SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 8, 2000 there were 24,566,734 shares of the Registrant's Common
Stock outstanding.
<PAGE>
The undersigned Registrant hereby amends and restates in its entirety its
Quarterly Report on Form 10-Q for the three months ended March 31, 2000 pursuant
to this Form 10-Q/A.
TEXT OF AMENDMENTS
Subsequent to the filing of Omega Research, Inc.'s consolidated financial
statements for the three months ended March 31, 2000 on Form 10-Q, and in
connection with its review of a registration statement on Form S-4 related to
the proposed merger with onlinetradinginc.com corp. ("OnlineTrading.com") (see
Note 6 of Notes to Consolidated Financial Statements elsewhere in this report),
the Staff of the Securities and Exchange Commission ("SEC") expressed concern
about the method of accounting for revenue recognition of licensing fees used by
Omega Research, Inc. (the "Registrant" or the "Company") and its method of
accounting for the acquisition of Window On WallStreet Inc. ("Window On
WallStreet"). As a result of consultation with the Staff of the SEC, the Company
restated certain of its annual and quarterly financial statements as discussed
below.
As a result of the restatement: (i) beginning in 1999 revenues with respect to
the Company's sales of its 2000i products are recognized on an as due basis in
accordance with the payment terms of the sales; and (ii) the Company's October
1999 merger with Window On WallStreet was accounted for under the purchase
method of accounting.
Accordingly, the purpose of this amendment is to restate the Company's
historical consolidated financial statements to reflect these changes. The
Company is amending and restating its Form 10-Q for the fiscal quarter ended
March 31, 2000 in its entirety in order to amend those items that are affected
by the restatement adjustments listed above. The Form 10-Q/A still speaks as of
March 31, 2000 (except as otherwise expressly noted herein), and the items
herein have been modified or updated as required to reflect the effects of the
restatement adjustments to the consolidated financial statements.
The restatement, as it relates to revenue recognition, relates solely to the
timing thereof and has no impact on cash flow. The primary effect of this change
is to shift a portion of the 1999 and early 2000 net revenues and operating
income to 2000 and, to a lesser extent, to 2001. This shift in timing of revenue
recognition does not change the Company's expectations that its change in
business model will result in net losses at least through the first quarter of
2001. The revenue recognition timing changes do not impact revenue recognition
for the Company's Internet subscription services or other revenues, or any of
the Company's planned service offerings, which are expected to generate the
majority of the Company's revenues in the future. See Note 1 of Notes to
Consolidated Financial Statements elsewhere in this report.
2
<PAGE>
OMEGA RESEARCH, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 2000 (unaudited) and December 31, 1999......... 4
Consolidated Statements of Operations
Three months ended March 31, 2000 and 1999 (unaudited)... 5
Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999 (unaudited)... 6
Notes to Consolidated Financial Statements......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................... 18
Item 6. Exhibits and Reports on Form 8-K................................... 18
Signature.................................................................. 19
Exhibit Index.............................................................. 20
3
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
OMEGA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Restated)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS:
-------
CURRENT ASSETS:
Cash and cash equivalents $ 1,537,436 $ 2,175,852
Marketable securities 1,695,304 1,695,304
Accounts receivable, net 1,549,373 1,976,000
Inventory 131,355 67,371
Income tax receivable 4,128,106 589,106
Other current assets 690,853 1,033,277
Deferred income taxes 9,682,000 13,221,000
------------ ------------
Total current assets 19,414,427 20,757,910
PROPERTY AND EQUIPMENT, net 2,659,199 2,611,454
GOODWILL, net 1,462,895 1,564,958
OTHER INTANGIBLE ASSETS, net 12,915,972 14,151,389
OTHER ASSETS 1,023,771 473,344
------------ ------------
Total assets $ 37,476,264 $ 39,559,055
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,297,198 $ 2,786,739
Accrued expenses 2,081,738 1,861,321
Deferred revenue 1,854,062 414,824
------------ ------------
Total current liabilities 7,232,998 5,062,884
------------ ------------
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, 24,557,010 and 24,475,104
issued and outstanding at March 31, 2000 and
December 31, 1999, respectively 245,570 244,751
Additional paid-in capital 34,901,794 34,618,412
Accumulated deficit (4,904,098) (366,992)
------------ ------------
Total shareholders' equity 30,243,266 34,496,171
------------ ------------
Total liabilities and shareholders' equity $ 37,476,264 $ 39,559,055
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Restated)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET REVENUES:
Licensing fees $ 5,846,996 $ 3,997,749
Subscription services 902,834 --
Other revenues 1,950,445 1,620,661
------------ ------------
Total net revenues 8,700,275 5,618,410
------------ ------------
OPERATING EXPENSES:
Cost of licensing fees 272,295 482,791
Cost of subscription services 539,374 --
Product development 1,827,503 1,064,747
Sales and marketing 7,572,860 3,849,881
General and administrative 1,722,211 1,128,456
