, upon which the Company becomes subject
to the Securities Exchange Act of 1934 (the "Act"), the Plan shall be
administered by the Board of Directors of the Company (the "Board") or a
committee appointed by the Board. After the date, if any, upon which the Company
becomes subject to the Act, the Plan will be administered by the Compensation
Committee (the administrator of the Plan, initially the Board or committee
thereof and thereafter the Compensation Committee, if and when the Company
becomes subject to the Act, shall be referred to hereinafter as the "Committee")
appointed by the Board from among its members PROVIDED, however, that as long as
Common Shares are registered under the Act, members of the Committee must
qualify as "non-employee directors" within the meaning of Securities and
Exchange Commission Regulation ss. 240.16b-3; provided further, however, that,
notwithstanding the foregoing, the Board can continue to administer the Plan
after the Company becomes subject to the Act until the Board has a sufficient
number of members who qualify as "non-employee directors" to constitute the
Committee. Once appointed, the Committee shall continue to serve until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause), and appoint new members in substitution therefor, and fill
vacancies however caused; provided, however, that at no time shall a Committee
of less than two members of the Board administer the Plan, and provided further,
that, once the Company becomes subject to the Act, all members of the Committee
if it consists of only two members must be "non-employee directors." The
Committee is authorized, subject to the provisions of the Plan, to establish
such rules and regulations as it deems necessary for the proper administration
of the Plan and to make such determinations and interpretations and to take such
action in connection with the Plan and any Awards (as hereinafter defined)
granted hereunder as it deems necessary or advisable. All determinations and
interpretations made by the Board and Committee shall be binding and conclusive
on all participants and their legal representatives. No member of the Board, no
member of the Committee and no employee of the Company shall be liable for any
act or failure to act hereunder, by any other member or employee or by any agent
to whom
- --------
* As amended through August 13, 1999.
<PAGE>
duties in connection with the administration of this Plan have been delegated
or, except in circumstances involving such person's bad faith, gross negligence
or fraud, for any act or failure to act by the member or employee.
(b) Pursuant to its administrative duties described in Section 2(a)
above and notwithstanding anything to the contrary contained herein, the
Compensation Committee may, by a resolution adopted at a meeting of the
Compensation Committee duly convened and called or by a unanimous written
consent in lieu of a meeting, delegate to the persons or persons who serve as
Chief Executive Officer or as Co-Chief Executive Officers of the Company the
authority to determine the identities of employees who are not officers or
directors of the Company who shall receive Stock Options under the Plan and the
terms, conditions, limitations and restrictions upon which such Stock Options
shall be granted; provided, however, that the per share exercise price of any
Stock Option awarded by the Chief Executive Officer or the Co-Chief Executive
Officers of the Company pursuant to any delegation of authority permitted
hereunder shall not be less than the Fair Market Value (as hereinafter defined)
of the Common Shares on the date the Stock Option is granted. The terms and
conditions of, and any limitation or restriction on, any such delegation shall
be at the sole discretion of the Compensation Committee and shall be set forth
in the resolution of the Compensation Committee establishing such delegation.
Any delegation pursuant to this Section 2(b) may be revoked by the Compensation
Committee at any time.
3. PARTICIPANTS. Participants will consist of such employees or
prospective employees (conditioned upon, and effective not earlier than his
becoming an employee) of the Company, and independent contractors (including
persons other than individuals) providing consulting or advisory services to the
Company, as the Committee in its sole discretion determines to be responsible
for the success and future growth and profitability of the Company and whom the
Committee may designate from time to time to receive Awards under the Plan.
Designation of a participant in any year shall not require the Committee to
designate such person to receive an Award in any other year or, once designated,
to receive the same type or amount of Awards as granted to the participant in
any year. The Committee shall consider such factors as it deems pertinent in
selecting participants and in determining the type and amount of their
respective Awards.
4. TYPES OF AWARDS. Awards under the Plan may be granted in any one or
a combination of (a) Stock Options, (b) Stock Appreciation Rights, (c) Stock
Awards, (d) Performance Shares, and (e) Performance Units, all as described
below (collectively "Awards").
