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, 2000
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 9, 2000 there were 24,592,081 shares of the Registrant's
Common Stock outstanding.
<PAGE>
OMEGA RESEARCH, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 2000 (unaudited) and December 31, 1999................ 3
Consolidated Statements of Operations
Three and six months ended June 30, 2000 and 1999 (unaudited).. 4
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999 (unaudited)............ 5
Notes to Consolidated Financial Statements (unaudited)........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................ 17
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. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,998,678 $ 2,175,852
Marketable securities -- 1,695,304
Accounts receivable, net 5,380,688 13,695,059
Inventory -- 67,371
Income tax receivable 7,964,105 436,106
Other current assets 671,751 1,033,277
Deferred income taxes 5,918,000 9,192,000
------------ ------------
Total current assets 23,933,222 28,294,969
PROPERTY AND EQUIPMENT, net 2,482,086 2,611,454
OTHER ASSETS 1,411,050 473,344
------------ ------------
Total assets $ 27,826,358 $ 31,379,767
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,726,214 $ 2,786,739
Accrued expenses 2,077,865 1,861,321
Deferred revenue 1,056,530 1,256,824
------------ ------------
Total current liabilities 8,860,609 5,904,884
------------ ------------
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, 24,589,891 and 24,475,104
issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 245,899 244,751
Additional paid-in capital 26,956,211 26,560,893
Accumulated deficit (8,236,361) (1,330,761)
------------ ------------
Total shareholders' equity 18,965,749 25,474,883
------------ ------------
Total liabilities and shareholders' equity $ 27,826,358 $ 31,379,767
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES:
Subscription services $ 2,007,791 $ 385,631 $ 2,910,625 $ 708,535
Licensing fees 531,051 8,779,954 6,078,347 17,225,414
Other revenues 2,818,565 2,458,450 4,769,010 4,125,470
------------ ------------ ------------ ------------
Total net revenues 5,357,407 11,624,035 13,757,982 22,059,419
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of subscription services 1,031,701 262,502 1,571,075 515,791
Cost of licensing fees 190,403 575,265 462,698 1,164,764
Product development 2,025,278 1,261,963 3,852,781 2,454,610
Sales and marketing 6,038,126 4,830,923 13,610,986 8,898,264
General and administrative 2,480,811 3,029,560 5,477,022 5,936,719
------------ ------------ ------------ ------------
Total operating expenses 11,766,319 9,960,213 24,974,562 18,970,148
------------ ------------ ------------ ------------
(Loss) income from operations (6,408,912) 1,663,822 (11,216,580) 3,089,271
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE), net:
Interest expense -- (971,058) -- (1,141,552)
Other income, net 22,638 151,530 56,980 260,676
------------ ------------ ------------ ------------
Total other income (expense), net 22,638 (819,528) 56,980 (880,876)
------------ ------------ ------------ ------------
(Loss) income before income taxes (6,386,274) 844,294 (11,159,600) 2,208,395
INCOME TAX (BENEFIT) PROVISION (2,442,000) 1,026,000 (4,254,000) 1,740,000
------------ ------------ ------------ ------------
Net (loss) income $ (3,944,274) $ (181,706) $ (6,905,600) $ 468,395
============ ============ ============ ============
(LOSS) EARNINGS PER SHARE (Note 4):
Basic and Diluted $ (0.16) $ (0.01) $ (0.28) $ 0.02
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $(6,905,600) $ 468,395
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 698,017 481,925
Provision for doubtful accounts 1,586,000 2,394,941
Compensation expense on stock option grants 76,839 77,712
Stock issued by pooled company in
conjunction with loan -- 950,766
Deferred income tax provision (benefit) 3,274,000 (3,945,000)
(Increase) decrease in:
Accounts receivable 6,728,371 (5,952,561)
Inventory 67,371 241,635
Other current assets 361,526 217,240
Other assets (981,193) (179,808)
Income tax receivable (7,527,999) --
Increase (decrease) in:
Accounts payable 2,939,475 817,713
Accrued expenses 216,544 521,031
Deferred revenue (200,294) 1,281,599
Income taxes payable -- 1,785,260
----------- -----------
Net cash provided by (used in) operating activities 333,057 (839,152)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (525,162) (844,176)
Redemption of/proceeds from maturity of
marketable securities 1,695,304 251,645
Acquisition of data rights and customer lists -- (85,000)
----------- -----------
Net cash provided by (used in) investing activities 1,170,142 (677,531)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 319,627 349,247
Proceeds from borrowings of debt -- 654,724
----------- -----------
Net cash provided by financing activities 319,627 1,003,971
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,822,826 (512,712)
CASH AND CASH EQUIVALENTS, beginning of period 2,175,852 7,649,771
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,998,678 $ 7,137,059
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ -- $ --
=========== ===========
Cash paid for income taxes $ -- $ 3,900,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All notes and related disclosures applicable to the three and six
month periods ended June 30, 2000 and 1999 are unaudited)
The accompanying financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes to Consolidated Financial
Statements included in the Annual Report on Form 10-K of Omega Research, Inc.