Amortization of goodwill 102,063 --
Amortization of other intangible assets 1,235,417 --
------------ ------------
Total operating expenses 13,271,723 6,525,875
------------ ------------
Loss from operations (4,571,448) (907,465)
OTHER INCOME, net 34,342 109,703
------------ ------------
Loss before income taxes (4,537,106) (797,762)
INCOME TAX BENEFIT -- (340,000)
------------ ------------
Net loss $ (4,537,106) $ (457,762)
============ ============
LOSS PER SHARE (Note 4):
Basic and diluted $ (0.18) $ (0.02)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Restated)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------- -----------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,537,106) $ (457,762)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,669,840 177,221
Compensation expense on stock option grants 38,418 42,781
Deferred income tax provision (benefit) 4,450,000 (2,709,000)
(Increase) decrease in:
Accounts receivable 426,627 1,814,618
Inventory (63,984) 117,031
Other current assets 342,424 145,719
Other assets (564,572) (106,450)
Income tax receivable (4,450,000) 2,069,260
Increase (decrease) in:
Accounts payable 510,459 476,383
Accrued expenses 220,417 329,950
Deferred revenue 1,439,238 199,011
----------- -----------
Net cash (used in) provided by operating activities (518,239) 2,098,762
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (365,960) (476,901)
Acquisition of data rights and customer lists -- (85,000)
----------- -----------
Net cash used in investing activities (365,960) (561,901)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 245,783 139,377
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (638,416) 1,676,238
CASH AND CASH EQUIVALENTS, beginning of period 2,175,852 7,436,980
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,537,436 $ 9,113,218
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ -- $ --
=========== ===========
Cash paid for income taxes $ -- $ 300,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All notes and related disclosures applicable to the three months ended
March 31, 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/A 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 March 31,
2000, the results of operations for the three months ended March 31, 2000 and
1999 and cash flows for the three months ended March 31, 2000 and 1999 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 that may be
reported for the year or for any subsequent period.
1. Restatement
Subsequent to the filing of the Company's Consolidated Financial
Statements for the three months ended March 31, 2000 and in connection with its
review of a registration statement on Form S-4 related to the proposed merger
with onlinetradinginc.com corp. ("OnlineTrading.com") (see Note 6), the Staff of
the Securities and Exchange Commission ("SEC") expressed concerns about the
method of accounting for revenue recognition of licensing fees used by the
Company and its method of accounting for the acquisition of Window On
WallStreet Inc. ("Window On WallStreet"). As a result of consultation with the
Staff of the SEC, the Company restated certain of its annual and quarterly
financial statements as discussed below.
Beginning in 1999 with the launch of the Company's 2000i product line,
changes in the Company's client software product sales, including introduction
of a new, higher-priced product and longer financing terms, were deemed to alter
the predictability of return reserves and the future collectibility of
receivables. Accordingly, all 2000i product sales are recognized as they become
due (generally over a period of up to 12 to 16 months). Prior to 1999, sales of
client software products were recognized, net of anticipated returns, at the
time the product was shipped. In addition, the Company's acquisition of Window
On WallStreet has been restated to be accounted for under the purchase method of
accounting. A summary of the effects of the restatement for the three month
periods ended March 31, 2000 and 1999 follows:
<TABLE>
<CAPTION>
Purchase Revenue
Previously Accounting Recognition As
Reported Adjustments Adjustments Restated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Three months ended March 31, 2000:
----------------------------------
Net revenues $ 8,400,575 $ -- $ 299,700 $ 8,700,275
Loss before income taxes (4,773,326) (1,337,480) 1,573,700 (4,537,106)
Net loss (2,961,326) (1,337,480) (238,300) (4,537,106)
Loss per share :
Basic and diluted (0.12) (0.05) (0.01) (0.18)
Three months ended March 31, 1999:
----------------------------------
Net revenues $ 10,435,384 $ (994,596) $ (3,822,378) $ 5,618,410
Income (loss) before income taxes 1,364,101 560,515 (2,722,378) (797,762)
Net income (loss) 650,101 560,515 (1,668,378) (457,762)
Earnings (loss) per share :
Basic 0.03 0.02 (0.07) (0.02)
Diluted 0.02 0.03 (0.07) (0.02)
</TABLE>
7
<PAGE>
The restatement, as it relates to revenue recognition, relates solely
to the timing thereof and has no impact on cash flow. The primary effect of this
change is to shift a portion of the 1999 and early 2000 net revenues and
operating income to 2000 and, to a lesser extent, to 2001. This shift in timing
of revenue recognition does not change the Company's expectations that its
change in business model will result in net losses at least through the first
quarter of 2001. The revenue recognition timing changes do not impact revenue
recognition for the Company's Internet subscription services or other revenues,
or any of the Company's planned service offerings, which are expected to
generate the majority of the Company's revenues in the future.