5. SHARES RESERVED UNDER THE PLAN. Subject to the following provisions
of this Section 5, there is hereby reserved for issuance under the Plan an
aggregate of 4,500,000 Common Shares, which may be authorized but unissued
shares. Any shares subject to Stock Options or Stock Appreciation Rights or
issued under such options or rights or as Stock Awards may thereafter be subject
to new options, rights or awards under this Plan if there is a lapse, expiration
or termination of any such options or rights prior to issuance of the shares or
the payment of the equivalent or if shares are issued under such options or
rights or as such awards and thereafter are reacquired by the Company pursuant
to rights reserved by the Company upon issuance thereof.
2
<PAGE>
6. STOCK OPTIONS. Stock Options will consist of awards from the
Company, in the form of agreements, which will enable the holder to purchase a
specific number of Common Shares, at set terms and at a fixed purchase price.
Stock Options may be "incentive stock options" ("Incentive Stock Options")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") or Stock Options which do not constitute Incentive Stock
Options ("Nonqualified Stock Options"). The Committee will have the authority to
grant to any participant one or more Incentive Stock Options, Nonqualified Stock
Options, or both types of Stock Options (in each case with or without Stock
Appreciation Rights). Each Stock Option shall be subject to such terms and
conditions consistent with the Plan as the Committee may impose from time to
time, subject to the following limitations:
(a) EXERCISE PRICE. Each Stock Option granted hereunder shall have
such per-share exercise price as the Committee may determine at the date of
grant provided, however, that the per-share exercise price for Incentive Stock
Options shall not be less than 100% of the Fair Market Value (as hereinafter
defined) of the Common Shares on the date the option is granted.
(b) PAYMENT OF EXERCISE PRICE. The option exercise price may be paid
by check or, in the discretion of the Committee, by the delivery of Common
Shares of the Company then owned by the participant or a combination of methods
of payment; provided, however, that option agreements may provide that payment
of the exercise price by delivery of Common Shares of the Company then owned by
the participant may be made only if such payment does not result in a charge to
earnings for financial accounting purposes as determined by the Committee. In
the discretion of the Committee, if Common Shares are readily tradeable on a
national securities exchange or other market system at the time of option
exercise, payment may also be made by delivering a properly executed exercise
notice to the Company together with a copy of irrevocable instructions to a
broker to deliver promptly to the Company the amount of sale or loan proceeds to
pay the exercise price. To facilitate the foregoing, the Company may enter into
agreements for coordinated procedures with one or more brokerage firms.
(c) EXERCISE PERIOD. Stock Options granted under the Plan will be
exercisable at such times and subject to such terms and conditions as shall be
determined by the Committee. In addition, Nonqualified Stock Options shall not
be exercisable later than fifteen years after the date they are granted and
Incentive Stock Options shall not be exercisable later than ten years after the
date they are granted. All Stock Options shall terminate at such earlier times
and upon such conditions or circumstances as the Committee shall in its
discretion set forth in such option at the date of grant.
(d) LIMITATIONS ON INCENTIVE STOCK OPTIONS. Incentive Stock Options
may be granted only to participants who are employees of the Company or one of
its subsidiaries (within the meaning of Section 424(f) of the Code) at the date
of grant. The aggregate Fair Market Value (determined as of the time the option
is granted) of the Common Shares with respect to which Incentive Stock Options
are exercisable for the first time by a participant during any calendar year
(under all option plans of the Company) shall not exceed $100,000. Incentive
Stock Options may not be granted to any participant who, at the time of grant,
owns stock possessing (after the
3
<PAGE>
application of the attribution rules of Section 424(d) of the Code) more than
10% of the total combined voting power of all classes of stock of the Company,
unless the option price is fixed at not less than 110% of the Fair Market Value
of the Common Shares on the date of grant and the exercise of such option is
prohibited by its terms after the expiration of five years from the date of
grant of such option.
(e) REDESIGNATION AS NONQUALIFIED STOCK OPTIONS. Options designated
as Incentive Stock Options that fail to continue to meet the requirements of
Section 422 of the Code shall be redesignated as Nonqualified Stock Options for
Federal income tax purposes automatically without further action by the
Committee on the date of such failure to continue to meet the requirements of
Section 422 of the Code.
(f) LIMITATION OF RIGHTS IN SHARES. The recipient of a Stock Option
shall not be deemed for any purpose to be a shareholder of the Company with
respect to any of the shares subject thereto except to the extent that the Stock
Option shall have been exercised and, in addition, a certificate shall have been
issued and delivered to the participant.