(the "Company" or "Omega Research") for the year ended December 31, 1999. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position as of June 30,
2000, the results of operations for the three and six month periods ended June
30, 2000 and 1999 and cash flows for the six months ended June 30, 2000 and 1999
have been made. Certain amounts included in the prior year's consolidated
financial statements have been reclassified to conform to the current year's
presentation. 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.
In connection with the review by the Staff of the Securities and
Exchange Commission ("SEC") of the Form S-4 registration statement, as amended,
filed in connection with the Company's pending merger with OnlineTrading.com,
the SEC has advised the Company that it disagrees with the timing of when the
Company recognizes licensing fee revenue derived from the sales of its legacy
client software. The Company continues to have on-going discussions with the SEC
and a final resolution is expected shortly. It is uncertain at this time what
the ultimate outcome of these discussions will be. If the Company were to change
the time at which its legacy client software licensing fee revenue has been
recognized, the overall net results recorded by the Company over time would not
be affected, but the timing difference would lead to variations, on a period by
period basis, in the Company's historical financial results as previously
reported. In particular, if any change is made, and depending on the exact
outcome of the Company's discussions with the SEC, the results reported in this
report for the first six months of 2000 could improve by up to $.21 per share
(revenues would increase, bad debt expense and losses would decrease); the loss
per share in 1999 could decrease by up to $.01 per share or increase by up to
$.08 per share; the loss per share in 1998 could decrease by up to $.02 per
share or increase by up to $.04 per share; and earnings per share in 1997 could
remain unchanged or decrease by up to $.15 per share. It is important to note
that, if any change is made, quarterly results would vary materially. These
discussions with the SEC only impact licensing fee revenue recognized on the
sale of the Company's legacy client software and do not impact revenue
recognition for the Internet subscription services or other revenues that
currently constitute substantially all of the Company's business or any of the
Company's planned service offerings that are expected to generate a majority of
its revenues in the future.
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 $7.9 million
and $6.3 million at June 30, 2000 and December 31, 1999, respectively, and
allowances for potential returns of approximately $5.0 million and $23.2 million
at June 30, 2000 and December 31, 1999, respectively.
2. Restricted Cash
Cash and cash equivalents at June 30, 2000 include $510,000 of
restricted cash held in trust for a credit card clearing agreement and a
stand-by letter of credit securing an equipment lease. There was no restricted
cash as of December 31, 1999.
3. Deferred Revenue
Deferred revenue is comprised of deferrals for (i) payments received in
advance of service provided or bundled with client software purchases, (ii)
licensing fees revenue for which amounts are not due within the next twelve
months and (iii) registration fees and sponsorship and exhibitor deposits for
OmegaWorld, the Company's annual conference which is designed to highlight the
benefits of trading strategy development and held during the second quarter of
each year. Deferred revenue consists of the following as of June 30, 2000 and
December 31, 1999:
June 30, December 31,
2000 1999
---------- ------------
Subscription services revenue $1,028,530 $ 290,300
Licensing fees revenue 28,000 842,000
OmegaWorld -- 124,524
---------- ----------
$1,056,530 $1,256,824
========== ==========
6
<PAGE>
4. (Loss) Earnings Per Share
Weighted average shares outstanding for the three and six month periods
ended June 30, 2000 and 1999 are calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares 24,567,668 24,246,502 24,554,362 24,145,042
outstanding (basic)
Impact of dilutive options after applying
the treasury stock method -- -- -- 2,207,403
---------- ---------- ---------- ----------
Weighted average shares
outstanding (diluted) 24,567,668 24,246,502 24,554,362 26,352,445
---------- ---------- ---------- ----------
Options outstanding which are not
included in the calculation of diluted
(loss) earnings per share because their
impact is antidilutive 4,344,829 3,351,033 4,344,829 122,435
========== ========== ========== ==========
</TABLE>
5. 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.
6. Business Combinations
Effective October 26, 1999, the Company acquired Window On WallStreet
Inc. ("Window On WallStreet"), a provider of Internet-based streaming real-time
market data and a developer of client software and on-line trading strategy
tools. Under the terms of the merger agreement, Window On WallStreet
shareholders received 1,999,995 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 (ii) assumed all outstanding stock
options to purchase Window On WallStreet common stock which, based on an
exchange ratio of 0.210974, were exercisable for an aggregate of 182,529 shares
of the Company's common stock.
