3,700,000 SHARES
[LOGO] OMEGA
RESEARCH
COMMON STOCK
Of the 3,700,000 shares of Common Stock offered hereby, 2,600,000 shares
are being sold by Omega Research, Inc. ("Omega Research" or the "Company") and
1,100,000 shares are being sold by the Selling Shareholders. See "Principal and
Selling Shareholders." The Company will not receive any of the proceeds from
the sale of the shares being sold by the Selling Shareholders. Prior to this
offering, there has been no public market for the Common Stock of the Company.
See "Underwriting" for information relating to the method of determining the
initial public offering price. The Common Stock has been approved for quotation
on the Nasdaq National Market under the symbol "OMGA."
-------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share ...... $11.00 $0.77 $10.23 $10.23
- -----------------------------------------------------------------------------------
Total(2) ...... $40,700,000 $2,849,000 $26,598,000 $11,253,000
===================================================================================
<FN>
(1) Before deducting expenses payable by the Company, estimated at $650,000.
(2) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase an aggregate of up to an additional 555,000
shares of Common Stock solely to cover over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Shareholders will be $46,805,000, $3,276,350,
$30,587,700 and $12,940,950, respectively.
</FN>
</TABLE>
-------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any
order in whole or in part. It is expected that delivery of such shares will be
made through the offices of Robertson, Stephens & Company LLC ("Robertson,
Stephens & Company"), San Francisco, California, on or about October 6, 1997.
ROBERTSON, STEPHENS & COMPANY
LEHMAN BROTHERS
HAMBRECHT & QUIST
The date of this Prospectus is September 30, 1997
<PAGE>
[LOGO] OMEGA
RESEARCH
[LANDSCAPE] - REDEFINING THE WAY INVESTORS MAKE THEIR DECISIONS
Allows investors
[Picture of to develop, test
Packaged and computer-
TradeStation automate their
Product] [Screen Captures own trading
from TradeStation] systems in real-
time - without
TradeStation being a computer
programmer.
-------------------------------------------------------------------
Gives investors
access to
professional level
option strategies
for stock, index
and futures [Screen Captures [Picture of
options - without from OptionStation] Packaged
having to be an OptionStation
options analysis Product]
expert or
mathematician. OptionStation
[Landscaped]
-------------------------------------------------------------------
Allows investors
to display and
technically analyze
[Picture of charts for virtually
Packaged SuperCharts [Screen Captures all stock, index,
Product] from SuperCharts] mutual fund and
futures symbols
SuperCharts traded to help
improve
investment
decision-making.
-------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, BY ANY SELLING SHAREHOLDER OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL OCTOBER 25, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-------------
TABLE OF CONTENTS
PAGE
-----
Summary ................................................ 4
Risk Factors ............................................. 7
Distribution of S Corporation Earnings .................. 18
Use of Proceeds .......................................... 19
Dividend Policy .......................................... 19
Capitalization .......................................... 20
Dilution ................................................ 21
Selected Financial Data ................................. 22
Management's Discussion and Analysis
of Financial Condition and Results of Operations ...... 23
Business ................................................ 32
Management ............................................. 41
Certain Transactions .................................... 46
Principal and Selling Shareholders ..................... 47
Description of Capital Stock ........................... 48
Shares Eligible for Future Sale ........................ 50
Underwriting ............................................. 51
Legal Matters .......................................... 53
Experts ................................................ 53
Additional Information ................................. 53
Index to Financial Statements ........................... F-1
-------------
The Company intends to mail to all of its shareholders an annual report
containing financial statements audited by its independent accountants for each
fiscal year and shall make available to all of its shareholders quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year.
TRADESTATION/registered trademark/, OPTIONSTATION/registered trademark/
and SUPERCHARTS/registered trademark/ are registered trademarks, and OMEGA
RESEARCH/trademark/, EASYLANGUAGE/trademark/ and POWEREDITOR/trademark/ are
trademarks, of the Company. This Prospectus also contains trademarks and
tradenames of other companies.
The Company was incorporated in Florida in 1982 and its principal
executive offices are located at 8700 West Flagler Street, Miami, Florida
33174. Its telephone number is (305) 551-9991.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS SUGGESTED BY THE
FORWARD-LOOKING STATEMENTS AND FROM THE RESULTS HISTORICALLY EXPERIENCED.
FACTORS THAT MAY CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
THE COMPANY
Omega Research is a leading provider of real-time investment analysis
software for the Microsoft Windows operating system. The Company's principal
products are TRADESTATION, OPTIONSTATION and SUPERCHARTS. With the 1991 release
of its flagship product, TRADESTATION, Omega Research pioneered the concept of
utilizing the power of the personal computer to enable investors to
historically test the profitability of their own investment and trading
strategies and then computer-automate those strategies to generate real-time
buy and sell signals. OPTIONSTATION enables investors who are not options
experts or mathematicians to benefit from advanced stock, index and futures
options trading strategies, and SUPERCHARTS provides investors with
state-of-the-art technical analysis capabilities. The Company designs its
products as PLATFORM APPLICATIONS: unique software applications that also serve
as platforms for independent third-party solutions. Over 150 independent
developers have developed software products for the Omega Research Platform.
In the last 25 years there has been unprecedented growth in the financial
markets as increasing amounts of capital have been actively invested in an
effort to generate superior returns. As investment and trading activity have
increased, investors are seeking to make use of the increased amounts of
financial market data available to support their investment decisions. While
the data have been available for some time, typically only large institutional
investors were able to manipulate, organize and analyze such data through the
use of mainframe or minicomputer-based software applications. With the advanced
processing capabilities of today's personal computers, both individual and
institutional investors are demanding powerful investment analysis software to
improve their investment decision-making. The Omega Research solution addresses
this demand through superior investment analysis products, an industry-leading,
open and extendible software platform, comprehensive support for a wide variety
of financial instruments and markets, and, through the Company's proprietary
EASYLANGUAGE technology, the ability to design and historically test investment
strategies without having computer programming experience.
Omega Research's objective is to be the leading worldwide provider of
real-time investment analysis software to both individual and institutional
investors. The Company's product strategy is to expand the Omega Research
Platform by enhancing and developing its own suites of integrated,
complementary products, and by facilitating the development of additional
compatible third-party products and services. The Company's marketing strategy
is to continue to penetrate the expanding individual investor market, increase
its focus on institutional investors and expand its international distribution.
The Company will also seek to strengthen and expand its relationships with data
vendors and to leverage its installed base of customers by marketing to its
customer base product upgrades and existing and new complementary products.
As of June 30, 1997 the Company had licensed its products to over 30,000
investors worldwide. The Company markets its products to individual investors
primarily through its dedicated, professional, team-oriented telesales force.
As a result of its strategic relationship with Dow Jones Markets, Inc., the
Company's products are marketed to institutional investors. Dow Jones Markets
offers the Company's TRADESTATION product as DOW JONES TRADESTATION under an
agreement that extends until 2002 and includes minimum annual royalty payments
to the Company which escalate each year of the agreement. In 1997, the Company
entered into an additional agreement to permit Dow Jones Markets to offer the
Company's SUPERCHARTS product as DOW JONES SUPERCHARTS.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company ..................... 2,600,000 shares
Common Stock offered by the Selling Shareholders ...... 1,100,000 shares
Common Stock to be outstanding after the Offering ...... 22,080,000 shares(1)
Use of Proceeds ....................................... To repay a short-term bank loan used to
fund payment of a distribution of
accumulated S corporation earnings to the
Company's current shareholders; working
capital and other general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol ........................... OMGA
</TABLE>
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Licensing fees ........................... $3,040 $5,593 $7,853 $7,913 $13,943 $6,322 $12,092
Other revenues ........................... -- -- 707 1,502 3,877 1,787 2,527
------- ------- ------- ------- -------- ------- --------
Total revenues ........................... 3,040 5,593 8,560 9,415 17,820 8,109 14,619
Income from operations .................. 1,035 2,407 3,727 3,288 7,022 3,250 5,379
Net income(2) .............................. 1,060 2,438 3,745 3,312 7,082 3,259 5,397
Pro forma net income(2) .................. 641 1,475 2,266 2,004 4,285 1,972 3,265
Pro forma net income per share(2)(3) ...... $ 0.21 $ 0.15
Pro forma weighted average number of shares
outstanding(3) ........................... 20,541 21,186
</TABLE>
JUNE 30, 1997
---------------------------------------
PRO PRO FORMA
ACTUAL FORMA(4) AS ADJUSTED(5)
-------- ---------- ---------------
BALANCE SHEET DATA:
Cash and cash equivalents ............ $ 264 $ 264 $15,590
Working capital (deficit) ............ 6,828 (2,794) 23,154
Total assets ........................ 9,257 12,081 27,407
Short-term obligations ............... -- 10,622 --
Shareholders' equity (deficit) ...... 7,807 (1,815) 24,133
- -------------
(1) Based on shares outstanding as of August 25, 1997. Excludes (i) 910,750
shares of Common Stock issuable upon exercise of stock options granted
under the Omega Research, Inc. Amended and Restated 1996 Incentive Stock
Plan (the "Incentive Stock Plan") as of August 25, 1997, with a weighted
average exercise price of $2.04 per share; (ii) 2,089,250 additional
shares of Common Stock reserved for future issuance under the Incentive
Stock Plan (including up to 150,000 shares which the Company intends to
issue to certain persons (other than executive officers) on or prior to
the date of this Prospectus, of which approximately 100,000 shares will be
issued at an exercise price equal to the initial public offering price);
(iii) 175,000 shares of Common Stock reserved for issuance under the Omega
Research, Inc. 1997 Nonemployee Director Stock Option Plan (the "Director
Stock Plan"); and (iv) 500,000 shares of Common Stock reserved for
issuance under the Omega Research, Inc. 1997 Employee Stock Purchase Plan
(the "Purchase Plan"). See "Management--Other Compensation Arrangements"
and Note 4 of Notes to Financial Statements.
5
<PAGE>
(2) The statement of income data reflects a pro forma provision for income
taxes as if the Company had been a C corporation subject to federal and
state corporate income taxes for all periods. See "Distribution of S
Corporation Earnings" and Note 1 of Notes to Financial Statements.
(3) Pro forma weighted average number of shares outstanding includes 321,000
and 966,000 shares for the year ended December 31, 1996 and the six-month
period ended June 30, 1997, respectively, at the initial public offering
price of $11.00 per share, the proceeds of which would fund undistributed
S corporation earnings. See "Distribution of S Corporation Earnings" and
Note 1 of Notes to Financial Statements.
(4) Reflects the effect of the dividend to current shareholders and other pro
forma adjustments described in "Distribution of S Corporation Earnings"
and Note 7 of Notes to Financial Statements.
(5) Adjusted to give effect to the sale of the Common Stock offered by the
Company hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
-------------
EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) HAS
BEEN ADJUSTED TO REFLECT A 97,400-FOR-1 STOCK SPLIT OF THE COMPANY'S COMMON
STOCK BY WAY OF A SHARE DIVIDEND DECLARED IN JANUARY 1997 AND (II) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE NOTE 7 OF NOTES TO
FINANCIAL STATEMENTS AND "UNDERWRITING."
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING ANY OF THE SHARES OF COMMON STOCK OFFERED
HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. WHEN USED IN THIS PROSPECTUS, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "INTEND" AND "EXPECT" AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS SUGGESTED BY THE FORWARD-LOOKING
STATEMENTS AND FROM THE RESULTS HISTORICALLY EXPERIENCED. FACTORS THAT MAY
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS PROSPECTUS.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly revenues and operating results have fluctuated
significantly in the past and will likely fluctuate in the future. Causes of
such significant fluctuations may include, but are not limited to, the
following factors: the ability of the Company to develop, introduce, market and
ship high-quality new and enhanced versions of the Company's products on a
timely basis; the number, timing and significance of new product introductions
by the Company and its competitors; the level of product and price competition;
changes in the Company's sales incentive or marketing strategy; demand for the
Company's products; changes in operating expenses; the volume and the timing of
orders; attempts by the Company to enter new markets or expand into related
businesses and the cost, timing and success thereof; the incurrence of
significant costs in one quarter related to revenues anticipated to be realized
in a subsequent quarter; and general economic factors. The occurrence of any
one or more of these or other factors could have a material adverse effect on
the Company's business, financial condition and results of operations. The
potential occurrence of any one or more of these factors makes the prediction
of revenues and results of operations on a quarterly basis difficult and
performance forecasts derived from such predictions unreliable. As a result,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as any
indication of future performance.
In general, revenues are difficult to forecast because the market for the
Company's products is evolving rapidly. Licensing fees in any quarter are
dependent substantially on orders received, booked and shipped in that quarter,
net of return reserves, all of which fluctuate from quarter to quarter.
Licensing fees from quarter to quarter are difficult to forecast, as no
significant order backlog exists at the end of any quarter, since the Company's
products typically are shipped shortly after receipt of orders. Additionally,
revenues are difficult to forecast because telesales, which, due to their
nature, are not easily forecast, have accounted to date for substantially all
of the Company's licensing fees from direct sales activities. Further, a
significant portion of the Company's revenues are derived from royalties and
marketing fees, the amounts of which depend upon the marketing and other
activities of independent third parties outside of the Company's control.
The Company has a 30-day return policy for its products. However, the
Company often permits returns beyond the 30-day period. Any significant
increase in the level of returns, in particular, returns beyond the 30-day
period, could result in an adjustment to the return reserves maintained by the
Company in any given quarter. There can be no assurance that any such
adjustment would not have a material adverse effect on the Company's business,
financial condition and quarterly results of operations.
A substantial portion of the Company's operating expenses are related to
personnel, facilities and marketing programs. The level of spending for such
expenses cannot be adjusted quickly and is therefore fixed in the short term.
The Company's expense levels for personnel, facilities and marketing programs
are based, in significant part, on the Company's expectations of future
revenues on a quarterly basis. If actual revenue levels on a quarterly basis
are below management's expectations, results of operations are likely to be
adversely affected by a substantially similar amount because a relatively small
amount of the Company's expenses varies with its revenues in the short term.
Software companies frequently experience strong fourth quarters followed by
weak first quarters, in some cases with sequential declines in revenues or
operating profit. There can be no assurance that the Company will not
experience this fluctuation in future years.
Due to all of the foregoing factors, as well as the occurrence of other
events and conditions discussed in this Prospectus, it is possible that in some
future quarter the Company's results of operations will be below the
7
<PAGE>
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "--Selected Quarterly Results of Operations."
DEPENDENCE ON KEY EMPLOYEES
The Company's success depends to a very significant extent on the
continued availability and performance of a number of senior management,
engineering and sales and marketing personnel, including the founders of the
Company and its Co-Chief Executive Officers, William R. Cruz and Ralph L. Cruz,
and the Company's Vice President of Product Development, Peter A. Parandjuk.
Since the Company's inception, William Cruz has been primarily responsible for
the conception and management of the Company's products and product strategies,
and Ralph Cruz has been primarily responsible for the Company's marketing
strategies. The Company does not have, or expect to obtain, key person life
insurance. The Company has entered into non-competition agreements with all of
its executive officers which provide that if their employment with the Company
is terminated they will not compete with the Company for a period of two years
following termination of employment. There is general uncertainty as to the
enforceability of non-competition agreements, and there can be no assurance
that such agreements will be enforceable against the Company's employees.
Additionally, the Company believes that its future success will depend in part
on its ability to attract and retain highly-skilled engineering, managerial and
sales and marketing personnel. Competition for such personnel in the software
industry is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. Failure to attract or
retain key personnel, William Cruz or Ralph Cruz in particular, would likely
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Employees" and "Management--Executive
Officers and Directors."
COMPETITION
The market for investment analysis software is intensely competitive and
rapidly changing. The Company believes that due to anticipated growth of the
market for investment analysis software, and other factors, competition will
substantially increase and intensify in the future. The Company believes its
ability to compete will depend upon many factors both within and outside its
control, including the timing and market acceptance of new products and
enhancements developed by the Company and its competitors, product
functionality, data availability, ease of use, pricing, reliability, customer
service and support, sales and marketing efforts and product distribution
channels.
The Company faces direct competition from several publicly-traded and
privately-held companies. The Company's principal competitors include AIQ,
Aspen Graphics, Equis International, Inc. (Metastock), a subsidiary of Reuters,
Market Arts, Inc. (Window on Wall Street) and TeleChart 2000. The Company also
competes with investment analysis solutions available on the Internet, some of
which are available for free. In addition, the Company faces competition from
data vendors, all of which offer investment analysis software products, and
which are the Company's existing and potentially future strategic partners. As
a result, the Company must educate prospective customers as to the potential
advantages of the Company's products, and continue to offer software solutions
not offered by major data vendors. There can be no assurance that the Company
will be able to compete effectively with its competitors, adequately educate
potential customers to the benefits that the Company's products provide, or
continue to offer such software solutions.
Many of the Company's existing and potential competitors, which include
large, established software companies which do not currently focus on the
investment analysis software market, have longer operating histories,
significantly greater financial, technical and marketing resources, greater
name recognition and a larger installed customer base than has the Company. One
or more of these competitors may be able to respond more quickly to new or
emerging technologies or changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than may the
Company. There can be no assurance that the Company's existing or potential
competitors will not develop products comparable or superior to those developed
by the Company or adapt more quickly than the Company to new technologies,
evolving industry trends or changing customer requirements. Increased
competition could result in price reductions, reduced margins or loss of market
share, any of which could materially adversely affect the
8
<PAGE>
Company's business, financial condition and results of operations. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors, or that competitive pressures faced by the
Company will not have a material adverse effect on its business, financial
condition and results of operations. See "Business--Competition."
PRODUCT CONCENTRATION
Since its introduction in 1991, sales of TRADESTATION have accounted for a
majority of the Company's total revenues and are expected to continue to
account for a substantial portion of such revenues for the foreseeable future.
As a result, any factor resulting in price reductions of, or declines in demand
for, TRADESTATION would have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will continue to be successful in marketing
TRADESTATION or any new or enhanced version thereof. Competitive pressures or
other factors may result in significant price erosion that would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview," "Business--Products" and
"--Competition."
MANAGEMENT OF CHANGE
The Company's business has grown rapidly in recent years. This growth has
placed, and will continue to place, a significant strain on the Company's
management and operations. The Company has ambitious plans for future growth,
including entry into new markets, that will place additional significant strain
on the Company's management and operations. The Company's future operating
results will depend, in part, on its ability to continue to broaden the
Company's senior management group and administrative infrastructure, and its
ability to attract, hire and retain skilled employees, particularly in the
product management and product development areas. The Company's success will
also depend on the ability of its officers and key employees to continue to
implement and improve the Company's operational and financial control systems
and to expand, train and manage its employee base. The Company's future
operating results will also depend on its ability to expand its sales and
marketing organizations and expand its customer support operations commensurate
with its growth, should such growth occur. The Company's inability to
effectively manage growth, should such growth occur, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Employees."
The Company is in the process of implementing a new accounting, customer
tracking and management system at its corporate headquarters to address certain
limitations in its information resources. The Company is in the process of
learning the full capabilities of the new system, and realization of all the
benefits of the new system will take an undetermined length of time. There can
be no assurance that the Company will not experience difficulties in
transitioning to the new system. The failure to receive adequate, accurate and
timely financial information could impair management's ability to make
effective and timely business decisions, which could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Sales and Marketing."
RISKS OF RETURNS AND COLLECTION OF ACCOUNTS RECEIVABLE
Revenues are recognized by the Company at the time product is shipped, and
the Company maintains a reserve to account for anticipated returns of its
products based on the Company's evaluation of historical experience and other
relevant information. The Company's return rate has increased over the last
several quarters and there can be no assurance that this trend will not
continue. In the event that returns materially increase over historical rates
as a result of changes in technology or marketing strategy, shifts in consumer
demand or other reasons, the reserves maintained by the Company will not be
sufficient to cover such returns and, in such event, the Company's business,
financial condition and results of operations would be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
9
<PAGE>
The Company has an unusually high level of accounts receivable, based
primarily on its policy of permitting customers to pay for many of its products
by automatic monthly charges to the customer's credit card over a 12-month
period. While the Company believes that it maintains adequate reserves to
account for the non-collection of its accounts receivable, there can be no
assurance that the rate of non-collection of accounts receivable will not
increase over historical levels. Such an increase could materially adversely
affect the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
RISKS ASSOCIATED WITH ENTRY INTO INSTITUTIONAL MARKET
The Company has historically sold its products to individuals and has no
experience in marketing its products directly to institutions. The Company
believes its future success will depend in part on its ability to move beyond
its traditional customer base and market its products to institutions,
including brokerage firms. The Company's ability to enter the institutional
market will depend, in part, upon its ability to successfully develop network
versions of its products. There can be no assurance that the Company will be
successful in developing a network version and marketing, on a timely and
cost-effective basis, if at all, products that respond to current and emerging
institutional market conditions or that will be accepted by institutional
investors, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--The
Omega Research Strategy."
RISKS ASSOCIATED WITH FLUCTUATIONS IN THE SECURITIES AND FINANCIAL MARKETS
The Company's products are marketed to customers who invest or trade in
the securities and financial markets. To the extent that interest in investing
or trading decreases due to volatility in the securities or financial markets,
tax law changes, recession, depression, or otherwise, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Business--Industry Background."
RELATIONSHIPS WITH DATA VENDORS
The Company's viability depends on the ability of its customers to obtain
access to a breadth of quality real-time and historical financial market data
from services that are technically compatible with the Company's products. The
Company currently depends nearly entirely upon relationships with third-party
data vendors to ensure such access, and it currently has cross-marketing
agreements with four of such data vendors including Data Broadcasting
Corporation (Signal, BMI), FutureSource (a division of Oster Communications),
Track Data Corporation (Dial/Data) and Telescan Incorporated. Most of the data
vendors with whom the Company has developed technical compatibility (including
those with which it has cross-marketing agreements) have developed and are
currently marketing their own versions of investment analysis software and, in
some cases, have established alliances with the Company's competitors. Such
data vendors may decide to increase the focus of their efforts and resources on
their own development efforts, develop products highly competitive with the
Company's products, strengthen their alliances with the Company's competitors,
discontinue their relationships with the Company, or develop strategic
initiatives which involve eliminating or limiting compatibility between the
Company's products and the data vendors' services. If this were to occur, the
Company would be required to find alternative sources for such data in order to
remain viable and there can be no assurance that such alternative sources would
be available on commercially reasonable terms, if at all. There is also the
risk that such data vendors will not pay the fees, commissions or royalties due
to the Company under their contractual agreements or that such contractual
relationships will not be renewed on terms favorable to the Company, if at all.