7. STOCK APPRECIATION RIGHTS. The Committee may, in its discretion,
grant Stock Appreciation Rights to the holders of any Stock Options granted
hereunder. In addition, Stock Appreciation Rights may be granted independently
of and without relation to Stock Options. Each Stock Appreciation Right shall be
subject to such terms and conditions consistent with the Plan as the Committee
shall impose from time to time, including the following:
(a) A Stock Appreciation Right relating to a Nonqualified
Stock Option may be made part of such option at the time of its grant or at any
time thereafter up to six months prior to its expiration, and a Stock
Appreciation Right relating to an Incentive Stock Option may be made part of
such option only at the time of its grant.
(b) Each Stock Appreciation Right will entitle the holder to
elect in lieu of exercising the Stock Option to receive the appreciation in the
Fair Market Value of the shares subject thereto up to the date the right is
exercised. In the case of a right issued in relation to a Stock Option, such
appreciation shall be measured from not less than the option price and in the
case of a right issued independently of any Stock Option, such appreciation
shall be measured from not less than 85% of the Fair Market Value of the Common
Shares on the date the right is granted. Payment of such appreciation shall be
made in cash or in Common Shares, or a combination thereof, as set forth in the
Award, but no Stock Appreciation Right shall entitle the holder to receive, upon
exercise thereof, more than the number of Common Shares (or cash of equal value)
with respect to which the right is granted.
(c) Each Stock Appreciation Right will be exercisable at the
times and to the extent set forth therein, but no Stock Appreciation Right may
be exercisable earlier than six months after the date it was granted or later
than the earlier of (i) the term of the related Stock Option, if any, and (ii)
fifteen years after it was granted. Exercise of a Stock Appreciation Right shall
reduce
4
<PAGE>
the number of shares issuable under the Plan (and the related Stock Option, if
any) by the number of shares with respect to which the right is exercised.
8. STOCK AWARDS. Stock Awards will consist of Common Shares transferred
to participants without other payment therefor or payment at less than Fair
Market Value as additional compensation for services to the Company. Stock
Awards shall be subject to such terms and conditions as the Committee determines
appropriate, including, without limitation, restrictions on the sale or other
disposition of such shares and rights of the Company to reacquire such shares
for no consideration upon termination of the participant's employment or other
contractual arrangement within specified periods. The Committee may require the
participant to deliver a duly signed stock power, endorsed in blank, relating to
the Common Shares covered by such an Award. The Committee may also require that
the stock certificates evidencing such shares be held in custody until the
restrictions thereon shall have lapsed. The participant shall have, with respect
to the Common Shares subject to a Stock Award, all of the rights of a holder of
Common Shares of the Company, including the right to receive dividends and to
vote the shares.
9. PERFORMANCE SHARES.
(a) Performance Shares may be awarded either alone or in
addition to other Awards granted under this Plan and shall consist of the right
to receive Common Shares or cash of an equivalent value at the end of a
specified Performance Period (defined below). The Committee shall determine the
participants to whom and the time or times at which Performance Shares shall be
awarded, the number of Performance Shares to be awarded to any person, the
duration of the period (the "Performance Period") during which, and the
conditions under which, receipt of the Common Shares will be deferred, and the
other terms and conditions of the Award in addition to those set forth in this
Section 9. The Committee may condition the grant of Performance Shares upon the
attainment of specified performance goals or such other factors or criteria as
the Committee shall determine.
(b) Performance Shares awarded pursuant to this Section 9
shall be subject to the following terms and conditions:
(i) Unless otherwise determined by the Committee at the time
of the grant of the Award, amounts equal to any dividends declared
during the Performance Period with respect to the number of Common
Shares covered by a Performance Share Award will not be paid to the
participant.
(ii) Subject to the provisions of the Performance Share Award
and this Plan, at the expiration of the Performance Period, share
certificates and/or cash of an equivalent value (as the Committee may
determine) shall be delivered to the participant, or his, her or its
legal representative, in a number equal to the vested shares covered by
the Performance Share Award.