The acquisition of Window On WallStreet was accounted for as a
pooling-of-interests. Accordingly, the financial statements herein have been
restated to give retroactive effect to this acquisition. There were no material
relationships or intercompany transactions between the Company and Window On
WallStreet prior to the merger.
On January 19, 2000, the Company signed a definitive, 100%
share-exchange merger agreement with onlinetradinginc.com corp.
("OnlineTrading.com"), an online broker. OnlineTrading.com provides order
execution technology that directly accesses electronic communications networks
("ECN's"), and electronically-centered exchanges and market makers, in order to
provide OnlineTrading.com's customers with prompt and efficient order execution
that avoids traditional market maker participation and brokerage order-flow
arrangements.
Pursuant to an Agreement and Plan of Merger and Reorganization, as
amended (the "Merger Agreement"), and subject to closing, a newly-formed holding
company named TradeStation Group, Inc. (f/k/a OnlineTrading.com Group, Inc.)
("TradeStation Group") will own 100% of the issued and outstanding capital stock
of Omega Research (which, upon consummation of the merger, is to be renamed
TradeStation
7
<PAGE>
Technologies, Inc.) and OnlineTrading.com (which, as soon as practicable after
the consummation of the merger, is to be renamed TradeStation Securities, Inc.).
Upon completion of the merger, as a result of share exchanges between
TradeStation Group and each of Omega Research and OnlineTrading.com, and the
listing of TradeStation Group shares, TradeStation Group will be the sole
publicly-traded company in the group with its outstanding shares of common stock
listed on The Nasdaq National Market. TradeStation Group will initially be owned
between 62% and approximately 57% (on a fully diluted basis) by Omega Research's
shareholders and between 38% and approximately 43% (on a fully diluted basis) by
OnlineTrading.com's shareholders. The precise percentages will be determined by
the formula set forth in the Merger Agreement. Closing of the Merger Agreement
is conditioned upon and subject to the effectiveness of a registration statement
on Form S-4, originally filed with the Securities and Exchange Commission
("SEC") on April 17, 2000, as amended, the approval of the shareholders of each
of Omega Research and OnlineTrading.com, and the satisfaction of other
conditions precedent. The financial statements herein have not been restated to
give effect to this pending merger as it has not yet been closed.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated 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
On January 19, 2000, the Company signed a definitive, 100%
share-exchange merger agreement (the "Merger Agreement") with
onlinetradinginc.com corp. ("OnlineTrading.com"), an online broker.
OnlineTrading.com provides order execution technology that directly accesses
electronic communications networks ("ECN's"), and electronically-centered
exchanges and market makers, in order to provide OnlineTrading.com's customers
with prompt and efficient order execution that avoids traditional market maker
participation and brokerage order-flow arrangements. Closing of the Merger
Agreement is conditioned upon and subject to the effectiveness of a registration
statement on Form S-4, originally filed with the SEC on April 17, 2000, as
amended, the approval of the shareholders of each of Omega Research and
OnlineTrading.com, and the satisfaction of other conditions precedent.
In connection with the review by the Staff of the SEC of the Form S-4
registration statement, as amended, filed in connection with the Company's
pending merger with OnlineTrading.com, the SEC has advised the Company that it
disagrees with the timing of when the Company recognizes licensing fee revenue
derived from the sales of its legacy client software. The Company continues to
have on-going discussions with the SEC and a final resolution is expected
shortly. It is uncertain at this time what the ultimate outcome of these
discussions will be. If the Company were to change the time at which its legacy
client software licensing fee revenue has been recognized, the overall net
results recorded by the Company over time would not be affected, but the timing
difference would lead to variations, on a period by period basis, in the
Company's historical financial results as previously reported. In particular, if
any change is made, and depending on the exact outcome of the Company's
discussions with the SEC, the results reported in this report for the first six
months of 2000 could improve by up to $.21 per share (revenues would increase
and bad debt expense and losses would decrease); the loss per share in 1999
could decrease by up to $.01 per share or increase by up to $.08 per share; the
loss per share in 1998 could decrease by up to $.02 per share or increase by up
to $.04 per share; and earnings per share in 1997 could remain unchanged or
decrease by up to $.15 per share. It is important to note that, if any change is
made, quarterly results would vary materially. These discussions with the SEC
only impact licensing fee revenue recognized on the sale of the Company's legacy
client software and do not impact revenue recognition for the Internet
subscription services or other revenues that currently constitute substantially
all of the Company's business or any of the Company's planned service offerings
that are expected to generate a majority of its revenues in the future.