2. Accounts Receivable
As of March 31, 2000 and December 31, 1999, accounts receivable were
primarily comprised of receivables earned under royalty agreements with entities
that market and sell financial market data. The Company performs periodic credit
evaluations and maintains allowances for potential credit losses of
approximately $716,000 at March 31, 2000 and December 31, 1999, and allowances
for potential returns of approximately $83,000 at March 31, 2000 and 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)
payments received for licensing fees prior to the completion of the Company's
30-day trial period and (iii) registration fees and sponsorship and exhibitor
deposits for OmegaWorld, the Company's annual conference, designed to highlight
the benefits of trading strategy development, held during the second quarter of
each year. Deferred revenue consists of the following as of March 31, 2000 and
December 31, 1999:
March 31, December 31,
2000 1999
---------- ----------
Subscription services $1,206,537 $ 290,300
Licensing fees 371,000 --
OmegaWorld 276,525 124,524
---------- ----------
$1,854,062 $ 414,824
========== ==========
4. Loss Per Share
Weighted average shares outstanding for the three months ended March
31, 2000 and 1999 are calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Weighted average shares outstanding (basic) 24,539,324 22,296,961
Impact of dilutive options after applying the treasury
stock method -- --
---------- ----------
Weighted average shares outstanding (diluted) 24,539,324 22,296,961
---------- ----------
Options outstanding which are not included in the
calculation of diluted loss per share because their
impact is antidilutive 4,181,927 3,038,159
========== ==========
</TABLE>
8
<PAGE>
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 loss is
equal to net loss for all periods presented.
6. Business Combinations
Effective October 26, 1999, the Company acquired Window On WallStreet,
a leading 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, (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 and
issued to employees 335,000 stock options to purchase the Company's common
stock, and (iii) paid fees and costs relating to the acquisition of $1.2
million. The acquisition has been accounted for under the purchase method of
accounting.
At the acquisition date, the shares of the Company's common stock
issued were valued at $8.6 million. The options were valued at $1.5 million. The
resulting goodwill of $1.6 million and other identifiable intangible assets of
$15.0 million will be amortized over a period of three to four years.
Under purchase accounting, the results of operations of the acquired
company are included from the acquisition date forward. Accordingly, the
Consolidated Financial Statements contained herein include the results of
operations of Window on WallStreet beginning October 26, 1999.
There were no material relationships or intercompany transactions
between the Company and Window On WallStreet prior to the acquisition.
On January 19, 2000, the Company signed a definitive, 100%
share-exchange merger agreement with 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 will own 100% of the issued and outstanding capital stock of Omega
Research and OnlineTrading.com. Upon completion of the merger, as a result of
share exchanges between the holding company and each of Omega Research and
OnlineTrading.com, and the listing of the holding company's shares, the holding
company will be the sole publicly-traded company in the group with its
outstanding shares of common stock listed on The Nasdaq National Market. The
holding company 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 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. Accordingly, the financial
statements herein have not been restated to give effect to this pending merger.
9
<PAGE>
7. Recently Issued Accounting Standards
In June 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("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, as amended by SFAS No. 138, will require the Company to recognize all
derivatives on the balance sheet as either assets or liabilities measured at
fair value. Derivatives that do not qualify for hedge accounting 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
adoption of SAB 101 is not expected to have a material impact on the financial
statements of the Company.