There can be no assurance that the Company will be able to increase the number
of compatible data sources available, or that its existing data sources will
continue to exist or cooperate in maintaining technical compatibility with the
Company's products. If the Company were unable to secure additional key data
sources or were to lose access to significant amounts of data, the Company's
ability to obtain and retain customers, and therefore the Company's business,
financial condition and results of operations, would be materially adversely
affected. The Company's business, financial condition and results of operations
would also be materially adversely affected if a significant number of its data
vendors failed to make their fee, commission or royalty payments to the Company
when due.
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The loss by data vendors of subscribers who use the Company's products may
also adversely affect the Company if such subscribers switch to a data vendor
whose services are not technically compatible with the Company's products, or a
data vendor who has an exclusive or more favorable relationship with a
competitor of the Company. The use of such other data vendor may reduce
marketing fees and commissions to the Company. The resultant loss of fees and
commissions, if significant, would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Competition" and "--Strategic Relationships."
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW PRODUCTS
The market for investment analysis software is characterized by rapidly
changing technology, evolving industry standards in computer hardware,
programming tools, programming languages, operating systems, database
technology and information delivery systems, changes in customer requirements
and frequent new product introductions and enhancements. The Company's future
success will depend upon its ability to maintain and develop competitive
technologies, to continue to enhance its current products and to develop and
introduce new products in a timely and cost-effective manner that meets
changing conditions such as evolving customer needs, new competitive product
offerings, emerging industry standards and changing technology. Any failure by
the Company to anticipate or to respond quickly to changing market conditions,
or any significant delays in product development or introduction, could cause
customers to delay or decide against purchases of the Company's products and
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--The Omega Research
Strategy" and "--Product Development."
RISKS ASSOCIATED WITH FUTURE RELIANCE ON THE INTERNET
The Company believes that future sales of its products and the future
growth of the Company, particularly outside of the United States and Canada,
will depend upon the adoption of the Internet as a widely used medium for
commerce and communication, and the Internet becoming a significant means of
delivery of high-quality financial market data, marketing materials and
customer support. If the Internet becomes viable in such manner, the Company
will have to develop extensive Internet product technical compatibility and
adjust its marketing and customer support approaches accordingly. There can be
no assurance that the Company will accomplish any of such tasks on a timely,
cost-effective basis, if at all. Conversely, the Internet may not prove to be a
viable commercial marketplace because of a failure to develop the necessary
infrastructure, such as reliable network backbones and adequate band-widths, or
the failure to develop complementary services, such as high-speed modems. The
Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. There can be
no assurance that the Internet infrastructure will continue to be able to
support the demands placed on it by this continued growth. In addition, the
Internet could lose its viability due to delays in the development or adoption
of new standards and protocols to handle increased levels of Internet activity,
or due to increased governmental regulation. Because global commerce and online
exchange of information on the Internet and other similar open wide area
networks are new and evolving, it is difficult to predict whether the Internet
will prove to be a viable commercial marketplace. There can be no assurance
that the infrastructure or complementary services necessary to make the
Internet a viable commercial marketplace will develop, or, if developed, that
the Internet will become a viable commercial marketplace for financial market
data or products such as those offered by the Company. If the necessary
infrastructure or complementary services are not developed, or if the Internet
does not become a viable commercial marketplace, or if the Internet becomes
viable and the Company does not adequately and timely develop the necessary
technical compatibility and adjust its marketing and customer support
approaches accordingly, the Company's business, financial condition and results
of operations could be materially adversely affected. See "Business--Industry
Background" and "--The Omega Research Strategy."
RISKS OF PRODUCT DEFECTS; PRODUCT LIABILITY
As a result of their complexity, all software products, including the
Company's products, contain errors. Despite testing by the Company and initial
use by customers, when new products are introduced or new versions of products
are released there can be no assurance that errors will not be found and
persist after
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commencement of commercial shipments, resulting in loss of revenues, delay in
market acceptance or damage to the Company's reputation, any of which could
have a material adverse effect upon the Company's business, financial condition
and results of operations. All investment analysis software products are
inherently limited by the accuracy of the data utilized by such products.
Because the monitoring, collection, storage and delivery of financial market
data by data vendors and by the Company's software is inherently difficult, the
data frequently contain errors. The effectiveness of the Company's products is
therefore limited by the accuracy of such data. Moreover, the financial market
data often used by investors with the Company's products to perform historical
testing are based upon discrete data points (such as open, high, low and close
prices for a user-specified time period) rather than on a trade-by-trade
continuum. This requires the Company's products to incorporate certain
assumptions as to the movement from one data point to the next. To the extent
that such assumptions are incorrect, the results of the historical testing will
be inaccurate. See "Business--Products."
The Company's products are used by investors in the financial markets,
and, as a result, an investor might claim that investment losses or lost
profits resulted from use of a flawed version of one of the Company's products
or inaccurate assumptions made by the product regarding data. Liability imposed
on the Company as a result of any such losses by its customers could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure for
potential claims based on use, errors or malfunctions of its products. It is
possible, however, that the limitation of liability provisions contained in the
Company's license agreements may not be effective under the laws of certain
jurisdictions. Although the Company has not experienced any product liability
claims to date, the sale and support of the Company's products entail the risk
of such claims. Although the Company has a limited amount of product liability
insurance, there can be no assurance that such insurance would be adequate to
cover the amount of such liabilities, if imposed on the Company, or that such
insurance would cover the types of claims which might be asserted against the
Company. A product liability claim brought against the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISK OF LITIGATION
There has been substantial litigation in the software industry involving
intellectual property rights. Although the Company does not believe that it is
infringing the intellectual property rights of others, there can be no
assurance that infringement claims, if asserted, would not have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, as part of its marketing strategy, the Company
licenses to its solution providers the Omega Research Solution Provider logo.
Several solution provider products recommend specific trading systems or
strategies to investors, which, if used by investors unsuccessfully, could
result in claims by them. The association of the Company's name and logo with a
solution provider's products or services may therefore subject the Company to
claims brought by third parties with respect to such products or services. Such
claims, if asserted, could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Strategic Relationships."
As the Company's products are designed to enable investors to make
improved investment and trading decisions, an investor who uses the Company's
products and sustains losses or fails to make profits in the securities or
financial markets may allege that the Company's products contributed to or
resulted in such losses or lost profits and that the Company should be held
liable to the investor for such losses. While the Company's user manuals
contain certain warnings and disclaimers, they may not be effective in certain
jurisdictions or under certain circumstances. The Company currently has a
limited amount of errors and omissions insurance which may cover such liability
risks, but there can be no assurance that such insurance would be adequate to
cover the amount of such liabilities, if imposed on the Company, or that such
insurance would cover the types of claims which might be asserted against the
Company. While the Company has never had such a claim asserted against it,
there can be no assurance that such claims will never be asserted and that, if
asserted, such claims would not have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Products."
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DEPENDENCE ON RELATIONSHIP WITH DOW JONES MARKETS
The Company has entered into two Software License, Maintenance and
Development Agreements with Dow Jones Markets, Inc., formerly known as Dow
Jones Telerate, Inc. ("Dow Jones Markets"), which the Company expects will
provide a substantial royalty stream over the next five years. While the
agreements are non-cancelable and, in the case of one of the agreements,
provide for certain guaranteed minimum annual royalty payments to the Company,
there can be no assurance that circumstances will not arise under which Dow
Jones Markets will seek to avoid continued payment of the royalties. Should Dow
Jones Markets not make the payments to the Company as and when due, the
Company's business, financial condition and results of operations would be
materially adversely affected. Further, under such agreements, Dow Jones
Markets has complete discretion as to how it markets on a worldwide basis the
Company's TRADESTATION and SUPERCHARTS products to Dow Jones Markets' existing
and potential subscribers, most of which are institutions. If Dow Jones
Markets, in the exercise of such discretion, markets such products in a manner
which is detrimental to the Company, whether due to Dow Jones Markets having a
different marketing focus which emphasizes its other products or a competing
software product, poor conception or execution, or otherwise, or Dow Jones
Markets fails to perform under either agreement, the Company's entry into the
institutional investor market, its reputation and its business, financial
condition and results of operations could be materially adversely affected. To
date, minimum royalties under the Dow Jones Markets agreement with respect to
TRADESTATION have exceeded actual royalties and Dow Jones Markets has not
commenced its marketing of SUPERCHARTS. In the event that the Dow Jones Markets
agreements are not extended or renewed beyond their expiration in the year
2002, there may be a decline in the Company's revenues for the quarter in which
the agreements terminate and thereafter, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" and "Business--Strategic Relationships."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A key component of the Company's strategy is its planned expansion into
international markets. This strategy is dependent, in part, on international
customers having access to the appropriate financial market data. There is no
practical and affordable access to such data in many countries and there can be
no assurance that the required financial market data will ever be readily
available in the countries in which the Company's products could be sold or
that such data, if available, will be reliable or affordable. To date, the
Company has only limited experience in marketing, selling and delivering its
products internationally. There can be no assurance that the Company will be
able to successfully market, sell and deliver its products in international
markets. In addition, there are certain risks inherent in doing business on an
international level, such as unexpected changes in regulatory requirements,
export restrictions, tariffs and other trade barriers, difficulties in staffing
and managing foreign operations, dependence upon and problems with foreign
distributors or strategic partners needed to succeed in certain countries,
difficulties in protecting intellectual property rights, longer payment cycles,
problems in collecting accounts receivable, political instability,
unfamiliarity with local laws and customs, fluctuations in currency exchange
rates, and potentially adverse tax consequences. There can be no assurance that
one or more of such or other factors will not have a material adverse effect on
the Company's future international operations and, consequently, on the
Company's business, financial condition and results of operations. See
"Business--Sales and Marketing."
DEPENDENCE UPON MICROSOFT'S WINDOWS OPERATING SYSTEM
The Company's products are currently designed for use on computers using
Microsoft's Windows operating system. The Company currently intends to develop
future versions of its products for 32-bit Windows operating systems, and, as a
result, such versions will not be compatible with the Microsoft Windows 3.1
operating system and will require Windows 95, Windows NT 4.0 or later versions
of Windows. A decision by current users of the Windows 3.1 operating system not
to upgrade to a newer version of the Windows operating system would adversely
affect demand for the Company's products, causing a material adverse effect on
the Company's business, financial condition and results of operations. Any
factor adversely affecting the demand for, or use of, or the current trends of
increasing and expanding use of, the Windows operating system could have an
impact on demand for the Company's products causing a material adverse effect
on the Company's business,
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financial condition and results of operations. Additionally, changes to the
underlying components of the Windows operating system may require changes to
the Company's products. If the Company is not able to successfully develop or
implement appropriate modifications to its products in a timely fashion, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Business--Industry Background" and
"--Products."
EMERGING MARKET FOR INVESTMENT ANALYSIS SOFTWARE
The market for software products that enable investors to design,
historically test and computer-automate their own investment and trading
strategies on the personal computer is relatively new and will be subject to
frequent and continuing changes. Any future growth of this market depends upon
continued customer acceptance of investment analysis software as valuable tools
in designing and implementing custom investment and trading strategies.
Historically, the Company has been required to educate prospective customers as
to the potential advantages of the Company's products. The Company expects that
the educational component of the sales process will continue for the
foreseeable future and will require significant resources. There can be no
assurance that the market for such software will grow, that the Company will be
successful in educating a sufficient number of customers as to the potential
advantages of such software or that the Company will be able to respond
effectively to changing customer preferences in this market. If the size of the
market is substantially smaller than the Company believes, or if the market for
investment analysis software fails to grow or grows more slowly than the
Company currently anticipates, or if the Company fails to respond effectively
to the evolving requirements of this market, the Company's business, financial
condition and results of operations would be materially adversely affected. See
"Business--Industry Background."
PROTECTION OF INTELLECTUAL PROPERTY
The Company's success is heavily dependent upon its proprietary
technology. The Company relies primarily on a combination of copyright, trade
secret and trademark laws, nondisclosure and other contractual provisions and
technical measures to protect its proprietary rights. The Company seeks to
protect its software, documentation and other written materials through trade
secret and copyright laws, which provide only limited protection. As part of
its confidentiality procedures, the Company generally enters into nondisclosure
agreements with its employees, consultants, distributors and corporate
partners. The Company uses a shrink-wrap license (typically on its packaging
and on-screen) directed to users of its products in order to protect its
copyrights and trade secrets and to prevent such users from commercially
exploiting such copyrights and trade secrets for their own gain. Since these
licenses are not signed by the licensees, many authorities believe that they
may not be enforceable under many state laws and the laws of many foreign
jurisdictions. The laws of Florida, which such licenses purport to make the
governing law, are unclear on this subject. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties copy or otherwise obtain,
use or exploit the Company's products or technology independently. Policing
unauthorized use of the Company's products is difficult, and the Company is
unable to determine the extent to which unauthorized use of its software
products exists. Piracy can be expected to be a persistent problem,
particularly in international markets and as a result of the growing use of the
Internet. In addition, effective protection of intellectual property rights may
be unavailable or limited in certain countries, including some in which the
Company may attempt to expand its sales efforts. There can be no assurance that
the steps taken by the Company to protect its proprietary rights will be
adequate or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies or products, either of which could result in a material adverse
effect on the Company's business, financial condition and results of
operations.
There has been substantial litigation in the software industry involving
intellectual property rights. The Company does not believe that it is
infringing the intellectual property rights of others, although there exists a
competing trademark application for the name WALL STREET ANALYST which claims
prior use. There can be no assurance that infringement claims would not have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, to the extent that the Company acquires or
licenses a portion of the software or data included in its products from third
parties, its exposure to infringement actions may increase because the Company
must rely upon such third parties for information as to the origin and
ownership of such acquired or licensed software or data. In the future,
litigation may be necessary to establish,
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enforce and protect trade secrets, copyrights, trademarks and other
intellectual property rights of the Company. The Company may also be subject to
litigation to defend against claimed infringement of the rights of others or to
determine the scope and validity of the intellectual property rights of others.
Any such litigation could be costly and divert management's attention, either
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. Adverse determinations in such
litigation could result in the loss of proprietary rights, subject the Company
to significant liabilities, require the Company to seek licenses from third
parties, which could be expensive, or prevent the Company from selling its
products or using its trademarks, any one of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Intellectual Property."
FUTURE CAPITAL NEEDS
The Company believes that funds generated from operations and the net
proceeds of this offering will be sufficient to meet normal working capital
needs at least through 1998. The Company's ability to expand and grow its
business in accordance with its current plans, to make acquisitions and to meet
its long-term capital requirements beyond 1998 will depend on many factors,
including, but not limited to, the rate, if any, at which the Company's cash
flow increases, the ability and willingness of the Company to accomplish
acquisitions with its capital stock, and the availability to the Company of
public and private debt and equity financing. No assurance can be given that
additional financing will be available or that, if available, it will be
available on terms favorable to the Company. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally.
While not currently regulated as such, there is the possibility that, because
of the use of the Company's products as a tool for formulating and implementing
investment strategies, the Company may become subject to existing or future
regulations applicable to investment advisors or other securities
professionals. Such regulations are complex and compliance therewith would
require the Company to make significant expenditures in the resources necessary
to ensure compliance with those regulations. Such expenditures would render the
Company's business or operations more costly or burdensome, less efficient or
even impossible, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Products."
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
The Company may acquire businesses, assets, products and technologies that
the Company believes could complement or expand the Company's business. The
Company currently has no specific plans, commitments or agreements with respect
to any acquisitions and there can be no assurance that the Company will be able
to identify any appropriate acquisition candidates. If the Company identifies
an acquisition candidate, there can be no assurance that the Company will be
able to successfully negotiate the terms of any such acquisition, finance such
acquisition or integrate such acquired business, assets, products or
technologies into the Company's existing business. Furthermore, the negotiation
of potential acquisitions as well as the integration of an acquired business
could cause diversion of management's time and resources, and require the
Company to use proceeds from this offering to consummate a potential
acquisition. Further, acquisitions by the Company could result in potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities and the amortization of goodwill and other acquired assets. There
can be no assurance that any acquisition would not have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Use of Proceeds."
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS
Other than with respect to the payment of S corporation accumulated
undistributed earnings to the Company's current shareholders, the Company
currently has no specific plan for using the proceeds of this offering. As a
consequence, the Company will have broad discretion to allocate a large
percentage of such
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proceeds to uses which the public shareholders may not deem desirable, and
there can be no assurance that the proceeds can or will yield a significant
return. See "Use of Proceeds."
CERTAIN BENEFITS TO CURRENT SHAREHOLDERS
The current shareholders of the Company will derive certain benefits as a
result of this offering, including the creation of a public market for the
shares of Common Stock, the receipt by the Selling Shareholders of net proceeds
in the amount of $11,253,000 ($12,940,950 if the Underwriters' over-allotment
option is exercised in full), and the use by the Company of a portion of the net
proceeds from this offering to finance the payment of a cash dividend which at
June 30, 1997 would have been approximately $10.6 million, but the actual amount
of which is expected to be materially higher. See "Distribution of S Corporation
Earnings" and "Use of Proceeds."
NO PRIOR MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF SHARE PRICE
Prior to this offering, there has been no public market for the Common
Stock of the Company, and there can be no assurance that an active trading
market will develop upon completion of this offering or, if it does develop,
that such market will be sustained. The initial public offering price of the
Common Stock has been determined by negotiation among the Company, the Selling
Shareholders and the representatives of the Underwriters, and may not be
representative of the price that will prevail in the public market. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price.
The market price of the Common Stock after this offering may be
significantly affected by factors such as quarterly variations in the Company's
results of operations, the announcement of new products or product enhancements
by the Company or its competitors, technological innovation by the Company or
its competitors and general market conditions specific to particular
industries. In particular, the stock prices for many companies in the
technology and emerging growth sectors have experienced wide fluctuations which
have often been unrelated to the operating performance of such companies. Such
fluctuations may materially adversely affect the market price of the Common
Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after
this offering could materially adversely affect the market price of the Common
Stock. Upon closing of this offering, the Company will have a total of
22,080,000 shares of Common Stock outstanding, of which 3,700,000 shares will
be freely tradeable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"). All of the remaining 18,380,000 shares are
"restricted securities" as defined by Rule 144 promulgated under the Securities
Act. Beginning 180 days after the date of this Prospectus, upon the expiration
of lock-up agreements with the Underwriters, all of such restricted securities
will be available for sale in the public market subject to compliance with Rule
144 volume and other requirements. The Company intends to register for issuance
or resale the 3,000,000 shares of Common Stock reserved for issuance under the
Incentive Stock Plan, the 175,000 shares of Common Stock reserved for issuance
under the Director Stock Plan and the 500,000 shares of Common Stock reserved
for issuance under the Purchase Plan. As of August 25, 1997, options to
purchase 910,750 shares were outstanding under the Incentive Stock Plan, all of
which become exercisable at varying times after November 30, 1997, and no
shares had been issued under the Director Stock Plan or the Purchase Plan.
Further, should either or both of the Company's principal shareholders die, a
substantial portion of their shares of the Company's Common Stock may need to
be sold in order to pay estate taxes. Such sales could materially adversely
affect the market price of the Common Stock. See "Management--Other
Compensation Arrangements," "Shares Eligible for Future Sale" and
"Underwriting."
CONTROL BY PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS
Upon completion of this offering, the Company's Co-Chief Executive
Officers, William Cruz and Ralph Cruz, and their affiliates will, in the
aggregate, beneficially own approximately 83.2% of the Company's outstanding
Common Stock, assuming no exercise of options outstanding (81.1% if the
Underwriters' over-allotment option is exercised in full). As a result, such
persons, acting together, will have the ability to control the
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vote on all matters submitted to shareholders of the Company for approval
(including election of directors and any merger, consolidation or sale of all
or substantially all of the Company's assets) and to control the management and
affairs of the Company. Such concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of the Company or a
merger, consolidation, takeover or other business combination involving the
Company or discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of the Company. See "Management" and
"Principal and Selling Shareholders."
CERTAIN FLORIDA STATUTORY PROVISIONS
Florida has enacted legislation that may deter or frustrate takeovers of
Florida corporations. The Florida Control Share Act generally provides that
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless such voting rights are approved by a majority vote of a
corporation's disinterested shareholders. The Florida Affiliated Transactions
Act generally requires supermajority approval by disinterested shareholders of
certain specified transactions between a public corporation and holders of more
than 10% of the outstanding voting shares of the corporation (or their
affiliates). Florida law also authorizes the Company to indemnify the Company's
directors, officers, employees and agents. The Company has adopted the Second
Amended and Restated Articles of Incorporation (the "Articles") and the Second
Amended and Restated Bylaws (the "Bylaws") with such an indemnity provision and
has entered into indemnification agreements with all of its executive officers
and directors. See "Description of Capital Stock--Certain Provisions of Florida
Law" and "--Limitation of Liability and Indemnification Matters."
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
The Articles and Bylaws contain certain provisions that could discourage
potential takeover attempts and make attempts by the Company's shareholders to
change management more difficult. Such provisions include the requirement that
the Company's shareholders follow an advance notification procedure for certain
shareholder nominations of candidates for the Board of Directors and for new
business to be conducted at any meeting of the shareholders. The Articles also
provide that special meetings of the shareholders may only be called by the
Board of Directors or the holders of shares representing not less than 50% of
all votes entitled to be cast on any issue to be considered at the special
meeting. The Articles require that, upon completion of this offering, any
actions by the shareholders of the Company may be taken only upon the vote of
the shareholders at a meeting and may not be taken by written consent. In
addition, the Articles allow the Board of Directors to issue up to 25,000,000
shares of preferred stock and to fix the rights, privileges and preferences of
those shares without any further vote or action by the shareholders. The rights
of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be
issued by the Company in the future. While the Company has no present intention
to issue preferred stock, any such issuance could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. See "Description of Capital Stock--Certain Charter
and Bylaw Provisions."