5
<PAGE>
(iii) Subject to the applicable provisions of the Performance
Share Award and this Plan, upon termination of a participant's
employment or contractual relationship with the Company for any reason
during the Performance Period for a given Performance Share Award, the
Performance Shares in question will vest or be forfeited in accordance
with the terms and conditions established by the Committee.
10. PERFORMANCE UNITS.
(a) Performance Units may be awarded either alone or in
addition to other Awards granted under this Plan and shall consist of the right
to receive a fixed dollar amount, payable in cash or Common Shares or a
combination of both. The Committee shall determine the participants to whom and
the time or times at which Performance Units shall be awarded, the duration of
Performance Units to be awarded to any person, the duration of the period (the
"Performance Cycle") during which, and the conditions under which, a
participant's right to Performance Units will be vested, the ability of
participants to defer the receipt of payment of such Performance Units, and the
other terms and conditions of the Award in addition to those set forth in this
Section 10. The Committee may condition the vesting of Performance Units upon
the attainment of specified performance goals or such other factors or criteria
as the Committee shall determine.
(b) The Performance Units awarded pursuant to this Section 10
shall be subject to the following terms and conditions:
(i) At the expiration of the Performance Cycle, the Committee
shall determine the extent to which the performance goals have been
achieved, and the percentage of the Performance Units of each
participant that have vested.
(ii) Subject to the applicable provisions of the Performance
Unit Award and this Plan, at the expiration of the Performance Cycle,
cash and/or share certificates of an equivalent value (as the Committee
may determine) shall be delivered to the participant, or his, her or
its legal representative, in payment of the vested Performance Units
covered by the Performance Unit Award.
(iii) Subject to the applicable provisions of the Performance
Unit Award and this Plan, upon termination of a participant's
employment or contractual relationship with the Company for any reason
during the Performance Cycle for a given Performance Unit Award, the
Performance Units in question will vest or be forfeited in accordance
with the terms and conditions established by the Committee.
11. ADJUSTMENT PROVISIONS.
(a) If the Company shall at any time change the number of
issued Common Shares without new consideration to the Company (such as by stock
dividend, stock split, recapitalization, reorganization, exchange of shares,
liquidation, combination or other change in corporate structure affecting the
Common Shares other than as contemplated under Section 5 hereof)
6
<PAGE>
or make a distribution of cash or property which has a substantial impact on the
value of issued Common Shares, the total number of shares available for Awards
under this Plan shall be appropriately adjusted and the number of shares covered
by each outstanding Award and the reference price or Fair Market Value for each
outstanding Award shall be adjusted so that the net value of such Award shall
not be changed.
(b) In the case of any sale of assets, merger, consolidation,
combination or other corporate reorganization or restructuring of the Company
with or into another corporation which results in the outstanding Common Shares
being converted into or exchanged for different securities, cash or other
property, or any combination thereof (an "Acquisition"), subject to the
provisions of this Plan and any limitation applicable to the Award:
(i) any participant to whom a Stock Option has been granted
shall have the right thereafter and during the term of the Stock Option
to receive upon exercise thereof the Acquisition Consideration (as
defined below) receivable upon the Acquisition by a holder of the
number of Common Shares which might have been obtained upon exercise of
the Stock Option or portion thereof, as the case may be, immediately
prior to the Acquisition;
(ii) any participant to whom a Stock Appreciation Right has
been granted shall have the right thereafter and during the term of
such right to receive upon exercise thereof the difference on the
exercise date between the aggregate Fair Market Value of the
Acquisition Consideration receivable upon such acquisition by a holder
of the number of Common Shares which are covered by such right and the
aggregate reference price of such right; and
(iii) any participant to whom Performance Shares or
Performance Units have been awarded shall have the right thereafter and
during the term of the Award, upon fulfillment of the terms of the
Award, to receive on the date or dates set forth in the Award, the
Acquisition Consideration receivable upon the Acquisition by a holder
of the number of Common Shares which are covered by the Award.
The term "Acquisition Consideration" shall mean the kind and amount of
securities, cash or other property or any combination thereof
receivable in respect of one Common Share upon consummation of an
Acquisition.
(c) Notwithstanding any other provision of this Plan, the
Committee may authorize the issuance, continuation or assumption of Awards or
provide for other equitable adjustments after changes in the Common Shares
resulting from any other merger, consolidation, sale of assets, acquisition of
property or stock, recapitalization, reorganization or similar occurrence upon
such terms and conditions as it may deem equitable and appropriate.