The Company is in the process of changing its business model. The
Company has taken steps, one of which is the pending merger with
OnlineTrading.com, to transform itself from a trading strategy client software
company to one that includes an on-line brokerage firm - a company which intends
to provide to active traders a trading platform that incorporates and seamlessly
integrates powerful trading strategy tools, historical and streaming real-time
market data and news, and high-speed access directly to an electronic order
execution system. The Company's historical business model has consisted of sales
of client software products, payment for which is committed to in full by the
customer at the time of sale. Under the new business model, the Company will
seek to derive recurring revenues from customers by offering monthly
subscription services for trading strategy tools integrated with streaming
real-time market data and news for which a monthly fee is payable, and by
offering through OnlineTrading.com (subject to completion of the merger) on-line
brokerage services for which commissions are payable. The Company believes that
it will be able to leverage its historical success in selling trading strategy
tools to build a subscriber base of active traders that will, assuming
completion of the merger, use the on-line brokerage services of
OnlineTrading.com or, at a minimum, its trading strategy subscription services.
As a result of the change in the business model, the Company's
licensing fee revenues have substantially decreased and will continue to
decrease as the Company focuses its efforts on promoting its Internet
subscription services such as WindowOnWallStreet.com, and it is difficult to
predict when, if at all, or to what extent, the Company's Internet subscription
services will offset such reductions. As a result, the Company expects to incur
net losses through the year 2000. See "Liquidity and Capital Resources" below.
On January 25, 2000, the Company launched WindowOnWallStreet.com, its
first Internet subscription service. WindowOnWallStreet.com offers streaming
real-time charts, quotes and news powered by some of the Company's trading
tools. On February 29, 2000, the Company announced that it was accelerating its
transition to its new business model by focusing its marketing efforts and
resources on WindowOnWallStreet.com (as opposed to its client software products,
from which, through 1999, substantially all of the Company's licensing fees were
derived). The Company discontinued all advertising for its client software
products at the end of May 2000.
It should be noted that the results of operations and liquidity and
capital resources discussions below do not give effect to the pending merger
with OnlineTrading.com. See Item 6(b) in Part II of this report for the current
report on Form 8-K filed by the Company with respect to the pending merger with
OnlineTrading.com.
9
<PAGE>
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items
in the Company's statements of operations reflected as a percentage of total net
revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ----------------------------
2000 1999 2000 1999
-------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
NET REVENUES:
Subscription services 37.5 % 3.3 % 21.1 % 3.2 %
Licensing fees 9.9 75.5 44.2 78.1
Other revenues 52.6 21.2 34.7 18.7
----------- ----------- ----------- ----------
Total net revenues 100.0 100.0 100.0 100.0
----------- ----------- ----------- ----------
OPERATING EXPENSES:
Cost of subscription services 19.3 2.2 11.4 2.3
Cost of licensing fees 3.5 4.9 3.4 5.3
Product development 37.8 10.9 28.0 11.1
Sales and marketing 112.7 41.6 98.9 40.4
General and administrative 46.3 26.1 39.8 26.9
----------- ----------- ----------- ----------
Total operating expenses 219.6 85.7 181.5 86.0
----------- ----------- ----------- ----------
(Loss) income from operations (119.6) % 14.3 % (81.5) % 14.0 %
------------ ----------- ------------ -----------
</TABLE>
Quarters Ended June 30, 2000 and 1999
Net Revenues
Total Net Revenues. The Company's total net revenues decreased from
$11.6 million in the three months ended June 30, 1999 to $5.4 million in the
comparable period of 2000.
Subscription Services. Subscription services increased 421% from
$386,000 in the three months ended June 30, 1999 to $2.0 million for the same
period of 2000 primarily due to the January 25, 2000 launch of
WindowOnWallStreet.com.
Licensing Fees. Licensing fees decreased from $8.8 million in the three
months ended June 30, 1999 to $531,000 in the comparable period of 2000 due to a
decrease in sales of the Company's client software products related to the
transition to the Company's subscription revenue model. Licensing fees are
expected to continue to decrease as the Company focuses its efforts on promoting
its Internet subscription services such as WindowOnWallStreet.com, and it is
difficult to predict when, if at all, or to what extent, the Company's Internet
subscription services will offset such reductions. The Company has provided what
it believes are appropriate provisions for returns, in light of its 30-day right
of return policy and the transition to its new subscription revenue model, but
no assurance can be given that the rate of returns will not be higher than the
reserved levels.
Other Revenues. Other revenues increased 15% from $2.5 million in the
three months ended June 30, 1999 to $2.8 million in the comparable period of
2000, primarily due to an increase in minimum royalties under the Company's
license agreement with Telerate, Inc., a subsidiary of Bridge Information
Systems, Inc. ("Bridge Telerate") offset by decreases in end-of-day data vendor
royalties and revenues generated from OmegaWorld, the Company's annual
conference.