DILUTION
Investors purchasing Common Stock in this offering will experience
immediate and substantial dilution of $9.91 in the net tangible book value per
share of Common Stock. See "Dilution."
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DISTRIBUTION OF S CORPORATION EARNINGS
The Company has been treated for federal and state income tax purposes as
an S corporation under the Internal Revenue Code of 1986, as amended (the
"Code"), and comparable state tax laws. As a result, the earnings of the
Company have been taxed for federal income tax purposes directly to the
shareholders of the Company, rather than to the Company (the state of Florida
currently does not impose an income tax on an individual's income, including
his or her share of an S corporation's earnings). Immediately prior to the date
of this Prospectus, the Company terminated its S Corporation status (the
"Termination Date") and the Company became a C corporation making it subject to
federal and state income taxes on its earnings.
The Company's Board of Directors has declared a cash dividend (the
"Dividend") payable to the Company's existing shareholders equal to the
Company's accumulated earnings during the period it was an S corporation, to the
extent such income was not previously distributed (the "S Corporation
Earnings"). The estimated amount of the Dividend was paid on the Termination
Date. The Company financed this payment with a short-term bank loan and will use
a portion of the proceeds of this offering to repay the bank loan. The estimated
S Corporation Earnings through June 30, 1997 was approximately $10.6 million.
The actual S Corporation Earnings through the Termination Date and, accordingly,
the Dividend, is expected to be materially higher than $10.6 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and Notes 1 and 7 of the Notes to Financial Statements.
The Company and its current shareholders have entered into an S
Corporation Tax Allocation and Indemnification Agreement (the "Tax Agreement")
relating to the Dividend and their respective income tax liabilities. The Tax
Agreement provides that to the extent the S Corporation Earnings, as
subsequently established by the filing of the Company's tax return for the
Company's short S corporation tax year, are less than the estimated Dividend
paid prior to the consummation of this offering, the existing shareholders will
make a payment equal to such difference to the Company, and if the S
Corporation Earnings are greater than the estimated Dividend, the Company will
make an additional distribution equal to such difference to the current
shareholders, in either case, with interest thereon. Subject to certain
limitations, the Tax Agreement also provides for the cross-indemnification of
the current shareholders and the Company for any federal and state income
taxes, including interest and penalties, if any, as a result of a final
determination of a taxing authority that increases or decreases the taxable
income of the Company for an S corporation taxable year (resulting in a change
in the income taxes due by the current shareholders for such year) and causes a
corresponding increase or decrease in the taxable income of the Company for a C
corporation taxable year. Each party's obligation under the Tax Agreement is
limited to the amount of any reduction in their tax liability as a result of
any such determination.
In July 1997, the Company voluntarily filed a request on Form 3115 with
the Internal Revenue Service (the "IRS") to change its method of accounting
from the cash method to the accrual method effective on January 1, 1997 (the
"Form 3115"). As the result of the filing of the Form 3115, the Company is
required to include in its income over three taxable years an amount equal to
the excess of the income it should have reported as taxable income under the
accrual method for years prior to 1997 and the amount it did report as taxable
income under the cash method for such years. Pursuant to the Tax Agreement, the
Company's liability for federal and state income taxes on such additional
income is limited to $1.8 million. If the IRS determines that some or all of
this additional income should be included in an S corporation taxable year of
the Company, pursuant to the Tax Agreement, the Company will make a payment to
the existing shareholders equal to any increase in their income taxes on such
additional income, up to $1.8 million.
To the extent a payment is made pursuant to the Tax Agreement by the
Company to the current shareholders after the one year anniversary of the
Termination Date, except to the extent it relates to the Form 3115, the Company
will be required to make an additional payment to the current shareholders
equal to any income taxes payable by such shareholders on such payments. The
Company will not receive a tax deduction for any payments made to the current
shareholders pursuant to the Tax Agreement. The current shareholders have not
provided security for their obligations under the Tax Agreement; accordingly,
the Company's ability to collect any such payments will be dependent upon the
current shareholders financial condition at the time such payments are to be
made. The Company is not aware of any tax adjustments which
18
<PAGE>
might require payments under the Tax Agreement, other than related to the Form
3115. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and Notes 1 and 7 of the Notes to Financial
Statements.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,600,000 shares of
Common Stock offered by the Company pursuant to this offering are estimated to
be $25,948,000 ($29,937,700 if the Underwriters' over-allotment option is
exercised in full) after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company. The Company will not
receive any proceeds from the sale of Common Stock by the Selling Shareholders.
See "Principal and Selling Shareholders."
The principal purposes of this offering are to establish a public market
for the Company's stock, to provide enhanced equity incentives to attract and
retain key employees, to increase the Company's visibility in its markets, to
facilitate future access to public capital markets and to obtain additional
working capital. The Company will use a portion of the net proceeds of this
offering to repay a short-term bank loan which the Company obtained in order to
pay the estimated Dividend prior to completion of this offering. At June 30,
1997 the Dividend would have been approximately $10.6 million, but the actual
amount of the Dividend is expected to be materially higher. A portion of the net
proceeds may also be used for the acquisition of businesses, assets, services
and technologies that the Company believes would be complementary to those of
the Company. The Company presently has no commitments or understandings for any
acquisitions and is not presently engaged in any discussions or negotiations for
any acquisitions. Pending such uses, the Company intends to invest the balance
of the net proceeds of this offering in short-term, interest-bearing
instruments. See "Risk Factors--Broad Management Discretion in Use of Proceeds."
DIVIDEND POLICY
The Company currently intends to retain future earnings to finance its
growth and development and therefore does not anticipate paying any cash
dividends in the foreseeable future. Payment of any future dividends will
depend upon the future earnings and capital requirements of the Company and
other factors which the Board of Directors considers appropriate. During 1994,
1995, 1996 and the first six months of 1997, the Company declared cash
dividends in the aggregate amounts of $3,468,000, $2,153,000, $5,222,000 and
$1,960,000, respectively, to the then current shareholders of the Company.
Additionally, during the second quarter of 1997, the Company declared a
dividend to the then current shareholders of the Company, William Cruz and
Ralph Cruz, of the Company's former office facilities located at 9200 Sunset
Drive, Miami, Florida 33173. The carrying value of the facility on the
Company's books was approximately $507,000, which the Company believes is not
substantially less than the fair market value of the facility. For certain
information regarding the Dividend paid by the Company in 1997 prior to
consummation of this offering, see "Distribution of S Corporation Earnings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
19
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1997 (i) the actual
capitalization of the Company, (ii) the capitalization of the Company on a pro
forma basis to give effect to the items referred to in footnote (2) below and
(iii) such pro forma capitalization as adjusted to give effect to the sale by
the Company of the 2,600,000 shares of Common Stock offered hereby and the
application of the net proceeds therefrom. See "Use of Proceeds." This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------
PRO PRO FORMA
ACTUAL FORMA(2) AS ADJUSTED
-------- ---------- ------------
(In thousands, except per share
data)
<S> <C> <C> <C>
Short-term obligations ............................................. $ -- $10,622 $ --
======= ======== ========
Shareholders' equity:
Preferred Stock, $0.01 par value per share, 25,000,000 shares
authorized, none issued and outstanding, actual, pro forma and pro
forma as adjusted ................................................ -- -- --
Common Stock, $0.01 par value per share, 100,000,000 shares
authorized; 19,480,000 shares issued and outstanding actual and pro
forma; and 22,080,000 shares issued and outstanding pro forma as
adjusted(1) ...................................................... 195 195 221
Additional paid-in capital (deficit) .............................. 44 (2,010) 23,912
Retained earnings ................................................ 7,568 -- --
------- -------- --------
Total shareholders' equity (deficit) ........................... 7,807 (1,815) 24,133
------- -------- --------
Total capitalization .......................................... $7,807 $ 8,807 $24,133
======= ======== ========
</TABLE>
- -------------
(1) Excludes (i) 910,750 shares of Common Stock issuable upon exercise of stock
options granted under the Incentive Stock Plan as of August 25, 1997, with
a weighted average exercise price of $2.04 per share; (ii) 2,089,250
additional shares of Common Stock reserved for future issuance under the
Incentive Stock Plan (including up to 150,000 shares which the Company
intends to issue to certain persons (other than executive officers) on or
prior to the date of this Prospectus, of which approximately 100,000
shares will be issued at an exercise price equal to the initial public
offering price); (iii) 175,000 shares of Common Stock reserved for
issuance under the Director Stock Plan; and (iv) 500,000 shares of Common
Stock reserved for issuance under the Purchase Plan. See
"Management--Other Compensation Arrangements" and Note 4 of Notes to
Financial Statements.
(2) Reflects the pro forma effects of (i) the distribution of the Dividend
estimated at $10.6 million based on the Company's previously undistributed
S corporation earnings through June 30, 1997 (although the actual amount
of the Dividend also includes the taxable income of the Company for the
period from July 1, 1997 through the termination of the S corporation
election) funded by a short-term bank loan the Company obtained prior to
the consummation of this offering, (ii) the recording of deferred tax
assets, net of tax liabilities, in the amount of $1.0 million arising from
termination of S corporation status and (iii) the reclassification of
remaining undistributed S corporation earnings to additional paid-in
capital. See "Distribution of S Corporation Earnings," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and Note 7 of Notes to Financial Statements.
20
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997
was $(1,815,000), or $(0.09) per share of Common Stock. Pro forma net tangible
book value per share represents the amount of total pro forma tangible assets
less total pro forma liabilities, divided by the number of shares of Common
Stock outstanding. Pro forma net tangible book value dilution per share
represents the difference between the amount paid by purchasers of Common Stock
in this offering and the pro forma net tangible book value per share of Common
Stock immediately after completion of this offering. After giving effect to the
sale of the 2,600,000 shares of Common Stock offered by the Company hereby at
the initial public offering price of $11.00 per share, and the application of
the estimated net proceeds therefrom, the adjusted pro forma net tangible book
value of the Company as of June 30, 1997 would have been $24,133,000, or $1.09
per share. This represents an immediate increase in pro forma net tangible book
value of $1.18 per share to existing shareholders and an immediate dilution of
$9.91 per share to new investors purchasing shares of Common Stock in this
offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share .................................... $ 11.00
Pro forma net tangible book value per share at June 30, 1997(1) ............ $ (0.09)
Increase per share attributable to new investors ........................... 1.18
-------
Adjusted pro forma net tangible book value per share after this offering(2) 1.09
--------
Dilution per share to new investors .......................................... $ 9.91
========
</TABLE>
- -------------
(1) Reflects the effect of the Dividend and other pro forma adjustments
described in "Distribution of S Corporation Earnings" and Note 7 of Notes
to Financial Statements.
(2) Excludes 910,750 shares of Common Stock issuable upon exercise of stock
options granted under the Incentive Stock Plan as of August 25, 1997, with
a weighted average exercise price of $2.04 per share. See
"Management--Other Compensation Arrangements."
The following table summarizes, on a pro forma basis, as of June 30, 1997,
the differences between number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price paid per share by
existing shareholders and by new investors in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
------------------------ ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing shareholders ...... 19,480,000 88.2% $ 56,000 0.2% $ 0.003
New investors ............... 2,600,000 11.8 28,600,000 99.8 11.00
----------- ------ ------------ ------
Total .................. 22,080,000 100.0% $28,656,000 100.0%
=========== ====== ============ ======
</TABLE>
- -------------
(1) Sales by the Selling Shareholders in this offering will cause the number of
shares held by existing shareholders to be reduced to 18,380,000 shares,
or 83.2% (18,215,000 shares, or 81.1%, if the Underwriters' over-allotment
option is exercised in full) of the total number of shares of Common Stock
to be outstanding after this offering, and will increase the number of
shares held by the new investors to 3,700,000 shares, or 16.8% (4,255,000
shares, or 18.9%, if the Underwriters' over-allotment option is exercised
in full) of the total number of shares of Common Stock to be outstanding
after this offering. See "Principal and Selling Shareholders."
21
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are qualified by reference to and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Financial
Statements and Notes thereto included elsewhere in this Prospectus. The
Statement of Income Data presented below for each of the years in the three-
year period ended December 31, 1996 and the Balance Sheet Data as of December
31, 1995 and 1996 have been derived from the Company's Financial Statements
included elsewhere in this Prospectus, which have been audited by Arthur
Andersen LLP. The Statement of Income Data presented below for the year ended
December 31, 1993 and the Balance Sheet Data as of December 31, 1994 have been
derived from audited financial statements not included herein. The Balance
Sheet Data as of December 31, 1992 and 1993 and as of June 30, 1997, and the
Statement of Income Data for the year ended December 31, 1992, and for each of
the six-month periods ended June 30, 1996 and 1997 have been derived from the
unaudited financial statements of the Company. In the opinion of management,
the unaudited financial statements include all adjustments (consisting only of
normal and recurring adjustments) necessary for a fair presentation of its
financial position and the results of operations for such periods. The selected
financial data for the six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the year ending December 31, 1997
or any other future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Licensing fees ................................................ $ 3,040 $ 5,593 $ 7,853 $ 7,913 $13,943
Other revenues ................................................ -- -- 707 1,502 3,877
-------- -------- -------- -------- --------
Total revenues ................................................ 3,040 5,593 8,560 9,415 17,820
-------- -------- -------- -------- --------
Operating expenses:
Cost of licensing fees .......................................... 243 377 831 876 1,717
Product development ............................................. 184 320 492 652 1,041
Sales and marketing ............................................. 1,174 1,832 2,712 3,561 5,618
General and administrative .................................... 404 657 798 1,038 2,422
-------- -------- -------- -------- --------
Total operating expenses ....................................... 2,005 3,186 4,833 6,127 10,798
-------- -------- -------- -------- --------
Income from operations .......................................... 1,035 2,407 3,727 3,288 7,022
Other income, net ................................................ 25 31 18 24 60
-------- -------- -------- -------- --------
Income before pro forma income taxes ........................... 1,060 2,438 3,745 3,312 7,082
Pro forma income taxes(1) ....................................... 419 963 1,479 1,308 2,797
-------- -------- -------- -------- --------
Pro forma net income(1) .......................................... $ 641 $ 1,475 $ 2,266 $ 2,004 $ 4,285
======== ======== ======== ======== ========
Pro forma net income per share(1)(2) ........................... $ 0.21
========
Pro forma weighted average number of shares outstanding(2) ...... 20,541
========
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1996 1997
--------- --------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Licensing fees ................................................ $ 6,322 $12,092
Other revenues ................................................ 1,787 2,527
-------- --------
Total revenues ................................................ 8,109 14,619
-------- --------
Operating expenses:
Cost of licensing fees .......................................... 881 856
Product development ............................................. 377 843
Sales and marketing ............................................. 2,603 4,946
General and administrative .................................... 998 2,595
-------- --------
Total operating expenses ....................................... 4,859 9,240
-------- --------
Income from operations .......................................... 3,250 5,379
Other income, net ................................................ 9 18
-------- --------
Income before pro forma income taxes ........................... 3,259 5,397
Pro forma income taxes(1) ....................................... 1,287 2,132
-------- --------
Pro forma net income(1) .......................................... $ 1,972 $ 3,265
======== ========
Pro forma net income per share(1)(2) ........................... $ 0.15
========
Pro forma weighted average number of shares outstanding(2) ...... 21,186
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997
-------------------------------------------- -----------------------------------
PRO PRO FORMA
1992 1993 1994 1995 1996 ACTUAL FORMA(3) AS ADJUSTED(4)
-------- -------- -------- -------- -------- -------- ---------- ---------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ...... $1,129 $ 368 $ 129 $ 311 $ 142 $ 264 $ 264 $15,590
Working capital (deficit) ...... 1,172 705 936 1,997 3,629 6,828 (2,794) 23,154
Total assets .................. 1,992 1,810 2,197 3,288 5,803 9,257 12,081 27,407
Short-term obligations ......... -- -- -- -- -- -- 10,622 --
Shareholders' equity (deficit) 1,814 1,534 1,811 2,970 4,835 7,807 (1,815) 24,133
</TABLE>
- -------------
(1) The statement of income data reflects a pro forma provision for income
taxes as if the Company had been a C corporation subject to federal and
state corporate income taxes for all periods. See "Distribution of S
Corporation Earnings" and Note 1 of Notes to Financial Statements.
(2) Pro forma weighted average number of shares outstanding includes 321,000
and 966,000 shares for the year ended December 31, 1996 and the six-month
period ended June 30, 1997, respectively, at the initial public offering
price of $11.00 per share, the proceeds of which would fund undistributed
S corporation earnings. See "Distribution of S Corporation Earnings" and
Note 1 of Notes to Financial Statements.
(3) Reflects the effect of the dividend to current shareholders and other pro
forma adjustments described in "Distribution of S Corporation Earnings"
and Note 7 of Notes to Financial Statements.
(4) Adjusted to give effect to the sale of the Common Stock offered by the
Company hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS SUGGESTED BY THE FORWARD-LOOKING STATEMENTS AND FROM THE RESULTS
HISTORICALLY EXPERIENCED. FACTORS THAT MAY CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Omega Research, founded in 1982, is a leading provider of real-time
investment analysis software to individual investors. In addition, the
Company's principal product has recently been introduced to institutional
investors by Dow Jones Markets.
The Company's revenues are derived principally from two sources: (i)
licensing fees for use of the Company's software products, and (ii) other
revenues consisting primarily of royalties, fees and commissions paid to the
Company in accordance with its agreements with third-party data vendors.
Licensing fees are recognized upon product shipment in accordance with
Statement of Position 91-1, SOFTWARE REVENUE RECOGNITION. While the Company has
no obligation to perform future services subsequent to shipment, the Company
voluntarily provides telephone, fax and electronic mail customer support to
purchasers of its products. The Company currently does not charge a fee for the
use of customer support. The costs associated with these services are
insignificant in relation to product value.
Substantially all of the Company's licensing fees have been derived from
the sale of products to individual investors. TRADESTATION, OPTIONSTATION and
SUPERCHARTS are sold primarily by the Company's telesales force. To date, a
majority of the licensing fees have been generated through sales of
TRADESTATION. For sales of most of the Company's products, customers typically
provide the Company with a credit card number and are billed for the product
automatically and on a monthly basis over the course of twelve months. The
Company's WALL STREET ANALYST product, which does not represent a material
portion of the Company's revenues, is sold through the retail channel by
distributors and to a lesser extent through third-party mail order catalogs.
The majority of the Company's other revenues for the year ended December
31, 1996 was derived from royalties associated with a licensing agreement with
Dow Jones Markets. Under existing agreements with Dow Jones Markets, Dow Jones
Markets has the right to sell TRADESTATION and SUPERCHARTS to its customers.
Dow Jones Markets pays a per unit royalty to the Company, subject to a minimum
annual royalty commitment with respect to TRADESTATION sales. The majority of
the remaining other revenues is comprised of fees and commissions paid to the
Company pursuant to cross-marketing agreements with data service vendors. Other
revenues are recognized as earned in accordance with the terms of the
applicable contract.
The Company provides customers with a 30-day right of return and, as a
result, records a provision for estimated returns at the time of sale.
Depending on the circumstances, the Company often allows customers to return
products after the 30-day period. The reserve for returns and the provision for
bad debts, in accordance with generally accepted accounting principles, are
estimated based on historical experience and other relevant factors and there
is no certainty that future returns or bad debts will not exceed established
estimates. As a result of recently expanded marketing and sales efforts,
including television advertising, the Company has reached a broader audience
which includes more individuals who are not necessarily suited to use the
Company's products. Consequently, the Company's rate of returns and provision
for bad debts have increased over the last several quarters. There can be no
assurance that this trend will not continue. See "Risk Factors--Risks of
Returns and Collection of Accounts Receivable."
Approximately 9.3% of the Company's revenues for the year ended December
31, 1996 were derived from customers outside of the United States and Canada.
The Company markets its products outside the United States and Canada primarily
through resellers and, to a lesser extent, through its U.S.-based telesales
force in
23
<PAGE>
response to inbound inquiries from international customers. The Company intends
to focus increased resources on international sales efforts and therefore
believes that international revenues will increase as a percentage of total
revenues in the future.
In accordance with Statement of Financial Accounting Standards No. 86,
ACCOUNTING FOR THE COST OF CAPITALIZED SOFTWARE TO BE SOLD, LEASED OR OTHERWISE
MARKETED, the Company examines its software development costs after
technological feasibility has been established to determine the amount of
capitalization that is required. Based on the Company's product development
process, technological feasibility is established upon completion of a working
model. The costs that are capitalized are amortized on the straight-line basis
over a one-year period, the period of benefit of the related products.
Capitalized software development costs, net of amortization, were $61,000,
$71,000 and $0 at December 31, 1995 and 1996 and June 30, 1997, respectively.
In the future, the Company believes that the time between the technological
feasibility of the Company's products and the general release of such software
will be insignificant, and, as a result, software development costs qualifying
for capitalization are expected to be immaterial.
In 1988, the Company elected to be taxed under Subchapter S of the Code,
and, as a result, the Company's earnings have been taxed at the federal level
directly to the Company's shareholders (the state of Florida does not have a
personal income tax). Immediately prior to completion of this offering, the
Company will terminate its S corporation election and will be subject to
corporate-level federal and state income taxes. As a result of terminating this
election, the Company, during the quarter in which the offering is completed,
will be required to record a non-recurring credit (the "FAS 109 credit") in the
tax provision line of the statement of income. The credit to be recorded
represents the recognition of net deferred tax assets arising from the book and
tax basis differences that arise primarily as a result of accounts receivable
reserves. The FAS 109 credit, net of the provision for taxes payable described
below, would have been approximately $1.0 million as of June 30, 1997 if the S
corporation election had been terminated as of that date.