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. The adoption of Issue No. 00-2 is not expected to have a material
impact on the financial statements of the Company.
10
<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 the Merger Agreement with
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, as amended (which was
originally filed with the SEC on April 17, 2000), the approval of the
shareholders of each of Omega Research and OnlineTrading.com, and the
satisfaction of other conditions precedent.
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 March 31, 2000, most of the Company's licensing fees were
derived).
On November 2, 2000, the Company announced the restatement of its
financial results for a six-quarter period from the first quarter of 1999
through the second quarter of 2000. This restatement addresses: (1) the timing
of revenue recognition with respect to sales of the Company's 2000i product line
for which revenues will be recognized as they become due (generally over the 12
to 16 month financing terms for these sales, as monthly payments are due) as
compared to recognition of revenue, net of provision for anticipated returns,
upon shipment of these products; and (2) the Company's October 1999 merger with
Window On WallStreet accounted for under the purchase method of accounting and
not under the pooling-of-interests method of accounting. (See Notes 1 and 6 in
Notes to Consolidated Financial Statements).
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 are expected to decrease each quarter 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, revenues from the Company's Internet subscription services will
offset such reductions. To support the change in the business
11
<PAGE>
model, the Company expects to increase significantly its product development and
infrastructure expenditures. As a result, the Company expects to incur net
losses through at least the first quarter of 2001. These anticipated losses
could reduce the Company's available cash resources, increase its capital
requirements and require the Company to seek debt and/or equity financing. See
"Liquidity and Capital Resources" below.
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
reports on Form 8-K filed by the Company with respect to the pending merger with
OnlineTrading.com.
RESULTS OF OPERATIONS
The results of operations for the three months ended March 31, 2000 and
1999 have been restated. See Note 1 of Notes to Consolidated Financial
Statements. 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:
Three Months Ended
March 31,
--------------------
2000 1999
-------- --------
Net revenues:
Licensing fees 67.2 % 71.2 %
Subscription services 10.4 --
Other revenues 22.4 28.8
-------- --------
Total net revenues 100.0 100.0
-------- --------
Operating expenses:
Cost of licensing fees 3.1 8.6
Cost of subscription services 6.2 --
Product development 21.0 19.0
Sales and marketing 87.0 68.5
General and administrative 19.8 20.1
Amortization of goodwill 1.2 --
Amortization of other intangible assets 14.2 --
-------- --------
Total operating expenses 152.5 116.2
-------- --------
Loss from operations (52.5)% (16.2)%
-------- --------
Three Months Ended March 31, 2000 and 1999
Net Revenues
Total Net Revenues. The Company's total net revenues increased 55% from
$5.6 million in the three months ended March 31, 1999 to $8.7 million in the
comparable period of 2000.
Licensing Fees. Licensing fees are derived from sales of the Company's
client software products. Licensing fees increased 46% from $4.0 million in the
three months ended March 31, 1999 to $5.8 million in the comparable period of
2000 primarily due to a change in the revenue recognition of sales of the
Company's client software products in 1999. Prior to 1999, licensing fees were
recognized in full (net of provision for anticipated returns) upon shipment. In
1999, upon the release of the Company's 2000i product line, the Company began
recognizing sales on an as due basis in accordance with the payment terms of the
sale (generally over a period of up to 12 to 16 months). As a result of the
Company's focus on building its Internet subscriber base, it is expected that
licensing fees will decrease quarter over quarter as the balance of the 1999
12
<PAGE>
product sales are recognized during 2000 and the number of new licensing fee
transactions decreases. It is difficult to predict when, if at all, or to what
extent, revenues from the Company's Internet subscription services will offset
such reductions in licensing fees.
Subscription Services. Subscription services revenues were
approximately $903,000 for the three months ended March 31, 2000 due to revenues
from the Financial Data Cast Network ("FDCN"), the real time market data
subscription service acquired in the October 1999 acquisition of Window on
WallStreet, and the January 25, 2000 launch of WindowOnWallStreet.com.
Other Revenues. Other revenues increased 20% from $1.6 million in the
three months ended March 31, 1999 to $2.0 million in the comparable period of
2000, primarily due to minimum royalties under the Company's license agreement
with Telerate, Inc., a subsidiary of Bridge Information Systems, Inc.,
increasing by $500,000 per quarter, partially offset by decreases in royalties
from end-of-day data vendors.