10
<PAGE>
Operating Expenses
Cost of Subscription Services. Cost of subscription services consists
primarily of expenses related to the operation, maintenance and support of the
Company's server farm, and data distribution and exchange fees. Cost of
subscription services increased from $263,000 in the three months ended June 30,
1999 to $1.0 million in the comparable period of 2000. Cost of subscription
services as a percentage of subscription services revenue decreased from 68% in
the three months ended June 30, 1999 to 51% in the comparable period of 2000 due
to a higher number of subscriptions. Cost of services related to the Company's
subscription services is expected to increase assuming that the Company is
successful in continuing to build its subscriber base.
Cost of Licensing Fees. Cost of licensing fees consists primarily of
product media, packaging and inventory costs. Cost of licensing fees decreased
from $575,000 in the three months ended June 30, 1999 to $190,000 in the
comparable period of 2000. Cost of licensing fees as a percentage of licensing
fee revenue increased from 7% in the three months ended June 30, 1999 to 36% in
the comparable period of 2000, primarily due to the write-down of remaining
client software inventory and lower licensing fee revenues during the second
quarter of 2000.
Product Development. Product development expenses include expenses
associated with the development of new products and services (including Internet
based products and services), enhancements to existing products and services,
testing of products and services and the creation of documentation. Such costs
consist primarily of personnel costs and depreciation of computer and related
equipment and other facilities expenses. Product development expenses increased
60% from $1.3 million in the three months ended June 30, 1999 to $2.0 million in
the comparable period of 2000, primarily due to an increase in the number of
individuals employed in product development. 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 services and
enhance existing products and services, including completion of the development
of TradeStation.com and integration of TradeStation.com with direct access order
execution technology.
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, sales commissions, personnel costs
for the customer support center and marketing personnel, web site design and
administration costs, and shipping expenses. Sales and marketing expenses
increased from $4.8 million in the three months ended June 30, 1999 to $6.0
million in the comparable period of 2000, primarily due to increased advertising
and promotional expenses of $1.4 million (primarily television advertising) and,
to a lesser extent, increased OmegaWorld expenses, offset by decreased personnel
costs related to the restructuring of the Company's sales team at the end of the
first quarter of 2000 and travel costs related to the Company's discontinued
seminars. The Company continues to evaluate its level of advertising
expenditures on a quarterly basis. During the third quarter of 2000, the Company
anticipates a reduction in advertising expense as compared to the quarter ended
June 30, 2000, and it is not known what impact, if any, such reduction will have
on its subscription services revenue.
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, as well as consulting and professional fees, rent and other
facilities expenses. General and administrative expenses decreased from $3.0
million in the three months ended June 30, 1999 to $2.5 million in the
comparable period of 2000, primarily as a result of decreased provision for bad
debt of $919,000 offset by increased facility expenses, consulting and
professional fees and travel costs. 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 and
the level of hiring of additional personnel to support the expected growth of
the Company as it transforms itself from a client software company to an
Internet-based trading platform that includes on-line brokerage services.
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Other Income (Expense), Net
Interest Expense. Interest expense of $971,000 during the three months
ended June 30, 1999 was primarily due to noncash interest expense associated
with the conversion of detachable warrants by the pooled company (Window On
WallStreet) into common stock upon non-payment of certain debt with related
parties. There was no interest expense in the comparable period of 2000 as the
debt of the pooled company was paid off at the time of the merger.
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 decreased from $152,000 in the
three months ended June 30, 1999 to $23,000 in the comparable period of 2000 due
to decreases in cash and cash equivalents and marketable securities.
Income Taxes
The Company recorded a benefit for income taxes of $2.4 million for the
three months ended June 30, 2000 as compared to a provision for income taxes of
$1.0 million for the comparable period of 1999, computed using the effective
annual income tax rate. The effective tax rates for the three months ended June
30, 2000 and 1999 were 38% and 122%, respectively. The increase during the three
months ended June 30, 1999 as compared to the 38.6% statutory rate is primarily
due to an increase in the valuation allowance established at the pooled company
(Window On WallStreet) during 1999 to offset net operating loss carryforwards.
Six Months Ended June 30, 2000 and 1999
Net Revenues
Total Net Revenues. The Company's total net revenues decreased from
$22.1 million in the six months ended June 30, 1999 to $13.8 million in the
comparable period of 2000.
Subscription Services. Subscription services increased 311% from
$709,000 in the six months ended June 30, 1999 to $2.9 million for the same
period of 2000 primarily due to the January 25, 2000 launch of
WindowOnWallStreet.com.