Since its inception, the Company has used for determining taxable income
the cash method of accounting rather than the accrual method of accounting. In
July 1997, the Company voluntarily filed with the IRS a Form 3115 to change to
the accrual method and to report income that should have been reported had the
accrual method been used. The effect of the change in method of accounting for
tax purposes permitted by the filing of Form 3115 is that the Company will, as
of the date the S corporation election is terminated, assuming no adjustments
are required, have additional taxable income in 1997 and 1998 aggregating
approximately $4.6 million, resulting in additional federal and state income
tax of approximately $1.8 million, payable one-half in each of 1997 and 1998.
Shortly after, though not as a result of, the filing of the Form 3115, the
Company received a notice that the IRS intends to perform an examination of the
Company's 1995 tax year (the "Examination").
Final acceptance of the Form 3115 is subject to review by the IRS. Should
the review of the Form 3115 or the Examination (or any other examinations)
result in the current shareholders being allocated taxable earnings for 1997 or
prior years in excess of the amounts contemplated by the Form 3115, the
Dividend (see "Distribution of S Corporation Earnings") shall be increased by
an amount equal to the current shareholders' tax liability attributable to such
excess, up to a maximum adjustment of $1.8 million. In that event, the expected
approximate $1.8 million tax liability of the Company would be reduced to the
extent of such increase.
The pro forma income tax adjustment in the Company's historical financial
statements reflects the federal and state income taxes which would have been
recorded if the Company had been treated as a C corporation during the periods
presented. The Company has calculated these amounts based upon an estimated
combined effective tax rate of 39.5% for the respective periods.
24
<PAGE>
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in
the Company's statement of income reflected as a percentage of total revenues
and as a percentage of licensing fees:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Licensing fees ........................... 91.7% 84.0% 78.2% 78.0% 82.7%
Other revenues ........................... 8.3 16.0 21.8 22.0 17.3
------ ------ ------ ------ ------
Total revenues ........................... 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------
Operating expenses:
Cost of licensing fees .................. 9.7 9.3 9.6 10.9 5.9
Product development ..................... 5.7 6.9 5.9 4.6 5.8
Sales and marketing ..................... 31.7 37.8 31.5 32.1 33.8
General and administrative ............... 9.3 11.0 13.6 12.3 17.7
------ ------ ------ ------ ------
Total operating expenses ............... 56.4 65.0 60.6 59.9 63.2
------ ------ ------ ------ ------
Income from operations ..................... 43.6 35.0 39.4 40.1 36.8
Other income, net ........................ 0.2 0.2 0.3 0.1 0.1
------ ------ ------ ------ ------
Income before pro forma income taxes ...... 43.8 35.2 39.7 40.2 36.9
Pro forma income taxes ..................... 17.3 13.9 15.7 15.9 14.6
------ ------ ------ ------ ------
Pro forma net income ..................... 26.5% 21.3% 24.0% 24.3% 22.3%
====== ====== ====== ====== ======
AS A PERCENTAGE OF LICENSING FEES:
Operating expenses:
Cost of licensing fees .................. 10.6% 11.1% 12.3% 13.9% 7.1%
Product development ..................... 6.3 8.2 7.5 6.0 7.0
Sales and marketing ..................... 34.5 45.0 40.2 41.2 40.9
General and administrative ............... 10.1 13.1 17.4 15.8 21.4
------ ------ ------ ------ ------
Total operating expenses ............... 61.5% 77.4% 77.4% 76.9% 76.4%
====== ====== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
REVENUES
TOTAL REVENUES. The Company's total revenues increased 80% from $8.1 million
in the first six months of 1996 to $14.6 million in the comparable period of
1997.
LICENSING FEES. Licensing fees increased 91% from $6.3 million in the first
six months of 1996 to $12.1 million in the comparable period of 1997, primarily
due to an increase in TRADESTATION sales (an approximate 56% increase in net
unit shipments and a 5% increase in list price in January 1997) and, to a
lesser extent, the introduction of OPTIONSTATION in September 1996. The Company
believes that the increased net unit shipments of TRADESTATION were due to new
marketing efforts, an emphasis on providing customers with the ability to pay
for products monthly over a 12-month period and growth in the Company's sales
and marketing organization. The Company has increased its returns reserves
during the first six months of 1997 to provide for the impact that its new
marketing efforts may have on returns.
OTHER REVENUES. Other revenues increased 41% from $1.8 million in the first
six months of 1996 to $2.5 million in the comparable period of 1997, primarily
due to an increase in minimum royalties under the license agreement with Dow
Jones Markets and increased cross-marketing commissions from data vendors which
resulted from an increase in licensing fees.
25
<PAGE>
OPERATING EXPENSES
COST OF LICENSING FEES. Cost of licensing fees consists primarily of product
media, packaging and storage and inventory costs. Cost of licensing fees
decreased 3% from $881,000 in the first six months of 1996 to $856,000 in the
comparable period of 1997, primarily due to increased sales of higher-priced
products as a percentage of total unit sales and the shipment of significant
product upgrades in the first six months of 1996 which did not recur in 1997.
The Company has no contractual obligation to provide upgrades, which are priced
separately from initially-licensed products. Cost of licensing fees as a
percentage of licensing fees declined from 14% in the first six months of 1996
to 7% in the comparable period of 1997, primarily due to increased unit sales
of higher-priced products as a percentage of total unit sales.
PRODUCT DEVELOPMENT. Product development expenses include expenses associated
with the development of new products, enhancements to existing products,
testing of products and the creation of training manuals, and consist primarily
of salaries, other personnel costs and depreciation of computer and related
equipment. Product development expenses increased 124% from $377,000 in the
first six months of 1996 to $843,000 in the comparable period of 1997,
primarily due to an increase in the number of individuals employed in product
development. Product development expenses as a percentage of licensing fees
increased from 6% in the first six months of 1996 to 7% in the comparable
period of 1997, primarily due to the increase in product development personnel.
The Company believes that a significant level of product development
expenditures will be required to remain competitive, particularly as it enters
the institutional investor market. Accordingly, the Company anticipates that
the dollar amount of product development expense will increase for the
foreseeable future.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries for the customer support center and marketing personnel, commissions
and other personnel costs, shipping costs and marketing programs, including
advertising, brochures, direct mail programs and seminars to promote the
Company's products to investors. Sales and marketing expenses increased 90%
from $2.6 million in the first six months of 1996 to $4.9 million in the
comparable period of 1997, primarily due to increased advertising (including
print advertising, the use of sales seminars and television advertising) of
$1.2 million, personnel costs for the customer support center and commissions
of $628,000, shipping costs of $248,000 and telephone expenses of $142,000.
Sales and marketing expenses as a percentage of licensing fees did not change
significantly in the first six months of 1996 as compared to the comparable
period of 1997. The Company expects to continue hiring additional personnel and
anticipates that sales and marketing expenses will increase in absolute dollar
amount at least through the remainder of 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee related costs for support functions such as executive,
human resources, finance, information systems and administrative personnel as
well as external professional fees, rent and other facilities expense and
provision for bad debts. General and administrative expenses increased 160%
from $998,000 in the first six months of 1996 to $2.6 million in the comparable
period of 1997, primarily due to increases in the provision for bad debts
associated with increased revenues and in personnel to manage the growth of the
Company and rent related to the Company's new corporate headquarters. The
Company believes that the dollar amount of its general and administrative
expenses will increase as the Company incurs additional costs (including
directors' and officers' liability insurance, investor relations costs and
increased professional fees) related to being a public company.
OTHER INCOME, NET
Other income, net consists primarily of interest income from cash and cash
equivalents. Other income, net increased from $9,000 in the first six months of
1996 to $18,000 in the comparable period of 1997. The Company generally invests
in interest-bearing accounts and overnight investments. The amount of interest
income fluctuates based on the amount of funds available for investment and the
prevailing interest rates.
26
<PAGE>
YEARS ENDED DECEMBER 31, 1995 AND 1996
REVENUES
TOTAL REVENUES. The Company's total revenues increased 89% from $9.4 million
in 1995 to $17.8 million in 1996.
LICENSING FEES. Licensing fees increased 76% from $7.9 million in 1995 to
$13.9 million in 1996, primarily due to an increase in TRADESTATION sales (an
approximate 51% increase in net unit shipments and a 20% increase in list price
in March 1996) and, to a lesser extent, increased sales of SUPERCHARTS and
add-on products and the introduction of OPTIONSTATION in September 1996. The
Company believes that the increased net unit shipments of TRADESTATION were due
to the release of version 4.0 and increased marketing efforts.
OTHER REVENUES. Other revenues increased 158% from $1.5 million in 1995 to
$3.9 million in 1996, primarily due to the commencement of royalties under the
Company's license agreement with Dow Jones Markets and, to a lesser extent,
increased cross-marketing commissions from data vendors which resulted from an
increase in licensing fees.
OPERATING EXPENSES
COST OF LICENSING FEES. Cost of licensing fees increased 96% from $876,000 in
1995 to $1.7 million in 1996, primarily due to increased product unit
shipments. Cost of licensing fees as a percentage of licensing fees increased
slightly from 11% in 1995 to 12% in 1996 due to a shift in product mix.
PRODUCT DEVELOPMENT. Product development expenses increased 60% from $652,000
in 1995 to $1.0 million in 1996, primarily due to an increase in the number of
individuals employed in product development. Product development expenses
represented 8% and 7% of licensing fees in each of 1995 and 1996, respectively.
SALES AND MARKETING. Sales and marketing expenses increased 58% from $3.6
million in 1995 to $5.6 million in 1996 primarily due to increased personnel
costs and commissions of $1.4 million, shipping costs of $413,000, travel and
trade convention expenses of $162,000 and telephone expenses of $66,000. Sales
and marketing expenses represented 45% and 40% of licensing fees in 1995 and
1996, respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
133% from $1.0 million in 1995 to $2.4 million in 1996, primarily due to
increases in the provision for bad debts associated with increased revenues, in
personnel and related expenses to manage the growth of the Company, in
insurance expense and incremental expenses related to the move by the Company
to a new corporate headquarters. General and administrative expenses
represented 13% and 17% of licensing fees in 1995 and 1996, respectively.
OTHER INCOME, NET
Other income, net increased 151% from $24,000 in 1995 to $60,000 in 1996,
primarily due to increased interest income earned on cash balances.
YEARS ENDED DECEMBER 31, 1994 AND 1995
REVENUES
TOTAL REVENUES. The Company's total revenues increased 10% from $8.6 million
in 1994 to $9.4 million in 1995.
LICENSING FEES. Licensing fees remained relatively flat in 1995 as compared
to 1994. Licensing fees did not change appreciatively in 1995 as the Company's
senior management and its then limited sales and marketing resources were
focused on developing its relationship with Dow Jones Markets and exploring the
establishment
27
<PAGE>
of a retail sales channel for WALL STREET ANALYST. This focus on the Dow Jones
Markets relationship and retail channel development temporarily diverted
resources away from sales and marketing efforts in support of the Company's
TRADESTATION and SUPERCHARTS products.
OTHER REVENUES. Other revenues increased 113% from $707,000 in 1994 to $1.5
million in 1995, primarily due to increased cross-marketing commissions from
data vendors.
OPERATING EXPENSES
COST OF LICENSING FEES. Cost of licensing fees increased 5% from $831,000 in
1994 to $876,000 in 1995, primarily due to slight increases in the cost of
product material. Cost of licensing fees as a percentage of licensing fees
represented 11% in each of 1994 and 1995.
PRODUCT DEVELOPMENT. Product development expenses increased 32% from $492,000
in 1994 to $652,000 in 1995, primarily due to an increase in the number of
individuals employed in product development. Product development expenses
represented 6% and 8% of licensing fees in 1994 and 1995, respectively.
SALES AND MARKETING. Sales and marketing expenses increased 31% from $2.7
million in 1994 to $3.6 million in 1995 primarily due to increased advertising
of $390,000, commissions of $307,000 and telephone expenses of $63,000. Sales
and marketing expenses represented 35% and 45% of licensing fees in 1994 and
1995, respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 30%
from $798,000 in 1994 to $1.0 million in 1995, primarily due to increases in
personnel to manage the growth of the Company, professional fees and property
taxes. General and administrative expenses represented 10% and 13% of licensing
fees in 1994 and 1995, respectively.
OTHER INCOME, NET
Other income, net increased 30% from $18,000 in 1994 to $24,000 in 1995,
primarily due to increased interest income earned on cash balances.
28
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables present certain unaudited quarterly financial data
for each of the six quarters ended June 30, 1997. This information has been
prepared on the same basis as the audited Financial Statements and Notes
thereto appearing elsewhere in this Prospectus and includes, in the opinion of
the Company, all adjustments (consisting only of normal and recurring
adjustments) necessary to present fairly the quarterly results when read in
conjunction with the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
---------- ---------- ----------- ---------- ---------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Licensing fees ........................... $ 2,926 $ 3,396 $ 3,870 $ 3,751 $ 5,550 $ 6,542
Other revenues ........................... 872 915 1,098 992 1,123 1,404
-------- -------- -------- -------- -------- --------
Total revenues ........................ 3,798 4,311 4,968 4,743 6,673 7,946
-------- -------- -------- -------- -------- --------
Operating expenses:
Cost of licensing fees .................. 332 549 462 374 388 468
Product development ..................... 144 233 322 342 364 479
Sales and marketing ..................... 1,161 1,442 1,543 1,472 1,996 2,950
General and administrative ............... 496 502 568 856 1,263 1,332
-------- -------- -------- -------- -------- --------
Total operating expenses ............... 2,133 2,726 2,895 3,044 4,011 5,229
-------- -------- -------- -------- -------- --------
Income from operations ..................... 1,665 1,585 2,073 1,699 2,662 2,717
Other income, net ........................ 4 5 39 12 7 11
-------- -------- -------- -------- -------- --------
Income before pro forma income taxes ...... 1,669 1,590 2,112 1,711 2,669 2,728
Pro forma income taxes ..................... 659 628 834 676 1,054 1,078
-------- -------- -------- -------- -------- --------
Pro forma net income ........................ $ 1,010 $ 962 $ 1,278 $ 1,035 $ 1,615 $ 1,650
======== ======== ======== ======== ======== ========
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Licensing fees ........................... 77.1% 78.8% 77.9% 79.1% 83.2% 82.3%
Other revenues ........................... 22.9 21.2 22.1 20.9 16.8 17.7
-------- -------- -------- -------- -------- --------
Total revenues ........................ 100.0 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- -------- -------- --------
Operating expenses:
Cost of licensing fees .................. 8.7 12.7 9.3 7.9 5.8 5.9
Product development ..................... 3.8 5.4 6.5 7.2 5.5 6.0
Sales and marketing ..................... 30.6 33.5 31.1 31.1 29.9 37.1
General and administrative ............... 13.0 11.6 11.4 18.0 18.9 16.8
-------- -------- -------- -------- -------- --------
Total operating expenses ............... 56.1 63.2 58.3 64.2 60.1 65.8
-------- -------- -------- -------- -------- --------
Income from operations ..................... 43.9 36.8 41.7 35.8 39.9 34.2
Other income, net ........................ 0.1 0.1 0.8 0.3 0.1 0.1
-------- -------- -------- -------- -------- --------
Income before pro forma income taxes ...... 44.0 36.9 42.5 36.1 40.0 34.3
Pro forma income taxes ..................... 17.4 14.6 16.8 14.3 15.8 13.5
-------- -------- -------- -------- -------- --------
Pro forma net income ..................... 26.6% 22.3% 25.7% 21.8% 24.2% 20.8%
======== ======== ======== ======== ======== ========
AS A PERCENTAGE OF LICENSING FEES:
Operating expenses:
Cost of licensing fees .................. 11.3% 16.2% 11.9% 10.0% 7.0% 7.1%
Product development ..................... 4.9 6.8 8.3 9.1 6.5 7.3
Sales and marketing ..................... 39.7 42.5 39.9 39.3 36.0 45.1
General and administrative ............... 17.0 14.8 14.7 22.8 22.8 20.4
-------- -------- -------- -------- -------- --------
Total operating expenses ............... 72.9% 80.3% 74.8% 81.2% 72.3% 79.9%
======== ======== ======== ======== ======== ========
</TABLE>
29
<PAGE>
The Company's revenues and operating expenses by quarter increased
sequentially during 1996 and 1997, except for revenues in the fourth quarter of
1996. The Company believes that the sequential decrease in revenues during the
fourth quarter of 1996 was primarily due to the impact of the release of
certain product upgrades and the receipt of certain one-time payments from
certain third parties in the third quarter of 1996. Other revenues in the
second quarter of 1997 also reflect an approximate $200,000 one-time payment
from Dow Jones Markets for the delivery of certain upgrades for Dow Jones
TradeStation. It is expected that, in the future, product upgrades and
releases, or lump-sum payments related to other revenues, will impact the
Company's revenues and results of operations on a quarterly basis.
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
from quarter to quarter in the future. Such fluctuations may result in
volatility in the price of the Common Stock. As budgeted expenses are based
upon expected revenues, if actual revenues on a quarterly basis are below
management's expectations, then results of operations are likely to be
adversely affected because a relatively small amount of the Company's expenses
varies with its revenues in the short term. In addition, operating results may
fluctuate based upon the timing of product releases, increased competition,
variations in the mix of sales, announcements of new products by the Company or
its competitors and other factors. Such fluctuations may result in volatility
in the price of the Common Stock. See "Risk Factors--Potential Fluctuations in
Quarterly Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded operations and financed growth
and capital expenditures through cash provided by operations. The Company
obtained a short-term bank loan prior to completion of this offering in order to
pay the estimated Dividend. Such loan is on commercially reasonable terms and
will be repaid with a portion of the net proceeds of this offering.
Cash provided by operating activities totaled $3.6 million, $2.4 million,
$5.6 million and $2.7 million in 1994, 1995, 1996 and the first six months of
1997, respectively. The decrease in cash provided by operations in 1995 was
primarily attributable to the decrease in net income for the year ended
December 31, 1995 when compared to net income for 1994. The increase in net
cash provided by operations in 1996 and 1997 was primarily attributable to
increased net income of the Company. Cash provided by operating activities was
reduced by increases in receivables of $600,000, $1.2 million, $3.2 million and
$4.8 million in 1994, 1995, 1996 and the first six months of 1997,
respectively. Accounts receivable increased as a result of increased sales
generated by expanded marketing and sales efforts. Although the Company has,
since 1992, granted its customers extended payment terms, only recently have
they been extended from 10 to 12 months.
The Company's investing activities used cash of $300,000, $101,000,
$541,000 and $630,000 in 1994, 1995, 1996 and the first six months of 1997,
respectively. The principal use of cash in investing activities was for capital
expenditures related to the acquisition of computer and related equipment and
software required to support expansion of the Company's operations. Capital
expenditures in 1997 also include purchases of furniture and fixtures and
leasehold improvements related to the Company's move to a new corporate
headquarters in February 1997.
The Company's financing activities used cash of $3.5 million, $2.2
million, $5.2 million and $2.0 million in 1994, 1995, 1996 and the first six
months of 1997, respectively, principally as a result of distributions to the
Company's shareholders.
As of June 30, 1997, the Company had cash and cash equivalents of
approximately $264,000 and working capital of approximately $6.8 million. The
Company believes that the net proceeds from the sale of the Common Stock in
this offering, together with existing cash balances and cash flow from
operations, will be sufficient to meet its normal working capital and capital
expenditure requirements through 1998. Thereafter, if cash generated by
operations is insufficient to satisfy the Company's operating requirements, the
Company will require additional debt or equity financing. There can be no
assurance that such financing will be available on terms acceptable to the
Company, or at all. The sale of additional equity or debt securities could
result in dilution to the Company's shareholders. See "Risk Factors--Future
Capital Needs" and "Use of Proceeds."
30
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 128, EARNINGS PER SHARE
("SFAS 128") which changes the method of calculating earnings per share. SFAS
128 requires the presentation of "basic" earnings per share and "diluted"
earnings per share on the face of the income statement. Basic earnings per
share is computed by dividing the net income available to common shareholders
by the weighted average shares of outstanding common stock. The calculation of
diluted earnings per share is similar to basic earnings per share except that
the denominator includes dilutive common stock equivalents such as stock
options and warrants. The statement is effective for financial statements for
periods ending after December 15, 1997. The Company will adopt SFAS 128 in the
fourth quarter of 1997, as early adoption is not permitted. The following table
presents pro forma earnings per share amounts calculated in accordance with
SFAS 128.
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
------------------- -----------------
Pro forma earnings per share:
Basic earnings per share ......... $ 0.22 $ 0.17
Diluted earnings per share ...... 0.21 0.15
31
<PAGE>
BUSINESS
OVERVIEW
Omega Research is a leading provider of real-time investment analysis
software for the Microsoft Windows operating system. The Company's principal
products are TRADESTATION, OPTIONSTATION and SUPERCHARTS. With the 1991 release
of its flagship product, TRADESTATION, Omega Research pioneered the concept of
utilizing the power of the personal computer to enable investors to
historically test the profitability of their own investment and trading
strategies and then computer-automate those strategies to generate real-time
buy and sell signals. OPTIONSTATION enables investors who are not options
experts or mathematicians to benefit from advanced stock, index and futures
options trading strategies, and SUPERCHARTS provides investors with
state-of-the-art technical analysis capabilities. The Company designs its
products as PLATFORM APPLICATIONS: unique software applications that also serve
as platforms for independent third-party solutions. Over 150 independent
developers have developed software products for the Omega Research Platform.
INDUSTRY BACKGROUND
In the last 25 years there has been unprecedented growth in the financial
markets as increasing amounts of capital have been actively invested in an
effort to generate superior returns. According to the Investment Company
Institute, total financial assets of U.S. households were $14.0 trillion at the
end of 1995, and are expected to grow to over $22.5 trillion by the year 2000.