Operating Expenses
Cost of Licensing Fees. Cost of licensing fees consists primarily of
product media, packaging and inventory costs that are recognized upon shipment
of client software products. Cost of licensing fees decreased from approximately
$483,000 in the three months ended March 31, 1999 to approximately $272,000 in
the comparable period of 2000 due to decreased shipments of client software
during the three months ended March 31, 2000 as compared to the same period
during the prior year. Cost of licensing fees as a percentage of revenue from
licensing fees decreased from 12% in the three months ended March 31, 1999 to 5%
in the comparable period of 2000, primarily due to a shift in the recognition of
2000i licensing fee revenue from upon shipment to an as due basis in accordance
with the payment terms of the sale.
Cost of Subscription Services. Cost of subscription services consists
primarily of expenses related to the maintenance and support of the Company's
server farm, data acquisition and exchange fees. Total cost of subscription
services for the three months ended March 31, 2000 was approximately $539,000 or
60% of subscription service revenues due to the recent launch of the Company's
WindowOnWallStreet.com subscription service and FDCN. Cost of services related
to the Company's subscription business is expected to increase assuming that the
Company is successful in continuing to build its subscriber base.
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
72% from $1.1 million in the three months ended March 31, 1999 to $1.8 million
in the comparable period of 2000, primarily resulting from an increase in
personnel and related costs of $661,000 due to the number of individuals
employed in product development increasing 93% from 45 at March 31, 1999 to 87
at March 31, 2000 (inclusive of 17 product development employees at Window on
WallStreet). The Company anticipates that the absolute dollar amount of product
development expense will increase for the foreseeable future as the Company
develops new products and services and enhances existing products and services
in connection with its new business model.
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 maintenance
and administration costs, and shipping expenses. Sales and marketing expenses
increased from $3.8 million in the three months ended March 31, 1999 to $7.6
million in the comparable period of 2000, primarily due to increased advertising
and promotional expenses of $2.5 million (primarily television advertising) and
personnel and related costs of $877,000.
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General and Administrative. General and administrative expenses consist
primarily of employee-related costs for administrative personnel such as
executive, human resources, finance and information technology, professional
fees, rent and other facilities expense. General and administrative expenses
increased from $1.1 million in the three months ended March 31, 1999 to $1.7
million in the comparable period of 2000 primarily due to the acquisition of
Window on WallStreet, and increased personnel and related costs and facilities
expense. 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 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.
Amortization of Goodwill and Other Intangible Assets. The October 26,
1999 acquisition of Window on WallStreet was accounted for under the purchase
method of accounting. The excess purchase price paid (including acquisition
costs of $1.2 million) over the net book value of assets was allocated to
goodwill and other intangible assets (the value of which was determined by an
independent appraisal). Other intangible assets consist of purchased technology
and workforce, trademarks, patents, customer lists and non-compete agreements
with useful lives ranging from three to four years. For the three months ended
March 31, 2000, amortization of goodwill and other intangible assets was
approximately $102,000 and $1.2 million, respectively.
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 approximately $110,000 in the three months
ended March 31, 1999 to approximately $34,000 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 $340,000 for the
three months ended March 31, 1999. This resulted in an effective tax rate of
43%, which was slightly higher than the 38.6% statutory rate due primarily to
the impact of tax free investment income. For the three months ended March 31,
2000, a valuation allowance was recognized to offset the tax benefit associated
with losses for the period.
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 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 the volatility in the price of the Company's common stock.
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Liquidity and Capital Resources
As of March 31, 2000, the Company anticipated that its available cash
resources and cash flows from operations would be sufficient to meet its
presently anticipated working capital and capital expenditure requirements
through the year 2000. However, the Company is experiencing a period of net
losses which is expected to continue at least through the first quarter of 2001.
Further, as the Company transitions to its new business model, it may need to
raise additional funds in order to execute that transition, 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 has also recently
substantially increased its rental obligations under real property, facilities
and equipment leases. The Company's future liquidity and capital requirements
will depend upon numerous factors, including the period of time it takes the
Company 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. 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 (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 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.
As of March 31, 2000, the Company had cash and cash equivalents of
approximately $1.5 million, investments in short term marketable securities of
$1.7 million, and working capital of approximately $12.2 million. Marketable
securities consist of investment grade municipal bonds maturing, on average,
within a year.