Licensing Fees. Licensing fees decreased from $17.2 million in the six
months ended June 30, 1999 to $6.1 million in the comparable period of 2000 due
to a decrease in sales of the Company's client software products related to the
transition to the Company's subscription revenue model. Licensing fees are
expected to continue to decrease as the Company focuses its efforts on promoting
its Internet subscription services such as WindowOnWallStreet.com and it is
difficult to predict when, if at all, or to what extent, the Company's Internet
subscription services will offset such reductions. The Company has provided what
it believes are appropriate provisions for returns, in light of its 30-day right
of return policy and the transition to the Company's subscription revenue model,
but no assurance can be given that the rate of returns will not be higher than
the reserved levels.
Other Revenues. Other revenues increased 16% from $4.1 million in the
six months ended June 30, 1999 to $4.8 million in the comparable period of 2000,
primarily due to an increase in minimum royalties under the Company's license
agreement with Bridge Telerate, offset by decreases in end-of-day data vendor
royalties and revenues generated from OmegaWorld.
Operating Expenses
Cost of Subscription Services. Cost of subscription services increased
from $516,000 in the six months ended June 30, 1999 to $1.6 million in the
comparable period of 2000. Cost of subscription services as a percentage of
subscription services revenue decreased from 73% in the six months ended June
30, 1999 to 54% in the comparable period of 2000 due to a higher number of
subscriptions. Cost of services related to the
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Company's subscription services is expected to increase assuming that the
Company is successful in continuing to build its subscriber base.
Cost of Licensing Fees. Cost of licensing fees decreased from $1.2
million in the six months ended June 30, 1999 to $463,000 in the comparable
period of 2000. Cost of licensing fees as a percentage of licensing fee revenue
increased from 7% in the three months ended June 30, 1999 to 8% in the
comparable period of 2000.
Product Development. Product development expenses increased 57% from
$2.5 million in the six months ended June 30, 1999 to $3.9 million in the
comparable period of 2000, primarily due to an increase in the number of
individuals employed in product development and increased facility expenses and
consulting fees. The Company anticipates that the absolute dollar amount of
product development expenses will increase for the foreseeable future as the
Company seeks to develop new products and services and enhance existing products
and services, including completion of the development of TradeStation.com and
integration of TradeStation.com with direct access order execution technology.
Sales and Marketing. Sales and marketing expenses increased from $8.9
million in the six months ended June 30, 1999 to $13.6 million in the comparable
period of 2000, primarily due to increased advertising of $3.6 million
(primarily television advertising), personnel and related expenses of $635,000
(related to the first quarter of 2000) and, to a lesser extent, increased
OmegaWorld expenses.
General and Administrative. General and administrative expenses
decreased from $5.9 million in the six months ended June 30, 1999 to $5.5
million in the comparable period of 2000, primarily due to decreased provision
for bad debt of $809,000, offset by increased facility costs. 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 and the level of hiring of additional personnel to support
the expected growth of the Company as it transforms itself from a client
software company to an Internet-based trading platform that includes on-line
brokerage services.
Other Income (Expense), Net
Interest Expense. Interest expense of $1.1 million during the six
months ended June 30, 1999 was primarily due to noncash interest expense
associated with the conversion of detachable warrants by the pooled company
(Window On WallStreet) into common stock upon non-payment of certain debt with
related parties. There was no interest expense in the comparable period of 2000
as the debt of the pooled company was paid off at the time of the merger.
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 decreased from $261,000 in the six
months ended June 30, 1999 to $57,000 in the comparable period of 2000 due to
decreases in cash and cash equivalents and marketable securities.
Income Taxes
The Company recorded a benefit for income taxes of $4.3 million for the
six months ended June 30, 2000 as compared to a provision for income taxes of
$1.7 million for the comparable period of 1999, computed using the effective
annual income tax rate. The effective tax rates for the six months ended June
30, 2000 and 1999 were 38% and 79%, respectively. The increase during the six
months ended June 30, 1999 as compared to the 38.6% statutory rate is primarily
due to an increase in the valuation allowance established at the pooled company
(Window On WallStreet) during 1999 to offset net operating loss carryforwards.
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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's quarterly
revenues and operating results have varied in the past, and are likely to vary
even further from quarter to quarter in the future due to the Company's
transition to its new business and revenue models. Such fluctuations may result
in volatility in the price of the Company's 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 services and/or enhancements, increased competition, variations in
the revenue mix, and announcements of new products and services and/or
enhancements by the Company or its competitors and other factors. Such
fluctuations may result in volatility in the price of the Company's common
stock.
Liquidity and Capital Resources
The Company believes that, after giving effect to the pending merger
with OnlineTrading.com, it will have cash resources and cash flows from
operations sufficient to meet currently anticipated working capital and capital
expenditure requirements for at least the next 12 months. The merger has already
been approved, through agreements with each company's affiliated shareholders,
by a majority of the outstanding shares of each company, and has received
regulatory approval from the NASD. Closing of the merger is expected by the end
of September 2000. The combined cash, cash equivalents and marketable securities
of the companies as of June 30, 2000 are approximately $19.0 million
(approximately $4.0 million from the Company and approximately $15.0 million
from OnlineTrading.com). In addition, the Company has an income tax receivable
of $8.0 million as of June 30, 2000 related to carry-back claims for prior
periods, as well as more than $5.0 million of client software net accounts
receivable collectible in the next twelve months.