Traditionally, financial instruments were held to maturity or for long
investment horizons, but in today's environment of abundant data flow and low
transaction costs, financial instruments are increasingly being actively
traded. Average daily trading volume on the New York Stock Exchange has grown
from 18.6 million shares in 1975 to 503.5 million shares in 1997. Nasdaq daily
trading volume has grown even faster, from an average of 5.5 million shares in
1975 to 607.9 million shares in 1997.
Increased investment and trading activity is being driven by both
individual and institutional investors. Forrester Research, a market research
firm, estimates that by the year 2000 over $46 billion in financial assets will
be managed over the Internet by individuals. Through the advent of
self-directed 401(k) plans and improved awareness and knowledge of the
financial markets, individual investors are increasingly seeking to self-manage
their financial assets. The broad availability of financial information online
has enabled individual investors to become more sophisticated and knowledgeable
about investing, having experienced greater access to stock quotes, financial
market data, investment advice and other investment information through the
Internet or through other online services. In addition to increased information
flows, the increased popularity and proliferation of discount brokerage and
online trading systems such as E-Schwab and E-Trade have resulted in reduced
transaction costs to the individual investor, thereby facilitating the increase
in investment activity.
Investment and trading activity has also increased significantly among
institutional investors, including mutual funds, pension funds, hedge funds,
savings institutions and brokerage firms. According to a report by Putnam,
Lovell & Thorton, a firm that conducts market research on the investment
management industry, total financial assets managed by the U.S. money
management industry grew from $1.4 trillion in 1980 to $10.3 trillion at the
end of 1995. In addition, the number of mutual funds in the United States has
doubled from 3,105 in 1990 to 6,293 in 1996. This proliferation of funds,
together with increasing competitiveness among institutions seeking to deliver
superior investment returns to their customers, has contributed to increased
investment and trading activity by institutional investors.
Investors, both individual and institutional, require financial market
data to make their investment or trading decisions. Investors today have access
to large quantities of financial market data increasingly being offered on a
real-time basis at substantially lower cost than ever before. Data are readily
available from a variety of data vendors, including companies such as Dow Jones
Markets, ADP, Bloomberg, Bridge Information Systems, Commodity Quote Graphics,
FutureSource, ILX, Reuters and S&P ComStock, all of which generally serve the
institutional market, and BMI, DTN, Dial/Data, Signal, Telescan and TeleChart
2000, which generally serve the individual investor market. In addition, the
Internet is becoming an increasingly valuable conduit of information for
individual and institutional investors seeking to support their investment
decision-making.
32
<PAGE>
While financial market data have been available for some time, typically
only large institutional investors with access to mainframe or
minicomputer-based systems have had the capability to manipulate, organize and
analyze such data to support their investment decisions. Historically, such
activities have been expensive and time consuming, and usually performed in the
"back office" of institutional investors through custom programming by
information technology professionals. The emergence of easy-to-use powerful
personal computers with standard operating systems has brought analytical
capability to "front office" decision makers of institutional investors, as
well as to individual investors who historically have not had access to such
technology or information.
With the advanced processing capabilities of today's personal computers,
both individual and institutional investors are demanding powerful investment
analysis software to improve their investment decision-making. Historically,
investment analysis software for the personal computer has generally been
limited to passive charting and analysis. However, as vast new quantities and
types of financial market data have become available, a need has arisen for
decision support software which enables investors to analyze market data in new
and powerful ways, including the design, testing and validation of custom
investment strategies and the implementation of those strategies in real time.
Investors are seeking to leverage quantitative data to make improved investment
decisions through the use of software solutions which provide powerful
investment analysis capabilities, open and extendible software platforms,
support for a wide variety of financial instruments and markets, and ease of
use.
THE OMEGA RESEARCH SOLUTION
The Omega Research product family addresses the growing need for powerful
software solutions which enable investors to thoroughly test the profitability
of their own investment and trading strategies. Key elements of the Omega
Research solution include:
SUPERIOR INVESTMENT ANALYSIS SOLUTIONS. The Company's products offer
state-of-the-art market analysis capabilities that empower the investor to make
improved investment decisions. The Company's flagship product, TRADESTATION,
enables investors to design and historically test their own investment
strategies against large quantities of historical data to assess the risk and
return of any given investment strategy. Using TRADESTATION, the investor can
then computer-automate a custom investment strategy to generate buy and sell
signals on a real-time basis. The Company's OPTIONSTATION product enables
investors who are not options analysis experts or mathematicians to explore
complex options trading strategies. The Company's SUPERCHARTS products provide
both end-of-day and real-time investors with powerful technical analysis
capabilities to enable improved investment decision-making.
INDUSTRY LEADING SOFTWARE PLATFORM. The Company develops its principal
products as "platform applications," unique and valuable software applications
that also serve as platforms for third-party solutions which add value to the
products (collectively, the "Omega Research Platform"). The Omega Research
Platform is designed to be open and extendible, encouraging the development of
as many complementary third-party solutions as possible. To date, more than 150
independent software developers ("Omega Research Solution Providers") have
developed specific trading systems or other investment applications for the
Omega Research Platform, which the Company believes makes it the industry
leading software platform for quantitative investment analysis. In addition to
supporting such third party applications, the Omega Research Platform has been
architected to seamlessly integrate with the financial market data services
offered by various well-known data vendors.
SOLUTIONS FOR MULTIPLE FINANCIAL MARKETS. The Company designs its
products to benefit investors in a variety of financial markets, including
investors in equities, futures, foreign currencies and options. Within each of
these segments, investors can use the products to fit their special needs and
levels of experience. The Company believes that many of its customers are
active in multiple financial markets and, as a result, has designed different
products to address different markets which can be used independently or in
combination. The Company currently markets the TRADESTATION PRO SUITE,
comprised of TRADESTATION and OPTIONSTATION, and intends to develop and market
additional product suites in the future which the Company believes will enable
investors to broaden their investment activities to markets on which they have
not previously focused.
33
<PAGE>
PROPRIETARY EASYLANGUAGE. Historically, designing, testing and
computer-automating custom investment and trading strategies required complex
and time-consuming programming. To solve this problem, the Company developed
EASYLANGUAGE, the Company's proprietary computer language comprised of English-
like statements, which, once learned, empowers investors with no prior
programming skills to describe their own investment or trading strategies and
then test their profitability against large quantities of historical data.
EASYLANGUAGE is currently included in TRADESTATION and, to a more limited
degree, in SUPERCHARTS.
THE OMEGA RESEARCH STRATEGY
Omega Research's objective is to establish itself as the leading worldwide
provider of real-time investment analysis software to both individual and
institutional investors. The Omega Research strategy includes the following key
elements:
ENHANCE AND EXPAND THE OMEGA RESEARCH PLATFORM. The Company intends to
continue to develop new products which are not only high-quality, unique
software solutions, but which are themselves platforms for independent
third-party software solutions. Such products will be designed to be
technically compatible with, and to functionally complement one another, in
order to encourage investors to own not just one, but a suite, of Omega
Research products. The Company believes that the rapid deployment of Internet
capabilities will in the near future result in the Internet being an important
financial market data delivery system for both domestic and international
markets and therefore intends to enhance the Omega Research Platform to support
Internet data delivery.
CONTINUE TO PENETRATE EXPANDING INDIVIDUAL INVESTOR MARKET. The Company
intends to devote considerable efforts to continue to penetrate the individual
investor market and to reach newcomers to this market as it expands. The
rapidity of technological advances in personal computing and information
delivery systems has made and is expected to continue to make the investment
industry more accessible to individuals using personal computers. The Company
believes that more individuals are interested in self-directing their
investment decisions and, with available technological advances, will be able
to engage in financial market transactions without the need of support systems
and resources historically provided only in an institutional setting.
FOCUS ON THE INSTITUTIONAL INVESTOR MARKET. In addition to its continued
focus on the individual investor market, the Company intends to devote
incremental resources to the institutional investor market. TRADESTATION was
introduced by Dow Jones Markets to institutional investors in 1996 as DOW JONES
TRADESTATION. Dow Jones Markets has also recently acquired from the Company the
right to market SUPERCHARTS as DOW JONES SUPERCHARTS to its data subscribers on
a worldwide basis. In addition, certain individual investors who use the
Company's products are employees of institutions, which the Company believes
increases awareness of the Company's products in the institutional market. The
Company intends to develop the necessary enhancements to its products, which
includes development of a network version of its products, to enable it to
penetrate the institutional investor market.
STRENGTHEN DATA VENDOR ALLIANCES. The Company intends to foster and grow
relationships with data vendors in order to enter new markets, expand the
Company's customer base, promote its products, and increase the number of
quality data services with which Omega Research products are technically
compatible. The Company believes that certain of these relationships, such as
the Dow Jones Markets relationship, will facilitate the Company's efforts to
penetrate the institutional investor market and the Company's expansion of its
international presence.
EXPAND INTERNATIONAL DISTRIBUTION. In addition to focusing on foreign
individual and institutional investors who are interested in North American
markets, the Company intends to focus on worldwide individual and institutional
interest in financial markets outside of North America where there are
increasing trading activity and numbers of investors, and growing availability
of financial market data. The Company intends to continue to enhance its
products to support additional foreign financial market data. The Company
expects to exploit the rapid deployment of the Internet, as both a data
delivery system and a sales and marketing and customer support channel, as part
of its expansion of its international presence and sales. The Company also
intends to continue to develop its network of international independent
distributors of Omega Research products.
34
<PAGE>
LEVERAGE INSTALLED BASE OF CUSTOMERS. The Company believes one of its
most important assets and a key competitive advantage is its installed base of
TRADESTATION, OPTIONSTATION and SUPERCHARTS customers. The Company believes
that significant opportunity exists to leverage this customer base by (i)
selling product upgrades to customers who own the earlier version of the
product, (ii) selling additional existing products to customers who do not own
those products, and (iii) marketing future products to its entire installed
customer base.
PRODUCTS
The Company's investment analysis software products, each of which
operates in a Microsoft Windows environment, are currently marketed to
individual investors and, through Dow Jones Markets, to institutional
investors. Products marketed directly by the Company are technically compatible
with data feeds and services offered by BMI, Dial/Data, FutureSource, Signal,
S&P ComStock and Telescan, and are currently offered with a historical
financial market database on CD-ROM containing up to 25 years of history on
each security and index included in the database. Each of the Company's
principal products operates on real-time, delayed and end-of-day data, except
for the end-of-day version of SUPERCHARTS.
Omega Research's principal products are:
<TABLE>
<CAPTION>
INITIAL LATEST CURRENT
PRODUCT OPERATING SYSTEM LIST PRICE RELEASE DATE RELEASE DATE VERSION
- ------------------------ ------------------- ------------ -------------- -------------- --------
<S> <C> <C> <C> <C> <C>
TRADESTATION Microsoft Windows $2,399 1991 1996 4.0
OPTIONSTATION Microsoft Windows $1,799 1996 1996 1.2
SUPERCHARTS REAL-TIME Microsoft Windows $ 839 1996 1996 4.0
SUPERCHARTS END-OF-DAY Microsoft Windows $ 200 1992 1996 4.0
</TABLE>
TRADESTATION. TRADESTATION is the flagship product of the Company,
serving as a platform for numerous third-party software solutions. TRADESTATION
is marketed to serious equities, futures and foreign currency investors.
TRADESTATION empowers the investor to design and develop custom trading systems
based upon the investor's own investment ideas and strategies, test the
profitability of such trading systems against historical data, and then
computer-automate a chosen trading system to monitor the applicable market and
alert the investor in real-time when the criteria of the trading system have
been met and an order should, therefore, be placed. If the investor is not at
the computer terminal when a buy or sell signal is generated, TRADESTATION can
automatically notify the investor via an alpha-numeric pager if the necessary
equipment and software have been installed. The principal features of
TRADESTATION which enable the investor to design and develop custom trading
strategies and systems are EASYLANGUAGE and the POWEREDITOR. EASYLANGUAGE is a
proprietary computer language developed by Omega Research consisting of
English-like statements which can be input by the investor to describe
particular trading ideas and strategies. The POWEREDITOR is a compiler of
EASYLANGUAGE statements and provides the investor with considerable flexibility
to modify and combine different trading rules and strategies which ultimately
result in the design of the investor's custom trading systems.
OPTIONSTATION. OPTIONSTATION is an options trading analysis product for
stock, index and futures options which enables investors who are not options
analysis experts or mathematicians to explore complex trading strategies.
Specifically, OPTIONSTATION is designed to sort through thousands of possible
options positions and identify the most favorable risk-reward profile based
upon user-defined assumptions. OPTIONSTATION is designed to perform two
critical tasks of options trading--position search and position analysis.
OPTIONSTATION'S Position Search helps the investor find the best risk-reward
profile based upon the investor's market assumptions. The Power Spreadsheet and
Position Chart features enable investors to design and customize options
positions and then graphically view and analyze each position's profitability
and risk. If the investor is using OPTIONSTATION with a real-time data feed,
the program will alert the investor when the investor's specified criteria have
been met. Also, the investor can be notified of the alert via an alpha-numeric
pager if the necessary equipment and software have been installed.
SUPERCHARTS. SUPERCHARTS is Omega Research's technical analysis charting
product and is available in both real-time and end-of-day versions. SUPERCHARTS
has a built-in library of more than 80 popular technical
35
<PAGE>
indicators and 15 drawing tools that highlight significant market patterns.
SUPERCHARTS provides the investor with sophisticated charting and technical
analysis capabilities, including the ability to draw trend lines, identify
chart patterns and chart historical fundamental data. SUPERCHARTS can generate
an alert on a real-time or end-of-day basis when a simple user-defined
criterion occurs with respect to a specific security. SUPERCHARTS also contains
certain trading system design and testing capabilities, in order to introduce
the less-experienced investor to such functions and potentially generate
interest in the Company's TRADESTATION product.
ADDITIONAL PRODUCTS AND SERVICES. The Company offers additional products
and services, such as WALL STREET ANALYST, the Company's introductory charting
and analysis product for the individual investor, historical data subscription
CD-ROM clubs (monthly deliveries of historical financial data updates on
CD-ROM), and seminars, conferences, tutorials and instructional videotapes
designed to enhance investors' abilities to use fully and effectively the
Company's products. These additional products and services are intended to
complement the Company's principal investment analysis products and are
expected to remain an ancillary portion of revenues.
SALES AND MARKETING
The Company markets its products using a combination of methods, including
inbound telesales and the use of domestic and international distributors and
other resellers, including value added resellers. Marketing efforts in support
of sales include print media and television advertising, direct mail, seminars
and establishment of strategic marketing and other strategic partner
relationships with data vendors and software and service solution providers.
The majority of the Company's direct product sales is generated by
telesales. The Company has devoted considerable efforts and resources to
assemble and train a dedicated, professional, team-oriented sales force. The
telesales process consists of the generation of leads through media and direct
mail advertising, fulfillment of information packets to prospective purchasers,
and follow-up calls to the recipients of the information packets to attempt to
complete the sale. The Company is in the process of implementing a new system
of customer tracking and management at its corporate headquarters to improve
its lead management capability, enhance its customer satisfaction through
increased responsiveness and to improve its ability to market additional
products to existing customers. See "Risk Factors--Management of Change."
The Company advertises its products in publications popular with investors
such as BARRON'S, FUTURES, INDIVIDUAL INVESTOR, INVESTORS BUSINESS DAILY and
STOCKS & COMMODITIES. The Company also advertises TRADESTATION and
OPTIONSTATION on a regular basis on the CNBC and CNN-FN television networks,
and certain local television stations. The Company undertakes periodic
promotional mailings to its customer base, as well as to mailing lists obtained
by the Company by license from, or agreement with, third parties. Such
promotional mailings include flyers, brochures, Omega Research Solution
Provider catalogues or a combination of the foregoing items.
The Company believes that significant opportunity exists to market its
products to international customers. The Company seeks to distribute its
products internationally through independent distributors. As of June 30, 1997,
Omega Research had arrangements with approximately 60 independent parties to
distribute one or more of the Company's products in Europe, Asia, Australia,
South Africa and Canada. The Company also sells directly to international
investors in response to direct inquiries received from abroad. The Company
believes its strategic relationships with data vendors, such as Dow Jones
Markets, will also provide significant benefit in its expansion into
international markets. The Company is in the early stages of its international
sales effort and intends to focus more resources on the establishment of a
comprehensive and effective international marketing and distribution network.
See "Risk Factors--Risks Associated with International Expansion."
STRATEGIC RELATIONSHIPS
Omega Research endeavors to establish and foster strategic marketing and
other strategic partner relationships with data vendors and with software and
service solution providers.
DOW JONES MARKETS AGREEMENTS. In August 1994, the Company entered into a
Software License, Maintenance and Development Agreement with Dow Jones Markets
(then known as Dow Jones Telerate, Inc.)
36
<PAGE>
under which Omega Research licensed to Dow Jones Markets the right to market
and distribute TRADESTATION to its data subscribers worldwide, who are
primarily institutional investors. The Company, in March 1997, entered into a
similar agreement with Dow Jones Markets regarding SUPERCHARTS Real-Time.
Following the execution of the TRADESTATION agreement, Omega Research developed
modifications to tightly integrate TRADESTATION with Dow Jones Markets' data
server. In January 1996, TELETRAC TRADESTATION (now being marketed as DOW JONES
TRADESTATION) was launched by Dow Jones Markets. The Company believes the Dow
Jones Markets relationship has begun to create an institutional market
awareness of the Company's products which should support the Company's
marketing efforts with respect to both the institutional and international
markets.
The Dow Jones Markets agreements expire in the year 2002. The TRADESTATION
agreement requires Dow Jones Markets to use commercially reasonable efforts to
market TRADESTATION, to market the product under the name "DOW JONES
TRADESTATION," and to pay to Omega Research a per-subscription royalty, subject
to minimum annual royalties which escalate each year of the agreement. The
Company has no technical support obligation under the agreement to the
customers of Dow Jones Markets, but is obligated to provide limited technical
support to Dow Jones Markets' managers. The SUPERCHARTS agreement is similar
but does not contain a minimum royalty payment provision.
During the term of the Dow Jones Markets agreements, Omega Research is not
permitted to enter into a similar licensing arrangement regarding TRADESTATION
or SUPERCHARTS with five enumerated competitors of Dow Jones Markets. Dow Jones
Markets is permitted under the agreements to offer to its data service
subscribers its own or another company's investment analysis software in
addition to offering TRADESTATION and SUPERCHARTS. However, should Dow Jones
Markets offer to its subscribers a technical analysis charting program
competitive with SUPERCHARTS, the prohibition on the Company entering into
similar arrangements regarding SUPERCHARTS with Dow Jones Markets' enumerated
competitors lapses. See "Risk Factors--Dependence on Relationship with Dow
Jones Markets."
CROSS-MARKETING AGREEMENTS. The Company currently has written agreements
with other data vendors which generally provide for the data vendor to pay the
Company monthly fees or commissions as consideration for data subscribers who
use Omega Research products to access such data vendors' data services. Each of
these agreements contains provisions designed to make the data vendors'
subscribers more aware of Omega Research's products and to make Omega
Research's customers more aware of the data vendors' services.
OMEGA RESEARCH SOLUTION PROVIDER NETWORK. More than 150 independent
software and service providers have become Omega Research Solution Providers.
Omega Research Solution Providers add value to the Omega Research Platform by
either offering complementary software applications compatible with an Omega
Research product or by providing an educational or support service which
enhances a customer's use of a Company product. A number of the Omega Research
Solution Providers have developed products that operate only in conjunction
with an Omega Research product. The Company permits each Omega Research
Solution Provider to use an Omega Research Solution Provider logo on a
royalty-free basis so that the solution provider can advertise to potential
customers that its product or service is compatible with the applicable Omega
Research product(s) or useful to Omega Research customers.
PRODUCT DEVELOPMENT
The Company believes that its future success depends in part on its
ability to maintain and improve its core software technologies, enhance its
existing products and develop new products that meet an expanding range of
customer requirements. To date, the Company has relied primarily on internal
development of its products, all of which are currently 16-bit Windows
applications. The Company performs all quality assurance and develops
documentation and other training materials internally. In 1996 and the
six-month period ended June 30, 1997, product development expenses were
approximately $1.0 million and approximately $843,000, respectively.
The Company views its product development cycle as a four-step process to
achieve technical feasibility. The first step is to conceptualize in detail the
defining features and functions that the targeted investor group requires from
the product, and to undertake a cost-benefit analysis to determine the proper
scope and integration of such features and functions. Once the functional
requirements of the product have been
37
<PAGE>
determined, the second step is to technically design the product. The third
step is the detailed implementation, or software engineering, of this technical
design. The fourth step is rigorous quality assurance testing to ensure that
the final product generally meets the functional requirements determined in the
first step. Several product refinements are typically added in the quality
assurance phase of development. Once this process is completed, technological
feasibility has been achieved and the working model is available for final
testing.
The Company is currently developing the next version of TRADESTATION. This
version will be a 32-bit version which is intended ultimately to support a
network environment, which would technically enable the marketing of
TRADESTATION by the Company directly to the institutional investor market. The
Company is also working to develop 32-bit versions of its other principal
products. The Company is currently considering additional enhancements to its
product line, including increased interactivity between TRADESTATION and
OPTIONSTATION, historical data enhancement products and services, and a
software solution which offers additional trading system design, testing and
automation capabilities for the equities investor.
The market for investment analysis software is characterized by rapidly
changing technology, evolving industry standards in computer hardware,
programming tools, programming languages, operating systems, database
technology and information delivery systems, changes in customer requirements
and frequent new product introductions and enhancements. The Company's future
success will depend upon its ability to maintain and develop competitive
technologies, to continue to enhance its current products and to develop and
introduce new products in a timely and cost-effective manner that meet changing
conditions such as evolving customer needs, new competitive product offerings,
emerging industry standards and changing technology. There can be no assurance
that the Company will be able to develop and market, on a timely basis, if at
all, product enhancements or new products that respond to changing market
conditions or that will be accepted by investors. Any failure by the Company to
anticipate or to respond quickly to changing market conditions, or any
significant delays in product development or introduction, could cause
customers to delay or decide against purchases of the Company's products and
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors--Rapid Technological
Change and Dependence on New Products" and "-- Dependence Upon Microsoft's
Windows Operating System."