Cash used in operating activities during the three months ended March
31, 2000 totaled approximately $518,000, compared to cash provided by operating
activities of approximately $2.1 million in the comparable period of 1999. The
increase in net cash used in operating activities in 2000 was primarily due to
the increase in net losses during the first quarter of 2000.
The Company's investing activities used cash of approximately $366,000
and $562,000 in the three months ended March 31, 2000 and 1999, respectively.
The principal use of cash in investing activities was primarily for capital
expenditures related to the acquisition of computer and related equipment and
software required to support expansion of the Company's operations.
The Company's financing activities provided cash of approximately
$246,000 and $139,000 in the three months ended March 31, 2000 and 1999,
respectively. Cash provided was from the issuance of common stock from the
exercise of stock options under the Company's Amended and Restated 1996
Incentive Stock Plan.
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Recently Issued Accounting Standards
In June 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("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, as amended by SFAS No. 138, will require the Company to recognize all
derivatives on the balance sheet as either assets or liabilities measured at
fair value. Derivatives that do not qualify for hedge accounting 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
adoption of SAB 101 is not expected to have a material impact on the financial
statements of the Company.
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. The adoption of Issue No. 00-2 is not expected to have a material
impact on the financial statements of the Company.
Year 2000 Compliance
Omega Research's most recent versions of its client software products,
TradeStation 2000i, RadarScreen 2000i, OptionStation 2000i and Omega Research
ProSuite 2000i are Year 2000 compliant in all material respects.
WindowOnWallStreet.com is also Year 2000 compliant in all material respects, as
are Window On WallStreet's 6.5, 7.0 and 7.5 versions of Internet Trader,
Internet Trader Deluxe, Internet Trader Pro, Day Trader and Professional
Investor.
With respect to the shipping versions of Omega Research's client
software products immediately prior to the 2000i line, TradeStation 4,
OptionStation 1.2, TradeStation ProSuite 4 and SuperCharts 4, Omega Research
offered, in June 1999, to all registered customers in good-payment standing of
those versions, as a courtesy, an appropriate solution to those products' Year
2000 compliance issues. No versions prior to version 6.0 of any Window On
WallStreet product, all of which are discontinued products, are Year 2000
compliant. With respect to the 5.0 shipping versions of those discontinued
client software products, Window On WallStreet offered, in December 1999, to all
registered customers of version 5.0 products in good-payment standing, as a
courtesy, a free upgrade to a Year 2000 compliant Window On WallStreet product.
The Company did not incur any material expenditures specifically to provide Year
2000 solutions for its products. During 1999, the Company utilized internal
resources having an approximate aggregate value of under $200,000 to provide all
requisite Year 2000 solutions.
There have not been, and will not be, any 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 other discontinued products.
The Company has not encountered any significant 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.
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Forward-Looking Statements
This report contains statements that are forward-looking within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. When used in this report, "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 failure to
consummate the pending merger with OnlineTrading.com at all (or on a timely
basis) due to regulatory issues (including, without limitation, receipt of
further comments from the SEC Staff related to accounting or other matters, and
the nature and extent thereof, as a result of the SEC Staff's review of
Amendment No. 3 to the Registration Statement) or other reasons; difficulty
integrating the two companies 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); 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 web site 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; the adequacy of
working capital, cash flows and available financing to fund the new business
model and sustain expected operating losses; 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/A
(including 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 March 31, 2000, the Company issued to 184
employees, options to purchase an aggregate of 562,545 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 $6.38 to $6.63 per share, which was the fair
market value of the Company's Common Stock on the respective dates on which the
options were granted. The options 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 first 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
(i) On January 7, 2000, the Company filed a Current Report on Form
8-K/A, dated January 7, 2000, which amended the Current Report on Form 8-K dated
and previously filed on November 8, 1999 to include and incorporate therein Item
7(a) (Financial Statements of Business Acquired) and Item 7(b) (Pro Forma
Financial Information).
(ii) On January 28, 2000, the Company filed a Current Report on Form
8-K, dated January 28, 2000, reporting in Item 5 thereof that the Company
entered into an Agreement and Plan of Merger and Reorganization on January 19,
2000 with OnlineTrading.com, under which Omega Research and OnlineTrading.com
are proposed to be merged in a 100% stock transaction, and in Item 7 thereof the
filing, among other documents, of a copy of the Merger Agreement.
(iii) 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 (as noted above) 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
November 13, 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
20