The Company is experiencing a period of net losses which is expected to
continue at least through the year 2000. As the Company transitions to its new
business model, it may need to raise additional funds in order to execute that
transition (including the completion of the development and integration of
TradeStation.com and order execution technology), support more rapid expansion,
develop new or enhanced services and products, respond to competitive pressures,
acquire complementary businesses or technologies and/or take advantage of
unanticipated opportunities. The Company's future liquidity and capital
requirements will depend upon numerous factors, including the period of time it
takes the Company to close the merger and to execute its transition to its new
business model, and customer acceptance thereof, 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, and 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 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. See "Forward-Looking Statements" below.
Given the regulatory approval of the merger by the NASD and the
contractually-promised approval by the requisite shareholders, the Company does
not believe that the merger will not close or that the closing will be
substantially delayed. However, in the event this should occur and/or the
Company's available cash and cash equivalents are depleted sooner than expected,
the Company would likely reposition and restructure its business strategies as
necessary, such as appropriate marketing, sales and general and administrative
cost reductions and appropriate shifts of focus on its available product and
service offerings, and explore possible debt and/or equity financing
arrangements. These matters have, as a contingency plan, been preliminarily
explored, and the Company is reasonably comfortable that, in the event of
substantial delay, or failure, to close the merger and/or the depletion of its
current available cash and cash equivalents sooner than expected, the Company
should have cash resources sufficient to meet currently anticipated working
capital and capital expenditure requirements for approximately the next twelve
months.
There can be no assurance that additional financing (debt or equity),
if or to the extent required, will be available when needed on terms favorable
to the Company, if at all. If adequate funds are not available on
14
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acceptable terms, the Company may be unable to complete effectively its
transition to its new business model, 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, results of operations and prospects. 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. See also "Forward-Looking
Statements" below.
As of June 30, 2000, the Company had cash and cash equivalents of
approximately $4.0 million, with working capital of approximately $15.1 million.
Cash provided by operating activities during the six months ended June
30, 2000 totaled approximately $333,000, compared to cash used in operating
activities of approximately $839,000 in the comparable period of 1999. The
increase in net cash provided by operations in 2000 was primarily due to
decreases in accounts receivable and increases in accounts payable and accrued
expenses offset by net losses and increases in income tax assets during the six
months ended June 30, 2000.
The Company's investing activities provided cash of approximately $1.2
million during the six months ended June 30, 2000 compared to cash used in
investing activities of approximately $678,000 in the comparable period of 1999.
Cash was provided from the redemption or maturity of marketable securities
offset by capital expenditures related to the acquisition of computers and
related equipment and software required to support the transition by the Company
into its new business model.
The Company's financing activities provided cash of approximately
$320,000 and $1.0 million in the six months ended June 30, 2000 and 1999,
respectively. Cash provided was from the issuance of common stock upon the
exercise of stock options under the Company's Amended and Restated 1996
Incentive Stock Plan during 1999 and 2000 and also from related party borrowings
at WindowOnWallstreet of $655,000 during the first six months of 1999.
Recently Issued Accounting Standards
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities-Deferral of
FASB Statement No. 133. SFAS No. 137 defers for one year the effective date of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 will now apply to all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS No. 133 will require the Company to recognize all
derivatives on the balance sheet as either assets or liabilities measured at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. The Company will adopt SFAS No. 133 effective for the year ended
December 31, 2001. The Company believes that the adoption of SFAS No. 133 will
not have a material impact on its consolidated financial statements, as it has
entered into no derivative contracts and has no current plans to do so in the
future.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), Revenue Recognition in Financial Statements, to provide guidance on
the recognition, presentation and disclosure of revenue in financial statements.
The Company will be required to adopt SAB 101 by the fourth quarter of 2000. The
Company has not completed its determination of the impact of the adoption of SAB
101 on its consolidated financial position or results of operations.
In March 2000, the Emerging Issues Task Force reached a consensus on
Issue No. 00-2, Accounting for Web Site Development Costs, which applies to all
web site development costs incurred for the quarters beginning after June 30,
2000. The consensus states that the accounting for specific web site development
costs should be based on a model consistent with AICPA Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. Accordingly, certain web site development costs that are currently
expensed as incurred may be capitalized and amortized. The adoption of Issue No.
00-2 is not expected to have a material impact on the financial statements of
the Company.