(d) In the event that another corporation or business entity
is being acquired by the Company, and the Company assumes outstanding stock
options and/or stock appreciation rights
7
<PAGE>
and/or the obligation to make future grants of options or rights to employees or
other persons affiliated with the acquired entity, the aggregate number of
Common Shares available for Awards under this Plan shall be increased
accordingly.
12. NONTRANSFERABILITY.
(a) Each Award granted under the Plan to a participant shall not be
transferable by such participant otherwise than as required by law or by will or
the laws of descent and distribution, and shall be exercisable, in the case of
an individual, only by him during his lifetime. In the event of the death of a
participant while the participant is rendering services to the Company, each
Stock Option or Stock Appreciation Right theretofore granted to him shall be
exercisable during such period after his death as the Committee shall in its
discretion set forth in such option or right at the date of grant (but not
beyond the stated duration of the option or right) and then only:
(i) By the executor or administrator of the estate of the
deceased participant or the person or persons to whom the deceased
participant's rights under the Stock Option or Stock Appreciation Right
shall pass by will or the laws of descent and distribution; and
(ii) To the extent that the deceased participant was entitled
to do so at the date of his death.
(b) Notwithstanding Section 12(a), in the discretion of the
Committee, Awards granted hereunder may be transferred to members of the
participant's immediate family (which for purposes of this Plan shall be limited
to the participant's children, grandchildren and spouse), or to one or more
trusts for the benefit of such immediate family members or partnerships in which
such immediate family members and/or trusts are the only partners, but only if
the Award expressly so provides. In the case of a participant who is not an
individual, transferability shall be determined by the Committee in its sole and
absolute discretion.
13. OTHER PROVISIONS. Awards under the Plan may also be subject to such
other provisions (whether or not applicable to any other Awards under the Plan)
as the Committee determines appropriate, including without limitation,
provisions for the installment purchase of Common Shares under Stock Options,
provisions for the installment exercise of Stock Appreciation Rights, provisions
to assist the participant in financing the acquisition of Common Shares,
provisions for the forfeiture of, or restrictions on resale or other disposition
of, Shares acquired under any form of Award, provisions for the acceleration of
exercisability or vesting of Awards in the event of a change of control of the
Company or other reasons, provisions for the payment of the value of Awards to
participants in the event of a change of control of the Company or other
reasons, or provisions to comply with Federal and state securities laws, or
setting forth understandings or conditions as to the participant's employment or
contractual relationship in addition to those specifically provided for under
the Plan.
8
<PAGE>
14. FAIR MARKET VALUE. For purposes of this Plan and any Awards
hereunder, Fair Market Value of Common Shares shall be the mean between the
highest and lowest sale prices for the Company's Common Shares as reported on
the NASDAQ National Market (or such other consolidated transaction reporting
system on which such Common Shares are primarily traded) on the date immediately
preceding the date of grant (or on the next preceding trading date if Common
Shares were not traded on the date immediately preceding the date of grant),
provided, however, that until the Company's Common Shares are readily tradeable
on a national securities exchange or market system, or if the Company's Common
Shares are not at the applicable time readily tradeable on a national securities
exchange or other market system, Fair Market Value shall mean the amount
determined in good faith by the Committee as the fair market value of the Common
Shares of the Company.
15. WITHHOLDING. All payments or distributions made pursuant to the
Plan shall be net of any amounts required to be withheld pursuant to applicable
federal, state and local tax withholding requirements. If the Company proposes
or is required to distribute Common Shares pursuant to the Plan, it may require
the recipient to remit to it an amount sufficient to satisfy such tax
withholding requirements prior to the delivery of any certificates for such
Common Shares. The Committee may, in its discretion and subject to such rules as
it may adopt, permit an optionee or Award or right holder to pay all or a
portion of the federal, state and local withholding taxes arising in connection
with (a) the exercise of a Nonqualified Stock Option or a Stock Appreciation
Right, (b) the receipt or vesting of Stock Awards, or (c) the receipt of Common
Shares upon the expiration of the Performance Period or the Performance Cycle,
respectively, with respect to any Performance Shares or Performance Units, by
electing to have the Company withhold Common Shares having a Fair Market Value
equal to the amount to be withheld.