CUSTOMER SUPPORT AND TRAINING
The Company believes that customer support and product-use training is
critical to creating, maintaining and increasing customer satisfaction with the
Company's products. The Company provides customer support and product-use
training in the following ways:
CUSTOMER SUPPORT. The Company provides technical support to its customers
by telephone, fax and electronic mail. Although the majority of these services
are provided during the first sixty days of ownership of a Company product,
Omega Research voluntarily provides technical support for each product,
free-of-charge, generally until the product's next version is released. The
Company has substantially increased its technical support staff, which has
grown approximately 79% since December 31, 1995 and approximately 48% since
December 31, 1996. The Company has also recently increased available hours of
telephone and electronic mail customer support.
PRODUCT-USE TRAINING. The Company considers product-use training
important in trying to ensure that its customers develop the ability to use
Omega Research's products as fully and effectively as is possible. The Company
has devoted considerable efforts to improve the user-education manuals and
videos generally included with its products. In addition, the Company has
recently embarked on a training seminar program to better educate its
customers, which consists of fee-based seminars to be conducted in various U.S.
cities.
COMPETITION
The market for investment analysis software is intensely competitive and
rapidly changing. The Company believes that due to anticipated growth of the
market for investment analysis software, and other factors, competition will
substantially increase and intensify in the future. The Company believes its
ability to compete will depend upon many factors both within and outside its
control, including the timing and market acceptance
38
<PAGE>
of new products and enhancements developed by the Company and its competitors,
product functionality, data availability, ease of use, pricing, reliability,
customer service and support, sales and marketing efforts and product
distribution channels. The Company believes that it currently competes
favorably overall with respect to these factors.
The Company faces direct competition from several publicly-traded and
privately-held companies. The Company's principal competitors include AIQ,
Aspen Graphics, Equis International, Inc. (Metastock), a subsidiary of Reuters,
Market Arts, Inc. (Window on Wall Street) and TeleChart 2000. The Company also
competes with investment analysis solutions available on the Internet, some of
which are available for free. In addition, the Company faces competition from
data vendors, all of which offer investment analysis software products, and
which are the Company's existing and potentially future strategic partners. As
a result, the Company must educate prospective customers as to the potential
advantages of the Company's products, and continue to offer software solutions
not offered by major data vendors. There can be no assurance that the Company
will be able to compete effectively with its competitors, adequately educate
potential customers to the benefits that the Company's products provide, or
continue to offer such software solutions.
Many of the Company's existing and potential competitors, which include
large, established software companies which do not currently focus on the
investment analysis software market, have longer operating histories,
significantly greater financial, technical and marketing resources, greater
name recognition and a larger installed customer base than has the Company. One
or more of these competitors may be able to respond more quickly to new or
emerging technologies or changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than may the
Company. There can be no assurance that the Company's existing or potential
competitors will not develop products comparable or superior to those developed
by the Company or adapt more quickly than the Company to new technologies,
evolving industry trends or changing customer requirements. Increased
competition could result in price reductions, reduced margins or loss of market
share, any of which could materially adversely affect the Company's business,
results of operations and financial condition. There can be no assurance that
the Company will be able to compete successfully against current or future
competitors, or that competitive pressures faced by the Company will not have a
material adverse effect on its business, financial condition and results of
operations. See "Risk Factors--Competition."
INTELLECTUAL PROPERTY
The Company's success is heavily dependent on its proprietary technology.
The Company views its software as proprietary, and relies on a combination of
copyright, trade secret and trademark laws, nondisclosure agreements and other
contractual provisions and technical measures to establish and protect its
proprietary rights. The Company has no patents or patents pending, and has not
to date registered any of its copyrights. The Company has obtained
registrations in the United States and Canada for the trademark TRADESTATION,
and registrations in the United States for the trademarks OPTIONSTATION and
SUPERCHARTS, and is seeking registrations in the United States for the
trademarks Omega Research and certain Omega Research designs and logos. The
Company uses a shrink-wrap license (typically on its packaging and on-screen)
directed to users of its products in order to protect its copyrights and trade
secrets and to prevent such users from commercially exploiting such copyrights
and trade secrets for their own gain. Since these licenses are not signed by
the licensees, many authorities believe that they may not be enforceable under
many state laws and the laws of many foreign jurisdictions. The laws of
Florida, which such licenses purport to make the governing law, are unclear on
this subject.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties copy or otherwise obtain, use or exploit the Company's
products or technology independently. Policing unauthorized use of the
Company's products is difficult, and the Company is unable to determine the
extent to which piracy of its software products exists. Piracy can be expected
to be a persistent problem, particularly in international markets and as a
result of the growing use of the Internet. In addition, effective protection of
intellectual property rights may be unavailable or limited in certain
countries, including some in which the Company may attempt to expand its sales
efforts. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technologies or products.
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<PAGE>
There has been substantial litigation in the software industry involving
intellectual property rights. The Company does not believe that it is
infringing the intellectual property rights of others, although there exists a
competing trademark application for the name WALL STREET ANALYST which claims
prior use. There can be no assurance that infringement claims would not have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, to the extent that the Company acquires or
licenses a portion of the software or data included in its products from third
parties, its exposure to infringement actions may increase because the Company
must rely upon such third parties for information as to the origin and
ownership of such acquired or licensed software or data. In the future,
litigation may be necessary to establish, enforce and protect trade secrets,
copyrights, trademarks and other intellectual property rights of the Company.
The Company may also be subject to litigation to defend against claimed
infringement of the rights of others or to determine the scope and validity of
the intellectual property rights of others. Any such litigation could be costly
and divert management's attention, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Adverse determinations in such litigation could result in the loss
of proprietary rights, subject the Company to significant liabilities, require
the Company to seek licenses from third parties, which could be expensive, or
prevent the Company from selling its products or using its trademarks, any one
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Protection of
Intellectual Property."
EMPLOYEES
As of June 30, 1997, the Company had 122 full-time employees consisting of
25 in product development (including product development, management,
documentation and quality assurance), 77 in sales and marketing (including
sales, marketing, customer support and order fulfillment), and 20 in general
administration (including executive management, finance and administration).
The Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage and
considers its relations with its employees to be good.
The Company's future success depends, in significant part, upon the
continued service of its key senior management, technical and sales and
marketing personnel. The loss of the services of one or more of these key
employees, including William Cruz or Ralph Cruz, the Company's Co-Chief
Executive Officers, or Peter A. Parandjuk, the Company's Vice President of
Product Development, would have a material adverse effect on the Company. There
can be no assurance that the Company will be able to retain its key personnel.
Departures and additions of personnel, to the extent disruptive, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Dependence on Key Employees."
FACILITIES
The Company's corporate headquarters are located in Miami, Florida, in a
leased facility consisting of approximately 17,300 square feet of office space
occupied under a lease which commenced in February 1997 and which expires in
August 2002. The Company also leases warehouse space consisting of
approximately 4,800 square feet, which is used for fulfillment of orders. The
warehouse lease expires in May 1998. The Company has also recently leased
approximately 1,100 square feet of space in Boca Raton, Florida from which the
Company intends to conduct certain quality assurance operations relating to the
historical database included within its products. Such lease expires in June
1998, and the Company has a one-year renewal option. The Company's corporate
headquarters contain all of the Company's facilities except for fulfillment and
such quality assurance operations. The Company believes that its existing
facilities are adequate to support its existing operations and that, if needed,
it will be able to obtain suitable additional facilities on commercially
reasonable terms.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
40
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
William R. Cruz 36 Co-Chairman of the Board, Co-Chief Executive Officer and President
Ralph L. Cruz 33 Co-Chairman of the Board and Co-Chief Executive Officer
Peter A. Parandjuk 35 Vice President of Product Development and Director
Salomon Sredni 30 Vice President of Operations, Chief Financial Officer, Treasurer
and Director
Marc J. Stone 36 Vice President of Corporate Planning and Development, General Counsel,
Secretary and Director
</TABLE>
WILLIAM R. CRUZ co-founded the Company in 1982 and has been its President
and a director since that time. Mr. Cruz was appointed Co-Chief Executive
Officer of the Company in 1996. Mr. Cruz studied classical violin at the
University of Miami, which he attended on a full scholarship, and Julliard
School of Music. Mr. Cruz left Julliard School of Music prior to graduation to
co-found the Company. Mr. Cruz has won numerous classical violin competitions.
Mr. Cruz has been primarily responsible for the conception and management of
the Company's products and product strategies.
RALPH L. CRUZ co-founded the Company in 1982 and has been a director since
that time. Mr. Cruz was Vice President of the Company from 1982 until 1996, at
which time he was appointed Co-Chief Executive Officer. Mr. Cruz studied
classical violin at the University of Miami, which he attended on a full
scholarship, and Indiana University. Mr. Cruz left Indiana University prior to
graduation to devote full time to the Company. Mr. Cruz has won numerous
classical violin competitions. Mr. Cruz has been primarily responsible for the
Company's marketing strategies.
PETER A. PARANDJUK joined the Company in 1988 as a software engineer,
became the Company's senior software engineer in 1991, was appointed Vice
President of Product Development in January 1995 and was named a director of
the Company in July 1997. Mr. Parandjuk received a bachelor's degree in Applied
Mathematics from the State University of New York at Buffalo.
SALOMON SREDNI joined the Company in December 1996 as its Vice President
of Operations and Chief Financial Officer and was named Treasurer in May 1997
and a director of the Company in July 1997. From August 1994 to November 1996,
Mr. Sredni was Vice President of Accounting and Corporate Controller at IVAX
Corporation, a publicly-held pharmaceutical company. Prior to that time, from
January 1988 to August 1994, Mr. Sredni was with Arthur Andersen LLP, an
international accounting firm. Mr. Sredni is a Certified Public Accountant and
a member of the American Institute of Certified Public Accountants and the
Florida Institute of Certified Public Accountants. Mr. Sredni has a bachelor's
degree in Accounting from The Pennsylvania State University.
MARC J. STONE joined the Company in May 1997 as its Vice President of
Corporate Planning and Development, General Counsel and Secretary and was named
a director of the Company in July 1997. From January 1993 to May 1997, Mr.
Stone was a partner at the law firm of Rubin Baum Levin Constant Friedman &
Bilzin ("Rubin Baum"), which serves as the Company's regular outside counsel.
Prior to that time, from 1985 to 1992, Mr. Stone was an associate with that law
firm. Mr. Stone remains of counsel to Rubin Baum. Mr. Stone has a bachelor's
degree in English and American Literature from Brown University, and received
his law degree from University of California (Boalt Hall) School of Law at
Berkeley.
INDEPENDENT DIRECTORS; COMMITTEES OF THE BOARD OF DIRECTORS
The Company intends to add two nonemployee, independent members to its
Board of Directors ("independent directors") within 90 days following the date
of this Prospectus.
At the time of the appointment of the independent directors, the Company's
Board of Directors will establish an Audit Committee, the majority of the
members of which will be independent directors, and a
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Compensation Committee, all the members of which will be independent directors.
The Audit Committee will recommend the annual engagement of the Company's
auditors, with whom the Audit Committee will review the scope of audit and
non-audit assignments, related fees, the accounting principles used by the
Company in financial reporting, internal financial auditing procedures and the
adequacy of the Company's internal control procedures. The Compensation
Committee will determine executive officers' salaries and bonuses and
administer the Incentive Stock Plan and the Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during its last
completed year. The compensation of the Company's executive officers was
determined by William Cruz and Ralph Cruz, as the Company's sole members of its
Board of Directors, for this period.
For information concerning cash dividends paid by the Company to its
current shareholders in 1994, 1995, 1996 and the first six months of 1997, the
dividend of the Company's former office facilities declared in the second
quarter of 1997, and the Dividend paid by the Company in 1997 to its current
shareholders and the Tax Agreement entered into between the Company and such
shareholders, see "Dividend Policy," "Distribution of S Corporation Earnings,"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
DIRECTOR COMPENSATION
The Company currently expects that directors who are not employees or
officers of the Company will receive $750 for attendance at each meeting of the
Board of Directors. Each director will also receive an option to purchase
12,000 shares of Common Stock upon initial election as a director of the
Company, and an option to purchase 3,000 shares of Common Stock upon each
re-election as a director at the Company's annual meeting of shareholders.
Directors may also be reimbursed for certain expenses in connection with
attendance at Board of Directors and committee meetings. Other than with
respect to reimbursement of expenses, directors who are employees or officers
of the Company will not receive additional compensation for service as a
director. See "Management--Other Compensation Arrangements."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to all
compensation paid or earned for services rendered to the Company in the year
ended December 31, 1996 by the co-chief executive officers of the Company and
the Company's two other most highly compensated executive officers whose
aggregate annual compensation exceeded $100,000 (together, the "Named Executive
Officers"). The Company does not have a pension plan or a long-term incentive
plan, has not issued any restricted stock awards and has not granted any stock
appreciation rights prior to this offering. The value of all perquisites and
other personal benefits received by each Named Executive Officer did not exceed
10% of the Named Executive Officer's total annual salary.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- -------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION(1)
- --------------------------- ---------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
William R. Cruz ..................... $ 90,000(2) $ -- -- $4,320
Co-Chief Executive
Officer and President
Ralph L. Cruz ........................ 90,000(2) -- -- 4,320
Co-Chief Executive Officer
Peter A. Parandjuk .................. 116,990 78,948(3) 250,000 5,700
Vice President of
Product Development
Salomon Sredni ..................... 10,833(4) -- 140,000 --
Vice President of Operations,
Chief Financial Officer and Treasurer
</TABLE>
- -------------
(1) Represents 401(k) Plan Company contributions on behalf of the Named
Executive Officer.
(2) In December 1996, his annual base salary was increased to $150,000.
(3) $26,491 of this amount was earned in 1996 but paid in 1997.
(4) Mr. Sredni joined the Company in December 1996. His annual base salary for
1996 was $130,000.
OPTION GRANTS. The following table summarizes the options which were
granted during the fiscal year ended December 31, 1996 to the Named Executive
Officers.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------ ASSUMED
ANNUAL
% OF VALUE AT RATES OF
NUMBER TOTAL GRANT-DATE STOCK PRICE
OF OPTIONS MARKET MARKET APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE PRICE ON PRICE OPTION TERM(1)
UNDERLYING EMPLOYEES OR BASE GRANT ------------ ------------------------
OPTIONS IN FISCAL PRICE DATE EXPIRATION
NAME GRANTED(2) YEAR ($)/(SH) ($)(SH)(3) DATE 0%($) 5%($) 10%($)
- ------------------------ ----------- -------- --------- ----------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William R. Cruz ...... -- -- -- -- -- -- -- --
Ralph L. Cruz ......... -- -- -- -- -- -- -- --
Peter A. Parandjuk ..... 250,000 43.0% $ 1.25 $ 1.75 11/30/06 $ 125,000 $400,141 $822,262
Salomon Sredni ...... 140,000 24.1 1.25 1.75 11/30/06 70,000 224,079 460,467
</TABLE>
- -------------
(1) Potential realizable value is based on the assumption that the Common Stock
price appreciates at the annual rate shown (compounded annually) from the
date of grant until the end of the option term. The amounts have been
calculated based on the requirements promulgated by the Securities and
Exchange Commission. The actual value, if any, a Named Executive Officer
may realize will depend on the excess of the stock price over the exercise
price on the date the option is exercised (if the executive were to sell
the shares on the date of exercise), so there is no assurance that the
value realized will be at or near the potential realizable value as
calculated in this table.
(2) These options vest over five years and have a term of ten years from the
date of grant, subject to acceleration under certain circumstances.
(3) Prior to this offering, there has been no public market for the Common
Stock of the Company. The Market Price on Grant Date is based on the Board
of Director's determination of the fair market value of the Common Stock
on the date of grant of the option.
43
<PAGE>
OPTION EXERCISES AND UNEXERCISED OPTION HOLDINGS. The following table
provides information regarding the value of all unexercised options held at
December 31, 1996 by the Named Executive Officers. No Named Executive Officer
exercised any stock options during the fiscal year ended December 31, 1996.
AGGREGATE OPTION EXERCISES IN 1996 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996(#) DECEMBER 31, 1996($)(1)
------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
William R. Cruz ......... -- -- -- --
Ralph L. Cruz ............ -- -- -- --
Peter A. Parandjuk ...... -- 250,000 -- $187,500
Salomon Sredni ......... -- 140,000 -- 105,000
</TABLE>
- --------
(1) There was no public trading market for the Common Stock as of December 31,
1996. Accordingly, these values have been calculated based on a price of
$2.00 per share, the Board of Director's determination of the fair market
value of the Common Stock as of December 31, 1996, minus the applicable
per share exercise price.
OTHER COMPENSATION ARRANGEMENTS
1996 INCENTIVE STOCK PLAN. The Incentive Stock Plan, pursuant to which
officers, employees and nonemployee consultants may be granted stock options,
stock appreciation rights, stock awards, performance shares and performance
units, was adopted by the Board of Directors and approved by the shareholders
in June 1996 and amended and restated in August 1997. The Company has reserved
3,000,000 shares of Common Stock for issuance under the Incentive Stock Plan,
subject to antidilution adjustments.
The Incentive Stock Plan has been administered by the Board of Directors
of the Company, but, upon completion of this offering and establishment of the
Compensation Committee of the Board of Directors (the "Committee"), the
Incentive Stock Plan will be administered by the Committee, whose members must
qualify as "nonemployee directors" (as such term is defined in Rule 16b-3 under
the Securities Exchange Act of 1934, as amended). The Board of Directors or the
Committee is authorized to determine, among other things, the employees to
whom, and the times at which, options and other benefits are to be granted, the
number of shares subject to each option, the applicable vesting schedule and
the exercise price (provided that, for incentive stock options, the exercise
price shall not be less than 100% of the fair market value of the Common Stock
on the date of grant). The Committee will also determine the treatment to be
afforded to a participant in the Incentive Stock Plan in the event of
termination of employment for any reason, including death, disability or
retirement. Under the Incentive Stock Plan, the maximum term of an incentive
stock option is ten years and the maximum term of a nonqualified stock option
is fifteen years.
The Board of Directors has the power to amend the Incentive Stock Plan
from time to time. Shareholder approval of an amendment is only required to the
extent that it is necessary to maintain the Incentive Stock Plan's status as a
protected plan under applicable securities laws or as a qualified plan under
applicable tax laws.
As of August 25, 1997, options to purchase 910,750 shares were outstanding
under the Incentive Stock Plan, of which options to purchase 530,000 shares had
been granted to executive officers of the Company. The Company intends to issue
options to purchase up to an additional 150,000 shares on or prior to the date
of this Prospectus to certain employees (excluding executive officers), of
which approximately 100,000 shares will be granted at an exercise price equal
to the initial public offering price. Of the options granted to executive
officers, options to purchase 250,000 shares were granted to Peter A.
Parandjuk, the Company's Vice President of Product Development, at an exercise
price of $1.25 per share; options to purchase 140,000 shares were granted to
Salomon Sredni, the Company's Vice President of Operations, Chief Financial
Officer and Treasurer, at an
44
<PAGE>
exercise price of $1.25 per share; and options to purchase 140,000 shares were
granted to Marc J. Stone, the Company's Vice President of Corporate Planning
and Development, General Counsel and Secretary, at an exercise price of $3.00
per share. All options granted under the Incentive Stock Plan vest at the rate
of 20% per year and have a total term of ten years. The options granted to
Messrs. Parandjuk, Sredni and Stone immediately vest and become exercisable
upon termination of employment due to death or permanent disability, or upon a
sale or a change in control of the Company, and, in the case of Mr. Parandjuk,
upon termination of employment by the Company without cause. The options to
purchase the shares granted under the Incentive Stock Plan outstanding as of
August 25, 1997 have a weighted average exercise price of $2.04 per share. See
Note 4 of Notes to Financial Statements.
1997 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN. The Director Stock Plan,
pursuant to which annual grants of a nonqualified stock option will be made to
each nonemployee director of the Company, was adopted by the Board of Directors
and approved by the shareholders in July 1997. Upon initial election to the
Board of Directors, each nonemployee director will be granted an option to
purchase 12,000 shares of Common Stock. Upon each re-election to the Board of
Directors at the annual meeting of shareholders, each nonemployee director will
be granted an additional option to purchase 3,000 shares of Common Stock. Each
option will be granted at an exercise price equal to the fair market value of
the Common Stock on the date of grant. These options will have a term of ten
years and will vest in equal installments over three years. The Company has
reserved 175,000 shares of Common Stock for issuance under the Director Stock
Plan, subject to antidilution adjustments. No options have yet been granted
under the Director Stock Plan.
The Board of Directors has the power to amend the Director Stock Plan from
time to time. Shareholder approval of an amendment is only required to the
extent that it is necessary to maintain the Director Stock Plan's status as a
protected plan under applicable securities laws.
1997 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1997 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors and
approved by the Company's shareholders in July 1997. The Purchase Plan provides
for the issuance of a maximum of 500,000 shares of Common Stock pursuant to the
exercise of nontransferable options granted to participating employees.
The Purchase Plan will be administered by the Compensation Committee of
the Board of Directors. All employees of the Company whose customary employment
is more than 20 hours per week and more than five months in any calendar year
and who have completed at least three months of employment are eligible to
participate in the Purchase Plan. Employees who would immediately after the
grant own 5% or more of the total combined voting power or value of the
Company's stock and all nonemployee directors of the Company may not
participate in the Purchase Plan. To participate in the Purchase Plan, an
employee must authorize the Company to deduct an amount (not less than one
percent nor more than ten percent of a participant's total cash compensation)
from his or her pay during six-month periods (each a "Plan Period"). The
maximum number of shares of Common Stock an employee may purchase in any Plan
Period is 500 shares. The exercise price for the option for each Plan Period is
85% of the lesser of the market price of the Common Stock on the first or last
business day of the Plan Period. If an employee is not a participant on the
last day of the Plan Period, such employee is not entitled to exercise his or
her option, and the amount of his or her accumulated payroll deductions will be
refunded. An employee's rights under the Purchase Plan terminate upon his or
her voluntary withdrawal from the plan at any time or upon termination of
employment. No options have been granted to date under the Purchase Plan. The
Purchase Plan provides for the first options to be granted for the Plan Period
commencing January 1, 1998.