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Year 2000 Compliance
The Company has not encountered any material difficulties with respect
to Year 2000 compliance issues with respect to the 2000i versions of its
products or WindowOnWallStreet.com, or any of its Year 2000 solutions offered to
customers relating to prior product versions. In addition, the Company has not
encountered any material difficulties with respect to Year 2000 compliance
issues with respect to its customer integrated support and general ledger
system, its telephone system, or any vendor products or services.
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 (including,
without limitation, those related to the Company's on-going discussions with the
SEC regarding the timing of the Company's recognition of revenue from its
licensing fees) are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. When used in this report, "believes,"
"plans," "estimates," "expects," "intends," "anticipates," "may," "will,"
"should," "could," "upcoming," "potential" and similar expressions, if and to
the extent used, are intended to identify forward-looking statements. All
forward-looking statements are based largely 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. Factors that may cause or contribute to such differences include, but
are not limited to, the Company being required to change the method used by the
Company to recognize licensing fee revenue from the sale of its legacy client
software upon completion of its discussions with the SEC and the extent of such
change, which would impact the timing of the Company's recognition of historical
revenue and, in certain periods, materially and, accordingly, may require the
restatement of its financial statements; in the event of such restatement of its
financial statements, the actual changes in the revenue recognized and its
earnings or losses for each historical period may be different (and possibly
materially) from any estimates set forth in this report based upon the exact
outcome of the Company's discussion with the SEC as well as the final
determination of such amounts upon audit or otherwise; the failure to consummate
the pending merger with OnlineTrading.com at all (or on a timely basis) due to
regulatory issues or other reasons; the adequacy of working capital, cash flows
and available or adequate financing to fund the new business model and sustain
expected operating losses; delays in the contemplated time period for the
Company to complete its transition to the new business model; difficulty
integrating the Company and OnlineTrading.com from technology, operational and
marketing aspects; potential NASD or other broker-dealer regulatory issues
arising from the merger and/or the conduct of a brokerage business focused on
active traders; the success (and cost) of new marketing strategies as a result
of the merger; the pace of WindowOnWallStreet.com paid subscriptions decreasing;
the Company's ability to continue to effectuate its Internet strategy and to
develop and successfully market the products and services described in this
report (and the costs associated therewith) and their acceptance in the
marketplace; technical difficulties or errors in the products and/or services;
market pressure to lower substantially or eliminate pricing on the types of
Internet subscription services described as a result of such services being
provided at low or no additional costs by brokerages, financial institutions and
other financial companies to their customers, or for other market reasons; the
Company's customer and active prospect base containing a substantially lower
number of interested subscribers and/or brokerage clients than the Company
anticipates; the Company's future participation in any merger or other strategic
alliance; unfavorable critical reviews; increased competition (including product
and price competition); the level of market demand for real-time decision
support tools, real-time data and/or online brokerage services and/or website
services generally; the scalability, performance failures and reliability of the
Company's real-time market data network; the entrance of new competitors into
the market; timing and significance of additional new product and service
introductions by the Company and its competitors; general economic and market
factors, including changes in securities and financial markets; and other risks
and uncertainties indicated from time to time; as well as those set forth in
other sections of this report and the Company's other filings with the SEC
including, but not limited to, the Company's December 31, 1999 Annual Report on
Form 10-K (including in the section titled "Forward Looking Statements; Business
Risks" in Item 7 thereof), its registration statement on Form S-4 originally
filed on April 17, 2000, as amended, and in the Company's press releases,
particularly those released during and subsequent to the 1999 third quarter, 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.
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PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities
During the three months ended June 30, 2000, the Company issued to 55
employees options to purchase an aggregate of 321,750 shares of Common Stock
pursuant to the Company's Amended and Restated 1996 Incentive Stock Plan (the
"Incentive Plan"). All such options vest ratably over a five-year period and are
exercisable at prices ranging from $2.72 to $4.69 per share, which were the
respective fair market values of the Company's Common Stock on the respective
dates on which the options were granted. The options 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 2000.
(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)
in Part II of the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1997 and Item 5 in Part II of the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On April 28, 2000, the Company filed a Current Report on Form 8-K/A,
dated April 28, 2000, which amended the Current Report on Form 8-K dated and
previously filed on January 28, 2000 (which reported the Company entering into
the Merger Agreement with OnlineTrading.com) to include therein as part of Item
5 the audited financial statements of OnlineTrading.com as of January 31, 2000
and 1999 and for each of the two years in the period ended January 31, 2000 and
unaudited pro forma combined financial statements as of December 31, 1999 giving
effect to, and assuming the completion of, the pending merger between the
Company and OnlineTrading.com on a pooling-of-interests basis.
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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 14, 2000 /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)
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OMEGA RESEARCH, INC.
EXHIBIT INDEX
Exhibit
No. Document Description
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27.1 Financial Data Schedule
19