16. TENURE. A participant's right, if any, to continue to serve the
Company as an officer, employee, independent contractor, or otherwise, shall not
be enlarged or otherwise affected by such person's designation as a participant
under the Plan, nor shall this Plan in any way interfere with the right of the
Company, subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such employment or to increase or decrease
the compensation of the participant from the rate in existence at the time of
the grant of an Award.
17. DURATION, AMENDMENT AND TERMINATION. No Award shall be granted
after June 29, 2006 (the "Expiration Date"); provided, however, that the terms
and conditions applicable to any Award granted prior to such date may thereafter
be amended or modified by mutual agreement between the Company and the
participant or such other persons as may then have an interest therein. Also, by
mutual agreement between the Company and a participant hereunder, under this
Plan or under any other present or future plan of the Company, Awards may be
granted to such participant in substitution and exchange for, and in
cancellation of, any Awards previously granted such participant under this Plan,
or any other present or future plan of the Company. The Board may amend the Plan
from time to time or terminate the Plan at any time. However, no action
authorized by this Section 17 shall reduce the amount of any existing Award or
change the terms and conditions thereof without the participant's consent. The
approval of the Company's shareholders will be required for any amendment to the
Plan which (i) would change the class of persons eligible for the
9
<PAGE>
grant of Stock Options as specified in Section 3 or otherwise materially modify
the requirements as to eligibility for participation in the Plan, or (ii) would
increase the maximum number of shares subject to Stock Options, as specified in
Section 5 (unless made pursuant to the provisions of Section 11) or (iii) is
required to be approved by the shareholders pursuant to the Code, Section 16 of
the Act or by any stock market or exchange on which the Common Shares are
listed. With respect to persons subject to Section 16 of the Act, transactions
under the Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the Act. To the extent any provision of the Plan
or action by the Committee fails to so comply, it shall be deemed null and void,
to the extent permitted by law and deemed advisable by the Committee. Moreover,
in the event the Plan does not include a provision required by Rule 16b-3 to be
stated therein, such provision (other than one relating to eligibility
requirements, or the price and amount of Awards) shall be deemed automatically
to be incorporated by reference into the Plan insofar as participants subject to
Section 16 of the Act are concerned.
18. GOVERNING LAW. This Plan and actions taken in connection herewith
shall be governed and construed in accordance with the laws of the State of
Florida (regardless of the law that might otherwise govern under applicable
Florida principles of conflict of laws).
19. SHAREHOLDER APPROVALS AND AMENDMENTS TO PLAN. The 1996 Incentive
Stock Plan was originally adopted by the Board of the Company and approved by
the Company's shareholders effective June 30, 1996, and the Plan (as amended and
restated) was adopted by the Board of the Company and approved by the Company's
shareholders as of August 14, 1997. Subsequent to the amendment and restatement
of the Plan, the Plan has been amended (a) to add paragraph (b) to Section 2 by
action taken by the Board of the Company on February 13, 1998, and (b) to
increase the number of Common Shares reserved for issuance under the Plan to
4,500,000 by action taken by the Board of the Company on December 29, 1998,
which increase was approved by the Company's shareholders at the annual meeting
of shareholders of the Company held on August 13, 1999.
10
<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, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,697,071
<SECURITIES> 4,473,143
<RECEIVABLES> 32,912,315
<ALLOWANCES> 19,246,000
<INVENTORY> 86,001
<CURRENT-ASSETS> 34,066,269
<PP&E> 4,267,560
<DEPRECIATION> 2,129,463
<TOTAL-ASSETS> 36,617,900
<CURRENT-LIABILITIES> 4,106,200
<BONDS> 0
0
0
<COMMON> 224,634
<OTHER-SE> 32,287,066
<TOTAL-LIABILITY-AND-EQUITY> 36,617,900
<SALES> 25,576,728
<TOTAL-REVENUES> 31,210,512
<CGS> 1,397,818
<TOTAL-COSTS> 19,018,779
<OTHER-EXPENSES> (321,411)
<LOSS-PROVISION> 3,900,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,215,326
<INCOME-TAX> 2,721,000
<INCOME-CONTINUING> 4,494,326
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,494,326
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.18
</TABLE>