The Board of Directors has the power to amend or terminate the Purchase
Plan. Shareholder approval of an amendment is only required to the extent that
it is necessary to maintain the Purchase Plan's status as a protected plan
under applicable securities laws or as a qualified plan under applicable tax
laws.
401(K) PLAN. The Company has a defined contribution retirement plan which
complies with Section 401(k) of the Code. All employees with at least one year
of continuous service (the Company intends to change this requirement from one
year to three months) are eligible to participate and may contribute up to 15%
of their compensation. Company contributions vest over a five-year period.
Company contributions charged against income were $23,000, $16,000 and $62,000
in 1994, 1995 and 1996, respectively.
45
<PAGE>
EMPLOYEE BONUS PROGRAMS. The Company has an informal profit-sharing
incentive program (the "Profit-Sharing Program"), which will be discontinued by
the Company effective as of October 1, 1997. Under the Profit-Sharing Program,
the Company makes discretionary quarterly distributions to its employees based
on the Company's attainment of specified percentage increases in net sales.
Company payments to employees under the Profit-Sharing Program for the years
ended December 31, 1994, 1995, 1996, and the six months ended June 30, 1997,
amounted to $81,000, $20,000, $423,000 and $277,000, respectively. Commencing
as of October 1, 1997, the Company intends to institute an informal quarterly
performance bonus incentive program, pursuant to which cash bonuses may be paid
to employees (including executive officers) based on the attainment of certain
pre-set objectives tied to individual and departmental performance. Such
bonuses will ultimately be payable solely at the discretion of the Company.
NON-COMPETITION AGREEMENTS
All executive officers have entered into agreements with the Company which
generally contain certain non-competition, non-disclosure and non-solicitation
restrictions and covenants, including a provision prohibiting such officers
from competing with the Company during their employment with the Company and
for a period of two years thereafter.
CERTAIN TRANSACTIONS
For information concerning cash dividends paid by the Company to its
shareholders in 1994, 1995, 1996 and the first six months of 1997, the dividend
of the Company's former office facilities to William Cruz and Ralph Cruz
declared in the second quarter of 1997, and the Dividend paid by the Company in
1997 to its current shareholders and the Tax Agreement entered into between the
Company and such shareholders, see "Dividend Policy" and "Distribution of S
Corporation Earnings."
Marc J. Stone, the Company's Vice President of Corporate Planning and
Development, General Counsel and Secretary and a director, was a partner in the
law firm of Rubin Baum Levin Constant Friedman & Bilzin until immediately prior
to joining the Company in May 1997 and remains of counsel to that firm. Rubin
Baum has acted as the Company's regular outside legal counsel since 1994. The
total fees and costs paid by the Company to Rubin Baum in 1994, 1995, 1996 and
the first six months of 1997 were approximately $35,000, $63,000, $34,000 and
$50,000, respectively. The Company believes that the fees paid to Rubin Baum
are no less favorable to the Company than could be obtained from other
comparable law firms in the Miami area.
46
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of August 25, 1997, and as adjusted for
the sale of the shares offered hereby, by (i) each shareholder of the Company
who beneficially owns more than 5% of the Common Stock, (ii) each director of
the Company, (iii) each Named Executive Officer, and (iv) all directors and
executive officers of the Company as a group. Except as otherwise described in
the footnotes below, the Company believes that the beneficial owners of the
Common Stock listed below, based on information provided by such owners, have
sole investment and voting power with respect to such shares. The address of
each person who beneficially owns more than 5% of the Common Stock is the
Company's principal executive office.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED
PRIOR TO OFFERING(1) NUMBER OF AFTER OFFERING(1)(2)
EXECUTIVE OFFICERS, --------------------------- SHARES -----------------------
DIRECTORS AND 5% SHAREHOLDERS NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- ------------------------------------ --------------- --------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
William R. Cruz .................. 9,740,000(3) 50.0% 550,000 9,190,000 41.6%
Ralph L. Cruz ..................... 9,740,000(4) 50.0 550,000 9,190,000 41.6
Peter A. Parandjuk ............... -- -- -- -- --
Salomon Sredni .................. -- -- -- -- --
Marc J. Stone ..................... -- -- -- -- --
All executive officers and directors
as a group (5 persons)(5) ...... 19,480,000 100.0% 1,100,000 18,380,000 83.2%
</TABLE>
- -------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares.
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
on a pro rata basis up to an aggregate of 555,000 additional shares of
Common Stock, 390,000 additional shares from the Company and 165,000
additional shares from the Selling Shareholders. If the over-allotment
option is exercised in full, each of William R. Cruz and Ralph L. Cruz
could sell an additional 82,500 shares beneficially owned by him, reducing
the percentage of shares beneficially owned by each of William R. Cruz and
Ralph L. Cruz to 40.5%. Any shares sold by the Selling Shareholders
pursuant to the over-allotment option will be sold equally by William R.
Cruz and Ralph L. Cruz.
(3) Includes 1,950,000 shares held by the Ralph L. Cruz 1997 Grantor Retained
Annuity Trust #1 as to which William R. Cruz possesses voting and
dispositive powers as trustee under the trust. Such trust provides for
annual distributions of principal and income to Ralph L. Cruz for five
years, and thereafter any remainder interest is payable to the Ralph L.
Cruz 1997 Family Trust for the benefit of certain family members and/or
charitable organizations.
(4) Includes 1,950,000 shares held by the William R. Cruz 1997 Grantor Retained
Annuity Trust #1 as to which Ralph L. Cruz possesses voting and
dispositive powers as trustee under the trust. Such trust provides for
annual distributions of principal and income to William R. Cruz for five
years, and thereafter any remainder interest is payable to the William R.
Cruz 1997 Family Trust for the benefit of certain family members and/or
charitable organizations. Also includes 389,600 shares owned beneficially
and of record by Michelle Cruz, the spouse of Ralph L. Cruz, with respect
to which Ralph L. Cruz has no investment or voting power and disclaims
beneficial ownership.
(5) See other footnotes above. Does not include options held by officers and
directors which are not exercisable within 60 days of August 25, 1997.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 125 million
shares, of which 100 million shares are Common Stock, par value $0.01 per
share, and 25 million shares are preferred stock, par value $0.01 per share. As
of August 25, 1997, there were 19,480,000 shares of Common Stock outstanding
held of record by five shareholders, and no shares of preferred stock
outstanding. See "Principal and Selling Shareholders." After completion of this
offering, 22,080,000 shares of Common Stock will be issued and outstanding.
The following description of the capital stock of the Company and certain
provisions of the Company's Articles and Bylaws is a summary and is qualified
in its entirety by the provisions of the Articles and Bylaws, which have been
filed as exhibits to the Company's Registration Statement, of which this
Prospectus is a part.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the Common
Stock to be sold by the Company and the Selling Shareholders in this offering
will be, validly issued, fully paid and nonassessable. Subject to the rights of
holders of preferred stock which may be issued in the future, the holders of
outstanding Common Stock are entitled to receive dividends out of assets
legally available therefor at such times and in such amounts as the Board of
Directors may from time to time determine. See "Dividend Policy." The shares of
Common Stock are neither redeemable nor convertible, and the holders thereof
have no preemptive or subscription rights to purchase any securities of the
Company. Upon liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive, pro rata, the assets of the
Company which are legally available for distribution, after payment of all
debts and other liabilities and subject to the prior rights of any holders of
preferred stock then outstanding. Each outstanding share of Common Stock is
entitled to one vote on all matters submitted to a vote of shareholders. There
is no cumulative voting in the election of directors.
PREFERRED STOCK
The Company's Articles authorize the Board of Directors to issue the
preferred stock in classes or series and to establish the designations,
preferences, qualifications, limitations or restrictions of any class or series
with respect to the rate and nature of dividends, the amounts payable upon
liquidation, the price and terms and conditions on which shares may be
redeemed, the terms and conditions for conversion or exchange into any other
class or series of shares, voting and preemptive rights and other terms. The
Company may issue, without approval of the holders of Common Stock, preferred
stock which has voting, dividend or liquidation rights superior to the Common
Stock and which may adversely affect the rights of holders of Common Stock. The
issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other things,
adversely affect the voting power of the holders of Common Stock and could have
the effect of discouraging, delaying, deferring or preventing a change in
control of the Company. The Company has no present intention to issue any
preferred stock.
CERTAIN PROVISIONS OF FLORIDA LAW
The Company is subject to Sections 607.0901 and 607.0902 of the Florida
Business Corporation Act. In general, Section 607.0901 restricts the ability of
a greater than 10% shareholder of a company to engage in a wide range of
specified transactions between such company and such shareholder or a person or
entity controlled by or controlling such shareholder. The statute provides that
such a transaction must be approved by the affirmative vote of the holders of
two-thirds of such company's voting shares, other than the shares beneficially
owned by the interested shareholder, unless it is approved by a majority of the
disinterested directors. Section 607.0902 restricts the ability of a third
party to effect an unsolicited change in control of a company. In general, the
statute provides that, unless approved by the board of directors of the
company, shares acquired in a transaction which effects a certain threshold
change in the ownership of a company's voting shares (a "control share
acquisition") have the same voting rights as shares held by the acquiring
person prior to the acquisition only to the extent granted by a resolution
adopted by shareholders in a prescribed manner. These statutory provisions have
an anti-takeover effect by deterring unsolicited offers or delaying changes in
control or management of the Company.
48
<PAGE>
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Articles and Bylaws contain a number of provisions related
to corporate governance and to the rights of shareholders. In particular, the
Bylaws provide that shareholders are required to follow an advance notification
procedure for certain shareholder nominations of candidates for the Board of
Directors and for certain other shareholder business to be conducted at any
meeting of the shareholders. The Articles provide that special meetings of the
shareholders may only be called by the Board of Directors or by holders of not
less than 50% of the outstanding voting shares of the Company. The Articles
require that, upon completion of this offering, any actions to be taken by the
shareholders of the Company may be taken only upon the vote of the shareholders
at a meeting and may not be taken by written consent. The existence of these
provisions in the Company's Articles and Bylaws may have the effect of
discouraging a change in control of the Company and limiting shareholder
participation in certain transactions or circumstances by limiting
shareholders' participation to annual and special meetings of shareholders and
making such participation contingent upon adherence to certain prescribed
procedures. The affirmative vote of the holders of shares equal to at least 66
2/3% of the outstanding capital stock is required to amend or repeal these
provisions.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles contain a provision eliminating the personal
liability of its directors for monetary damages resulting from breaches of
their fiduciary duty to the extent permitted by the Florida Business
Corporation Act. This provision in the Articles does not eliminate the duty of
care and, in appropriate circumstances, equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
Florida law. Each director will continue to be subject to liability for breach
of a director's duty of loyalty to the Company or its shareholders, for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, and for any transaction from which the director derived an
improper personal benefit. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
The Company's Articles and Bylaws provide that the Company will indemnify
its directors and officers, and may indemnify its employees and other agents,
to the fullest extent permitted by law. The Company's Bylaws also permit it to
secure insurance on behalf of any person it is required or permitted to
indemnify for any liability arising out of his or her actions in such capacity,
regardless of whether the Articles or Bylaws would permit indemnification. The
Company intends to obtain liability insurance for its directors and officers.
In addition to the indemnification provided for in the Company's Articles
and Bylaws, the Company has entered into agreements to indemnify its directors
and its executive officers. These agreements, among other things, indemnify the
Company's directors and executive officers for all direct and indirect expenses
and costs (including, without limitation, all reasonable attorneys' fees and
related disbursements, other out-of-pocket costs and reasonable compensation
for time spent by such persons for which they are not otherwise compensated by
the Company or any third person) and liabilities of any type whatsoever
(including, but not limited to, judgments, fines and amounts paid in
settlement) actually and reasonably incurred by such persons in connection with
either the investigation, defense, settlement or appeal of any threatened,
pending or completed action, suit or other proceeding, including any action by
or in the right of the Company, arising out of such persons' services as a
director, officer, employee or other agent of the Company, any subsidiary of
the Company or any other company or enterprise to which such persons provide
services at the request of the Company. The Company believes that these
provisions and agreements are necessary to attract and retain talented and
experienced directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be American
Stock Transfer & Trust Company, New York, New York.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, the Company will have 22,080,000 shares
of Common Stock outstanding, of which 3,700,000 (4,255,000 if the Underwriters'
over-allotment option is exercised in full) will be freely tradable without
restriction or registration under the Securities Act, except for any shares
purchased by an affiliate of the Company (in general, a person who has a
control relationship with the Company), which will be subject to the
limitations of Rule 144 promulgated under the Securities Act ("Rule 144"). All
of the remaining 18,380,000 outstanding shares of Common Stock are deemed to be
"restricted securities," as that term is defined in Rule 144. Beginning 180
days after the date of this Prospectus, upon the expiration of lock-up
agreements with the Underwriters (described below), all of such restricted
securities will be available for sale subject to compliance with Rule 144
volume and other requirements.
The current shareholders, officers and directors of the Company have
agreed for a period of 180 days after the date of this Prospectus that they
will not, subject to certain exceptions, directly or indirectly offer, sell,
contract to sell, grant any option to purchase, pledge, or otherwise dispose of
or transfer, any shares of Common Stock, or any securities convertible into or
exchangeable for, or any rights to purchase or acquire, shares of Common Stock,
now owned or hereafter acquired directly by such holders or with respect to
which they now have or hereafter acquire the power of disposition, without the
prior written consent of Robertson, Stephens & Company LLC, which may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to lock-up agreements. See "Underwriting."
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated) who owns shares that were last acquired from the
issuer or an affiliate of the issuer at least one year prior to a proposed sale
is entitled to sell, within any three-month period, a number of shares which
does not exceed the greater of 1% of the then-outstanding shares of the
Company's Common Stock (220,800 shares immediately after this offering) or the
average weekly trading volume of the Company's Common Stock in the over-the-
counter market during the four calendar weeks preceding the date on which
notice of the sale is filed with the Securities and Exchange Commission (the
"Commission"). Sales under Rule 144 may also be subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months preceding a proposed sale, and who owns restricted
securities that were last acquired from the issuer or an affiliate of the
issuer at least two years prior to a proposed sale, is entitled to sell such
shares under Rule 144(k) without regard to the volume limitation, manner of
sale provisions, public information requirements or notice requirements.
The Company is authorized to issue up to 3,000,000 shares of Common Stock
under the Incentive Stock Plan, up to 175,000 shares under the Director Stock
Plan and up to 500,000 shares under the Purchase Plan. As of August 25, 1997,
options to purchase 910,750 shares were outstanding under the Incentive Stock
Plan, none of which is currently exercisable, and no shares had been issued
under the Director Stock Plan or the Purchase Plan. The Company intends to
issue options to purchase up to an additional 150,000 shares under the
Incentive Stock Plan on or prior to the date of this Prospectus. See
"Management--Other Compensation Arrangements." The Company intends to file one
or more registration statements under the Securities Act covering the issuance
or resale of these shares of Common Stock promptly following the closing of
this offering. Shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to affiliates, be available
for sale in the open market, subject to vesting restrictions and the lock-up
arrangements described above.
No predictions can be made of the effect, if any, that the availability of
shares for sale or the actual sale of shares will have on market prices
prevailing from time to time. See "Risk Factors--Shares Eligible for Future
Sale."
50
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Lehman Brothers Inc. and Hambrecht & Quist
LLC (the "Representatives"), have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company and the
Selling Shareholders the number of shares of Common Stock set forth opposite
their respective names below. The Underwriters are committed to purchase and
pay for all such shares if any are purchased.
NUMBER
UNDERWRITER OF SHARES
----------- ----------
Robertson, Stephens & Company LLC ...... 1,224,000
Lehman Brothers Inc. .................. 918,000
Hambrecht & Quist LLC .................. 918,000
Oppenheimer & Co., Inc. .................. 160,000
First Albany Corporation ............... 160,000
Raymond James & Associates, Inc. ......... 160,000
Sands Brothers & Co., Ltd. ............... 160,000
----------
Total ................................. 3,700,000
==========
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price, less a concession of not more than $0.44 per share, of
which $0.10 per share may be reallowed to other dealers. After the initial
public offering, the public offering price, concession and reallowance to
dealers may be reduced by the Representatives.
The Company and the Selling Shareholders have granted to the Underwriters
an option, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to an additional 555,000 shares of Common Stock at
the same price per share as the Company and the Selling Shareholders receive
for the 3,700,000 shares that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage of
such additional shares that the number of shares of Common Stock to be
purchased by it shown in the above table represents as a percentage of the
3,700,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 3,700,000
shares are being sold. The Company and the shareholders subject to such
over-allotment option will be obligated, pursuant to the option, to sell shares
to the Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended, and liability arising from breaches of representations and warranties
contained in the Underwriting Agreement.
All current shareholders, officers and directors of the Company have
agreed with the Representatives that, until 180 days from the date of this
Prospectus, subject to certain limited exceptions, they will not, directly or
indirectly, offer, sell, contract to sell, grant any option to purchase,
pledge, or otherwise dispose of or transfer, any shares of Common Stock, or any
securities convertible into or exchangeable for, or any rights to purchase or
acquire, shares of Common Stock, now owned or hereafter acquired by such
holders or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of Robertson, Stephens & Company
LLC. Robertson, Stephens & Company LLC may, in its sole discretion, without
notice, release all or any portion of the securities subject to lock-up
agreements. See "Shares Eligible for Future Sale." All of such shares will be
eligible for immediate public sale following expiration of the lock-up period,
subject to Rule 144. In addition, the Company has agreed that, until 180 days
from the date of this Prospectus, the Company will not, without the prior
written consent of Robertson, Stephens & Company LLC, subject to certain
exceptions, sell or otherwise dispose of any shares of Common Stock, any
options or warrants to
51
<PAGE>
purchase any shares of Common Stock or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock other than the
Company's sale of shares in this offering, the issuance of Common Stock upon
the exercise of outstanding options, or the Company's grant of options and
issuance of stock under existing stock option or stock purchase plans. See
"Shares Eligible for Future Sale."
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters do not intend to confirm sales to accounts over which
they exercise discretionary authority.
Certain persons participating in this offering may overallot or affect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, affecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of Common Stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected, where permitted, on the Nasdaq National Market,
in the over-the-counter market, or otherwise. Such stabilizing, if commenced,
may be discontinued at any time.
The Underwriters have reserved for sale, at the initial public offering
price, up to 4.9% of the shares of Common Stock offered hereby for employees of
the Company and certain individuals who have expressed an interest in
purchasing shares of Common Stock in this offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the Underwriters to the general public on the same basis as
other shares offered hereby.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock has been determined through negotiations among the Company, the
Selling Shareholders and the Representatives. The material factors considered
in such negotiations were prevailing market conditions, certain financial
information of the Company for recent periods, market valuations of other
companies that the Company, the Selling Shareholders and the Representatives
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development, the Company's
management and other factors deemed relevant. There can be no assurance that an
active or orderly trading market will develop for the Common Stock or that the
Common Stock will trade in the public market subsequent to this offering at or
above the initial trading price. See "Risk Factors--No Prior Market for the
Common Stock; Possible Volatility of Share Price" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
52
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby are being passed upon for the Company by Rubin Baum Levin
Constant Friedman & Bilzin, Miami, Florida. Marc J. Stone, the Company's Vice
President of Corporate Planning and Development, General Counsel and Secretary
and a director, is currently of counsel to Rubin Baum and was previously a
partner at that firm. See "Certain Transactions." Certain legal matters in
connection with this offering will be passed upon for the Underwriters by Hale
and Dorr LLP, Boston, Massachusetts.
EXPERTS
The financial statements included in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to the shares
of Common Stock offered hereby. This Prospectus, which constitutes a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement. Statements made in this Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete; with respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits thereto may be inspected, without charge, at the
public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at 500 West Madison Street, Chicago, IL 60661, and 7 World
Trade Center, New York, New York 10048. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Registration
Statement and the exhibits thereto may also be accessed through the EDGAR
terminals in the Commission's public reference facilities in Washington, D.C.
or through the World Wide Web at http://www.sec.gov.
53
<PAGE>
OMEGA RESEARCH, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
----
Report of Independent Certified Public Accountants ........................... F-2
Balance Sheets as of December 31, 1995 and 1996 and
June 30, 1997 (unaudited) ................................................ F-3
Statements of Income for the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited) ............... F-4
Statements of Shareholders' Equity for the years ended December 31, 1994,
1995 and 1996 and the six months ended June 30, 1997 (unaudited) ......... F-5
Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996 and the six months ended June 30, 1996 and 1997 (unaudited) ... F-6
Notes to Financial Statements ................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of
Omega Research, Inc.:
We have audited the accompanying balance sheets of Omega Research, Inc. (a
Florida corporation) as of December 31, 1995 and 1996, and the related
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Omega Research, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 28, 1997 (except with respect to the
matters discussed in Note 7, as to which
the date is July 17, 1997).
