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May 15, 2000
OMEGA RESEARCH INC (OMGA)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Financial Statements and the Notes to Financial Statements contained herein. The results of operations for an interim period may not give a true indication of results for the year, or for any subsequent period.
RECENT DEVELOPMENTS
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 (which was filed on April 17, 2000), the approval of the shareholders of each of Omega Research and OnlineTrading.com, and the satisfaction of other conditions precedent.
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 development 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 b!
y 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.
To support the change in the business model, the Company expects to increase significantly its sales and marketing, product development and infrastructure expenditures. As a result, the Company expects to incur net losses through the year 2000. 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.
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, which through 1999 substantially most of the Company's licensing fees were derived).
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 following table presents, for the periods indicated, certain items in the Company's statement of income reflected as a percentage of total net revenues:
THREE MONTHS ENDED
MARCH 31,
2000 1999
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Net revenues:
Licensing fees 66.0 % 80.9 %
Subscription services 10.8 3.1
Other revenues 23.2 16.0
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Total net revenues 100.0 100.0
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Operating expenses:
Cost of licensing fees and services 9.7 8.0
Product development 21.7 11.4
Sales and marketing 90.1 39.0
General and administrative 35.7 27.9
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Total operating expenses 157.2 86.3
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(Loss) income from operations (57.2)% 13.7 %
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QUARTERS ENDED MARCH 31, 2000 AND 1999
NET REVENUES
TOTAL NET REVENUES. The Company's total net revenues decreased 19% from $10.4 million in the three months ended March 31, 1999 to $8.4 million in the comparable period of 2000.
LICENSING FEES. Licensing fees decreased from $8.4 million in the three months ended March 31, 1999 to $5.5 million in the comparable period of 2000 primarily due to a decrease in sales of the Company's client software products. 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 of its business, but no assurance can be given that the rate of returns will not be higher than the reserved levels.
SUBSCRIPTION SERVICES. Subscription services increased from $323,000 in the three months ended March 31, 1999 to $903,000 for the same period of 2000 primarily due to the January 25, 2000 launch of WINDOWONWALLSTREET.COM.
OTHER REVENUES. Other revenues increased 17% from $1.7 million in the three months ended March 31, 1999 to $2.0 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.
OPERATING EXPENSES
COST OF LICENSING FEES AND SERVICES. Cost of licensing fees and services consists primarily of expenses related to the maintenance and support of the Company's server farm, data acquisition and exchange fees, product media, packaging and inventory costs. Cost of licensing fees decreased from $843,000 in the three months ended March 31, 1999 to $812,000 in the comparable period of 2000. Cost of licensing fees and services as a percentage of revenue increased from 8% in the three months ended March 31, 1999 to 10% in the comparable period of 2000, primarily due to increased costs related to the Company's subscription business during the first quarter of 2000. 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 53% from $1.2 million in the three months ended March 31, 1999 to $1.8 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.
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 $4.0 million in the three months ended March 31, 1999 to $7.6 million in the comparable period of 2000, primarily due to increased television advertising, marketing and sales personnel and promotional expenses.
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 professional fees, rent and other facilities expense. General and administrative expenses increased from $2.9 million in the three months ended March 31, 1999 to $3.0 million in the comparable period of 2000. 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 $170,000 during the three months ended March 31, 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 $109,000 in the three months ended March 31, 1999 to $34,000 in the comparable period of 1999 due to decreases in cash and cash equivalents and marketable securities.
INCOME TAXES
The Company recorded a benefit for income taxes of $1.8 million for the three months ended March 31, 2000 as compared to a provision for income taxes of $714,000 for the comparable period of 1999, based upon the effective annual income tax rate. The effective tax rates for three months ended March 31, 2000 and 1999 were 38% and 52%, respectively. The increase during the three months ended March 31, 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.
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 a new business
model. 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 currently anticipates that its available cash resources and cash flows from operations will be sufficient to meet its presently anticipated working capital and capital expenditure requirements for approximately the next 12 months. However, the Company is experiencing a period of net losses which is expected to continue at least through the year 2000. 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, to 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 it
s 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 th!
e Company's common stock.
There can be no assurance that additional financing (debt or equity), if 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 $19.1 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 $2.0 million in the comparable period of 1999. The decrease in net cash provided by operations in 2000 was primarily due to an increase in net loss during the first quarter of 2000.
The Company's investing activities used cash of approximately $366,000 and $567,000 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 $203,000 in the three months ended March 31, 2000 and 1999, respectively. Cash provided was primarily from the issuance of common stock from the exercise of stock options under the Company's Amended and Restated 1996 Incentive Stock Plan.
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.
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 res!
ources having an approximate agg
regate 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.
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 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 marke
t 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; 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 Securities and Exchange Commission 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 filed!
on April 17, 2000, and in the C
ompany'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.
Recent filings: Mar 30, 1999 (Annual Rpt) | May 14, 1999 (Qtrly Rpt) | Aug 06, 1999 (Qtrly Rpt) | Nov 12, 1999 (Qtrly Rpt) | Mar 22, 2000 (Annual Rpt) | May 15, 2000 (Qtrly Rpt) More filings for OMGA available from EDGAR Online | Access real-time filings with EDGAR Online Premium EDGAR Online offers detailed company intelligence with Real Time SEC Filings, Full Search, People, Personal and more.
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