F-2
<PAGE>
OMEGA RESEARCH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997
--------------------------- -------------------------------
1995 1996 HISTORICAL PRO FORMA
------------ ------------ ------------- ---------------
(Unaudited) (Unaudited)
(Note 7)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 311,468 $ 141,633 $ 263,595 $ 263,595
Accounts receivable, net ........................... 1,964,020 4,357,048 7,899,027 7,899,027
Inventories ....................................... 34,723 92,188 96,432 96,432
Other current assets .............................. 5,132 5,690 18,836 18,836
Deferred income taxes .............................. -- -- -- 2,824,000
---------- ----------- ----------- ------------
Total current assets ........................... 2,315,343 4,596,559 8,277,890 11,101,890
PROPERTY AND EQUIPMENT, net ........................ 908,231 1,085,112 928,528 928,528
OTHER ASSETS ....................................... 64,511 121,657 50,311 50,311
---------- ----------- ----------- ------------
Total assets .................................... $3,288,085 $5,803,328 $9,256,729 $ 12,080,729
========== =========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................. $ 203,923 $ 482,662 $ 868,289 $ 868,289
Accrued expenses ................................. 113,905 485,189 581,248 581,248
Income taxes payable .............................. -- -- -- 1,824,000
Note payable to bank .............................. -- -- -- 10,622,000
---------- ----------- ----------- ------------
Total current liabilities ........................ 317,828 967,851 1,449,537 13,895,537
---------- ----------- ----------- ------------
COMMITMENTS AND CONTINGENCIES
(Note 6)
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,
19,480,000 shares issued and
outstanding .................................... 194,800 194,800 194,800 194,800
Additional paid-in capital ........................ -- 2,517 44,336 (2,009,608)
Retained earnings ................................. 2,777,707 4,638,160 7,568,056 --
Less--Treasury stock, at cost,
194,800 shares in 1995 ........................... (2,250) -- -- --
---------- ----------- ----------- ------------
Total shareholders' equity ..................... 2,970,257 4,835,477 7,807,192 (1,814,808)
---------- ----------- ----------- ------------
Total liabilities and shareholders' equity ...... $3,288,085 $5,803,328 $9,256,729 $ 12,080,729
========== =========== =========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
F-3
<PAGE>
OMEGA RESEARCH, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Licensing fees .................. $7,853,349 $7,912,502 $13,943,234 $6,322,124 $12,092,426
Other revenues .................. 706,720 1,501,911 3,876,928 1,786,478 2,526,560
----------- ----------- ------------ ----------- ------------
Total revenues ............... 8,560,069 9,414,413 17,820,162 8,108,602 14,618,986
----------- ----------- ------------ ----------- ------------
OPERATING EXPENSES:
Cost of licensing fees ......... 831,098 875,700 1,716,884 880,829 855,583
Product development ............ 492,076 651,432 1,041,131 376,522 842,917
Sales and marketing ............ 2,711,699 3,560,970 5,617,931 2,603,097 4,945,968
General and administrative ...... 798,037 1,038,088 2,421,638 997,848 2,595,505
----------- ----------- ------------ ----------- ------------
Total operating expenses ...... 4,832,910 6,126,190 10,797,584 4,858,296 9,239,973
----------- ----------- ------------ ----------- ------------
Income from operations ......... 3,727,159 3,288,223 7,022,578 3,250,306 5,379,013
OTHER INCOME, net ............... 18,232 23,724 59,436 8,513 17,664
----------- ----------- ------------ ----------- ------------
Net income ..................... 3,745,391 3,311,947 7,082,014 3,258,819 5,396,677
PRO FORMA ADJUSTMENT TO
REFLECT INCOME TAXES
(Note 1) ........................ 1,479,429 1,308,219 2,797,396 1,287,234 2,131,687
----------- ----------- ------------ ----------- ------------
Pro forma net income ......... $2,265,962 $2,003,728 $ 4,284,618 $1,971,585 $ 3,264,990
=========== =========== ============ =========== ============
PRO FORMA NET INCOME
PER SHARE ..................... $ 0.21 $ 0.15
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING ..................... 20,541,000 21,186,000
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
F-4
<PAGE>
OMEGA RESEARCH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------------ ---------- ----------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 ......... 19,480,000 $194,800 $ -- $ 1,341,337 $ (2,250) $ 1,533,887
Cash distributions to shareholders -- -- -- (3,467,968) -- (3,467,968)
Net income ........................ -- -- -- 3,745,391 -- 3,745,391
----------- --------- -------- ------------ -------- ------------
BALANCE, December 31, 1994 ......... 19,480,000 194,800 -- 1,618,760 (2,250) 1,811,310
Cash distributions to shareholders -- -- -- (2,153,000) -- (2,153,000)
Net income ........................ -- -- -- 3,311,947 -- 3,311,947
----------- --------- -------- ------------ -------- ------------
BALANCE, December 31, 1995 ......... 19,480,000 194,800 -- 2,777,707 (2,250) 2,970,257
Retirement of treasury stock ...... -- -- (2,250) -- 2,250 --
Compensation expense on stock
option grants ..................... -- -- 4,767 -- -- 4,767
Cash distributions to shareholders -- -- -- (5,221,561) -- (5,221,561)
Net income ........................ -- -- -- 7,082,014 -- 7,082,014
----------- --------- -------- ------------ -------- ------------
BALANCE, December 31, 1996 ......... 19,480,000 194,800 2,517 4,638,160 -- 4,835,477
Compensation expense on stock
option grants (unaudited) ......... -- -- 41,819 -- -- 41,819
Cash distributions to shareholders
(unaudited) ..................... -- -- -- (1,960,000) -- (1,960,000)
Noncash distributions to shareholders
(unaudited) ..................... -- -- -- (506,781) -- (506,781)
Net income (unaudited) ............ -- -- -- 5,396,677 -- 5,396,677
----------- --------- -------- ------------ -------- ------------
BALANCE, June 30, 1997 (unaudited) ... 19,480,000 $194,800 $ 44,336 $ 7,568,056 $ -- $ 7,807,192
=========== ========= ======== ============ ======== ============
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
F-5
<PAGE>
OMEGA RESEARCH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
--------------- --------------- --------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income .................................... $ 3,745,391 $ 3,311,947 $ 7,082,014 $ 3,258,819 $ 5,396,677
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization ............. 153,676 205,753 353,852 114,787 351,081
Provision for doubtful accounts ............ 117,000 134,000 830,430 485,726 1,231,684
Compensation expense on
stock option grants ..................... -- -- 4,767 -- 41,819
(Increase) decrease in:
Accounts receivable ..................... (588,602) (1,158,223) (3,223,458) (1,825,229) (4,773,663)
Inventories ............................. (10,652) 8,082 (57,465) (42,670) (4,244)
Other current assets .................... 1,954 4,919 (558) (2,360) (13,146)
Other assets ............................ -- (2,211) (46,800) -- --
Increase (decrease) in:
Accounts payable ........................ 69,083 (86,175) 278,739 462,250 385,627
Accrued expenses ........................ 79,604 18,472 371,284 80,740 96,059
------------ ------------ ------------ ------------ ------------
Net cash provided by operating
activities ......................... 3,567,454 2,436,564 5,592,805 2,532,063 2,711,894
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures ........................ (167,404) (240,310) (530,733) (141,978) (600,574)
Purchases of investments ..................... (100,325) -- -- -- --
Proceeds from maturities of investments ...... -- 200,489 -- -- --
Capitalized software development costs ...... (32,400) (61,000) (10,346) (150,151) (29,358)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities.. (300,129) (100,821) (541,079) (292,129) (629,932)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on note payable ..................... (39,093) -- -- -- --
Distributions to shareholders ............... (3,467,968) (2,153,000) (5,221,561) (1,856,561) (1,960,000)
------------ ------------ ------------ ------------ ------------
Net cash used in financing activities.. (3,507,061) (2,153,000) (5,221,561) (1,856,561) (1,960,000)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ........................ (239,736) 182,743 (169,835) 383,373 121,962
CASH AND CASH EQUIVALENTS,
beginning of period ........................... 368,461 128,725 311,468 311,468 141,633
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
end of period ................................. $ 128,725 $ 311,468 $ 141,633 $ 694,841 $ 263,595
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for interest ...... $ 1,641 $ 1,657 $ -- $ -- $ --
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
NONCASH TRANSACTIONS-See Note 7
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
F-6
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
(A) DESCRIPTION OF BUSINESS
Omega Research, Inc. (the "Company"), a Florida corporation, was
incorporated in 1982 to develop, market and sell investment analysis software
to investors. The Company's principal products allow investors to historically
test and computer automate trading strategies.
(B) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of December 31,
1995 and 1996, cash and cash equivalents consisted primarily of interest-
bearing deposits.
ACCOUNTS RECEIVABLE
Accounts receivable are principally from individuals, distributors and
retailers of the Company's products. The Company performs periodic credit
evaluations and maintains allowances for potential credit losses of $134,000,
$830,430 and $2,010,114 (unaudited) at December 31, 1995 and 1996 and June 30,
1997, respectively, and allowances for potential returns of approximately
$252,000 and $1,796,859 and $4,875,000 (unaudited) at December 31, 1995 and
1996 and June 30, 1997, respectively.
The Company provides all customers with a 30-day right of return, and as a
result, records a provision for returns at the time of sale. The Company,
depending on the circumstances, permits customers to return products after the
30-day period in order to maintain as high a level of customer satisfaction as
possible. The reserve for returns and the provision for bad debts, in
accordance with generally accepted accounting principles, are estimated based
on historical experience and other relevant information. There is no certainty
that future returns or bad debts will not exceed established estimates. In
addition, the Company is subject to rapid changes in technology and shifts in
consumer demand which could result in product returns, in the near term, that
are materially different than the Company's reserves provided.
INVENTORIES
Inventories, which consist primarily of software media, manuals and
related packaging materials, are stated at the lower of cost or market with
cost determined on a first-in, first-out ("FIFO") basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using the accelerated and straight-line
methods over the estimated useful lives of the assets.
Maintenance and repairs are charged to expense when incurred; betterments
are capitalized. Upon the sale or retirement of assets, the cost and
accumulated depreciation are removed from the accounts, and any gain or loss is
recognized currently.
F-7
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
REVENUE RECOGNITION
LICENSING FEES
Sales, net of provisions for estimated returns, are recognized at the time
the product is shipped, in accordance with the provisions of the AICPA
Statement of Position 91-1, "Software Revenue Recognition." While the Company
has no obligation to perform future services subsequent to shipment, the
Company provides telephone customer support as an accommodation to purchasers
of its products as a means of fostering customer satisfaction. The majority of
such services are provided during the first 60 days of ownership of the
Company's products. Costs associated with this effort are generally
insignificant in relation to product sales value.
OTHER REVENUES
The Company has entered into various agreements with entities that market
and sell financial market data feed subscriptions. Except for the agreements
described in Note 6, the Company receives, in general, monthly payments based
on the use by the Company's customers of financial market data feed
subscriptions which are accessed through one of the Company's products. The
Company records these revenues as they are earned in accordance with the terms
of the applicable contracts.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Cost of Capitalized Software to be Sold, Leased or
Otherwise Marketed" ("SFAS 86"), the Company examines its software development
costs after technological feasibility has been established to determine the
amount of capitalization that is required. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. The costs that are capitalized are amortized on the
straight-line basis over a one-year period, the period of benefit, of the
related products. For certain periods, the technological feasibility of the
Company's products and the general release of such software substantially
coincide, and, as a result, software development costs qualifying for
capitalization are immaterial. Software development costs, net of amortization,
were $61,000, $71,348 and $0 (unaudited) at December 31, 1995 and 1996 and June
30, 1997, respectively.
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be disposed of" ("SFAS 121") was issued. SFAS 121 establishes accounting
standards for recording the impairment of long-lived assets, certain
identifiable intangibles and goodwill. The Company, as required, adopted the
provisions of SFAS 121 for the year ended December 31, 1996 which did not have
an impact on its results of operations and financial position.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
STOCK-BASED COMPENSATION
Beginning in 1996, the Company implemented the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") in accounting for stock-based transactions with
nonemployees and, accordingly, records compensation expense in the statements
of income when these type of options are issued. The Company continues to apply
the provisions of APB 25 for transactions with employees, as permitted by SFAS
123.
INTERIM FINANCIAL DATA
In the opinion of the management of the Company, the accompanying
unaudited financial statements contain all adjustments (consisting of only
normal and recurring adjustments) necessary to present fairly the financial
position of the Company as of June 30, 1997, and the results of operations for
the six months ended June 30, 1996 and 1997. The results of operations and cash
flows for the six months ended June 30, 1997 are not necessarily indicative of
the results of operations or cash flows which may be reported for the remainder
of 1997, or for any subsequent period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value as of December 31,
1995 and 1996.
INCOME TAX STATUS
For income tax reporting purposes, the Company is an S Corporation.
Accordingly, net income and related timing differences which arise in the
recording of income and expense items for financial reporting and tax reporting
purposes are included in the individual tax returns of the shareholders.
The pro forma adjustment to reflect income taxes included in the
accompanying statements of income is for informational purposes only. Income
taxes have been provided at the estimated effective rate of 39.5%.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per common share and common share equivalents have
been computed by dividing net income by the weighted average number of common
shares and common share equivalents outstanding as well as the impact of the
following:
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common share and common share equivalents issued at prices below the
assumed public offering price during the 12-month period prior to the proposed
public offering having been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method and an
assumed initial public offering price of $11.00 per share).
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 55, common shares outstanding also include the estimated portion of the
shares in the proposed initial public offering (321,000 and 966,000 shares for
the year ended December 31, 1996 and for the six months ended June 30, 1997,
respectively,
F-9
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
at an assumed initial offering price of $11 per share) whose proceeds would
fund undistributed S Corporation earnings at December 31, 1996 and June 30,
1997 of $3,526,000 and $10,622,000, respectively. See Note 7.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
-------------- ---------------
<S> <C> <C>
Weighted average shares outstanding ............ 19,480,000 19,480,000
Impact of stock options with exercise prices below
the initial offering price ..................... 740,000 740,000
Impact of shares required to settle undistributed
S Corporation earnings ........................ 321,000 966,000
----------- -----------
20,541,000 21,186,000
=========== ===========
</TABLE>
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") which changes the method of calculating earnings per share. SFAS
128 requires the presentation of "basic" earnings per share and "diluted"
earnings per share on the face of the income statement. Basic earnings per
share is computed by dividing the net income available to common shareholders
by the weighted average shares of outstanding common stock. The calculation of
diluted earnings per share is similar to basic earnings per share except that
the denominator includes dilutive common stock equivalents such as stock
options and warrants. The statement is effective for financial statements for
periods ending after December 15, 1997. The Company will adopt SFAS 128 in the
fourth quarter of 1997, as early adoption is not permitted. The following table
presents pro forma earnings per share amounts calculated in accordance with
SFAS 128:
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
-------------- ---------------
Pro forma earnings per share:
Basic earnings per share ......... $0.22 $0.17
Diluted earnings per share ...... $0.21 $0.15
F-10
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIFE --------------------------- JUNE 30,
IN YEARS 1995 1996 1997
------------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Land ........................... -- $ 47,034 $ 47,034 $ --
Building and improvements ...... 35 556,778 559,119 --
Computers and software ......... 3 432,594 913,052 1,270,921
Furniture and equipment ......... 3-5 262,135 284,625 430,665
Leasehold improvements ......... 5 -- -- 96,666
Autos ........................... 5 110,205 110,205 110,205
---------- ---------- ----------
1,408,746 1,914,035 1,908,457
Less--Accumulated depreciation
and amortization ............... (500,515) (828,923) (979,929)
---------- ---------- ----------
$ 908,231 $1,085,112 $ 928,528
========== ========== ==========
</TABLE>
(3) ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
---------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
Payroll and related accruals ......... $ 68,761 $262,268 $377,395
Accrued technical support costs ...... -- 120,000 150,000
Other ................................. 45,144 102,921 53,853
--------- --------- ---------
$113,905 $485,189 $581,248
========= ========= =========
</TABLE>
(4) STOCK OPTIONS:
The Company has reserved 3,000,000 shares of its common stock for issuance
under its Amended and Restated 1996 Incentive Stock Plan (the "Plan"). Under
the Plan, incentive and nonqualified stock options, stock appreciation rights,
stock awards, performance shares and performance units are available to
employees or consultants of the Company. Currently, only options have been
granted. The terms of each option agreement are determined by the Board of
Directors until a Compensation Committee is established. The exercise price of
incentive stock options may not be less than fair market value at the date of
grant and their terms may not exceed ten years. All options issued under the
Plan in 1996 had a five-year vesting period. A summary of stock option activity
is as follows:
F-11
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) STOCK OPTIONS:--(CONTINUED)
<TABLE>
<CAPTION>
NO. OF SHARES EXERCISE PRICE
--------------- ---------------
<S> <C> <C>
Options outstanding at December 31, 1995 ...... --
Granted ....................................... 582,000 $1.25
-------
Outstanding, December 31, 1996 ............... 582,000 1.25
Granted (unaudited) ........................... 304,750 1.25 - 7.00
Cancelled (unaudited) ........................ (500) 2.00
-------
Outstanding, June 30, 1997 (unaudited) ......... 886,250 $1.25 - 7.00
=======
</TABLE>
All options issued during 1996 were issued to key employees at an exercise
price that was subsequently determined to be approximately $286,000 below fair
market value at the date of grant as determined by an independent appraisal.
Several of the options issued during 1997 were determined to be, in the
aggregate, $629,000 (unaudited) below fair value as determined by an
independent appraisal. These differences will be amortized over the five-year
vesting period of the related stock options. For the year ended December 31,
1996 and the six months ended June 30, 1997, the Company recorded compensation
expense of $4,767 and $41,819 (unaudited), respectively. At December 31, 1996
and June 30, 1997, there were no exercisable options.
The Company, as permitted by SFAS 123, applies APB opinion 25 for options
granted to employees. Accordingly, no compensation is recognized for such
grants to the extent their exercise price is equal to the fair market value of
the underlying stock at the date of grant. Had compensation cost for the
Company's stock options been based on fair value at the grant dates consistent
with the methodologies of SFAS 123, the Company's net income for the year ended
December 31, 1996 and the six months ended June 30, 1997 would have been
reduced by $8,324 and $143,088 (unaudited), respectively. These amounts had no
impact on pro forma net income per share.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes model with the following assumptions: expected
volatility of 70%, risk-free interest rate of 7.0%, expected dividends of $0
and expected terms of 7 years.
(5) EMPLOYEE BENEFIT PLANS:
The Company provides retirement benefits through a defined contribution
401(k) plan (the "Plan") which was established during 1994. Company
distributions under the Plan amounted to $22,842, $16,350, $62,483 and $0
(unaudited) in 1994, 1995, 1996 and the six months ended June 30, 1997,
respectively. The Company also provides benefits through a Profit Sharing Bonus
Program for eligible employees, as defined, which will be terminated effective
as of September 30, 1997.
Distributions under the Profit Sharing Bonus Program are based on
increases in net sales levels and are made at the sole discretion of the
Company. Company distributions under this Profit Sharing Bonus Program amounted
to $81,279, $19,903, $422,878 and $277,000 (unaudited) in 1994, 1995, 1996 and
the six months ended June 30, 1997, respectively.
(6) COMMITMENTS AND CONTINGENCIES:
Operating Leases
During 1996, the Company entered into a noncancellable operating lease for
new office facilities. The term of the lease is five and one-half years and
commenced in February 1997. Future minimum lease payments as of December 31,
1996 under all operating leases are as follows:
F-12
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
1997 ............ $262,140
1998 ............ 280,957
1999 ............ 265,638
2000 ............ 271,942
2001 ............ 280,586
Thereafter ...... 178,293
-----------
$1,539,556
===========
Total rent expense for 1996 and the six months ended June 30, 1997 was
$47,264 and $118,999 (unaudited), respectively.
ROYALTY AGREEMENT
On August 26, 1994, and as amended on March 7, 1997, the Company entered
into a Software License, Maintenance and Development Agreement (the
"Agreement") with Dow Jones Markets, Inc. ("Dow Jones Markets"). Under the
Agreement, the Company modified one of its software products to create a Dow
Jones Markets version. Also, the Company granted Dow Jones Markets a license to
promote, market, sublicense and distribute the Dow Jones Markets version for
six years. The Company received no royalties under the Agreement in 1994 and
1995. During 1996 and the six months ended June 30, 1997, the Company earned
approximately $1,452,000 and $1,240,000 (unaudited), respectively, in royalties
(based upon minimum royalty requirements) under the terms of this Agreement. In
March 1997, the Company entered into a similar agreement (but without minimum
royalty requirements) with Dow Jones Markets concerning one of its other
software products. Marketing of such other product under that agreement has not
yet begun.
LITIGATION
From time to time, the Company may become engaged in ordinary routine
litigation incidental to its business. The Company does not believe that such
ordinary routine litigation would have a material adverse effect on its
financial position or results of operations.
(7) SUBSEQUENT EVENTS:
SHARE SPLIT
Effective January 29, 1997, the Company authorized an increase in the
amount of its authorized common stock to 100,000,000 and changed the par value
of each share to $.01. In addition, on January 30, 1997, the Company declared a
97,400-for-1 split of its outstanding common stock. The split has been
retroactively reflected in the financial statements for all periods presented.
INITIAL PUBLIC OFFERING
The Company is in the process of preparing an initial public offering (the
"Offering") of up to 4,255,000 shares of common stock of the Company. It is
currently contemplated that of the shares of common stock to be offered to the
public, 2,990,000 shares of common stock will be offered by the Company and up
to 1,265,000 shares of common stock will be offered by the Selling
Shareholders. On July 16, 1997, the Company authorized 25,000,000 shares of
preferred stock with a par value of $.01 per share. No specific preferences or
rights have been established to date with respect to any of these shares nor
have any of these shares been issued.
F-13
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) SUBSEQUENT EVENTS:--(CONTINUED)
Additionally, just prior to consummation of the Offering the Company
intends to revoke its S Corporation status. As a result, deferred income taxes
and related tax liabilities will be recorded and will result in a benefit of
approximately $1.0 million to the provision for income taxes.
DISTRIBUTION
Effective June 30, 1997, the Company declared a dividend distributing land
and a building to its shareholders. The carrying values of such assets were
$506,781.
UNAUDITED PRO FORMA BALANCE SHEET
The accompanying unaudited pro forma balance sheet at June 30, 1997,
assumes the effects, on a pro forma basis, of the following transactions: (a)
the distribution of undistributed S Corporation earnings through June 30, 1997
to the current shareholders totaling $10,622,000 and financed through the
issuance of a note payable to a bank; (b) the recording of estimated deferred
taxes and related tax liabilities recognized in accordance with Financial
Accounting Standards Board Statement No. 109, which the Company will adopt upon
termination of S Corporation status, and (c) the reclassification of remaining
undistributed amounts to additional paid-in capital.
F-14
<PAGE>
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