SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number: 0-22895
OMEGA RESEARCH, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2223464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8700 WEST FLAGLER STREET, MIAMI, FLORIDA 33174
(Address of principal executive offices) (Zip Code)
(305) 485-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT ON MARCH 17, 1999, BASED UPON THE CLOSING
MARKET PRICE OF THE REGISTRANT'S VOTING STOCK ON THE NASDAQ NATIONAL MARKET ON
MARCH 17, 1999, WAS APPROXIMATELY $56,814,671.
THE REGISTRANT HAD 22,317,992 SHARES OF COMMON STOCK, $.01 PAR VALUE,
OUTSTANDING AS OF MARCH 17, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
(SPECIFIC SECTIONS INCORPORATED ARE IDENTIFIED UNDER APPLICABLE ITEMS HEREIN)
CERTAIN PORTIONS OF THE REGISTRANT'S PROXY STATEMENT TO BE FILED IN
CONNECTION WITH ITS 1999 ANNUAL MEETING OF SHAREHOLDERS ARE
INCORPORATED BY REFERENCE IN PART III OF THIS REPORT.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE NO.
--------
<S> <C>
PART I
ITEM 1. BUSINESS.................................................................................................1
Overview and Recent Developments.......................................................1
Industry Background....................................................................1
Products...............................................................................3
Sales and Marketing....................................................................6
Strategic Relationships................................................................8
Product Development and Year 2000 Compliance...........................................9
Customer Support and Training.........................................................12
Competition...........................................................................12
Intellectual Property.................................................................13
Employees.............................................................................14
ITEM 2. PROPERTIES..............................................................................................15
ITEM 3. LEGAL PROCEEDINGS.......................................................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.............................................................................16
Common Stock Information..............................................................16
Dividend Policy.......................................................................16
Recent Sales of Unregistered Securities...............................................17
Use of Proceeds.......................................................................17
ITEM 6. SELECTED FINANCIAL DATA.................................................................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................................................19
Overview .............................................................................19
Results of Operations.................................................................22
Years Ended December 31, 1998 and 1997................................................22
Years Ended December 31, 1997 and 1996................................................24
Income Taxes..........................................................................25
Variability of Results................................................................26
Liquidity and Capital Resources.......................................................26
Recently Issued Accounting Standards..................................................27
Year 2000 Compliance..................................................................28
Forward-Looking Statements; Business Risks............................................28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................................................................36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................................................................36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT..........................................................................................37
ITEM 11. EXECUTIVE COMPENSATION..................................................................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................................................................................37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.....................................................................................38
SIGNATURES.......................................................................................................40
</TABLE>
i
<PAGE>
PART I
ITEM 1. BUSINESS.
OVERVIEW AND RECENT DEVELOPMENTS
Omega Research, Inc. ("Omega Research" or the "Company") is a leading
provider of real-time investment analysis software for the Microsoft Windows
operating system. On February 22, 1999, the Company officially released its next
generation of premium software products, branded "2000I," which includes upgrade
versions of its existing products and new products. Accordingly, as of February
22, 1999, the Company's software product line consists of TRADESTATION 2000I,
RADARSCREEN 2000I, OPTIONSTATION 2000I, OMEGA RESEARCH PROSUITE 2000I and
SUPERCHARTS 4 (SUPERCHARTS 4 is not part of the next generation of the Company's
products; SUPERCHARTS 2000I is expected to be released later in 1999). All of
the 2000I software products have 32-bit architecture, are "Internet-centric,"
and utilize Microsoft Component Object Model (COM) technology. Prior to February
22, 1999, the Company marketed three principal software products: TRADESTATION
(version 4), OPTIONSTATION (version 1.2) and SUPERCHARTS (version 4).
TRADESTATION enables 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. RADARSCREEN, a new product,
enables investors to scan the markets in real time to identify favorable buying
and selling opportunities based upon their own investment and trading
strategies, and OMEGA RESEARCH PROSUITE, also a new product, is an integrated
suite of TRADESTATION, OPTIONSTATION and RADARSCREEN. 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.
The Company also launched in the first quarter of 1999 HISTORYBANK.COM,
an end-of-day financial market data service consisting of two components:
HISTORYBANK.COM FINANCIAL DATABASE, a database on CD-ROM that contains more than
30 years of financial market price and volume data that is included with
TRADESTATION 2000I, RADARSCREEN 2000I, OPTIONSTATION 2000I and OMEGA RESEARCH
PROSUITE 2000I; and HISTORYBANK.COM DAILY UPDATE SERVICE, an Internet data
service that offers daily updates of such data after the close of the markets.
The Company was incorporated in Florida in 1982. Its principal
executive offices are located at 8700 West Flagler Street, Miami, Florida 33174,
and its telephone number is (305) 485-7000.
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.
<PAGE>
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 and online brokerage services
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. The proliferation of these funds over the past several years,
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 Bloomberg,
LP, Bridge Information Systems, Inc. ("Bridge"), including its subsidiary,
Telerate, Inc. ("Bridge Telerate"), CQG, Inc., FutureSource Information Systems,
Inc. ("FutureSource"), ILX Systems, Inc., Reuters Group PLC and Standard &
Poor's ComStock, Inc. (Xpressfeed), all of which generally serve the
institutional market, and Data Broadcasting Corporation (BMI, DBC Signal, Signal
Online, StockEdge Online, InSite), Data Transmission Network Corporation (DTN
Real Time, DTNstant), P.C. Quote, Inc. (Hyperfeed), Telescan, Inc., Track Data
Corporation (Dial Data, Track on Line) and Worden Brothers, Inc. (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.
While financial market data have been available for some time,
historically 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 Company believes that the emergence of
easy-to-use powerful personal computers with standard operating systems has
increasingly brought more 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 increasing and less-expensive accessibility to large quantities of
various types of financial data, the increasingly-powerful processing
capabilities of personal computers, and the rapidly-growing capabilities of the
Internet, the Company believes that 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,
the Company believes that 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
2
<PAGE>
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.
PRODUCTS
In the first quarter of 1999, the Company released its next generation
of products: TRADESTATION 2000I, RADARSCREEN 2000I, OPTIONSTATION 2000I, and
OMEGA RESEARCH PROSUITE 2000I. The Company expects to release prior to the end
of 1999 SUPERCHARTS 2000I (the next generation of its SUPERCHARTS product; the
current shipping version of SUPERCHARTS therefore remains, until that time,
SUPERCHARTS 4). Except for SUPERCHARTS 4, and except for availability for a
limited time of TRADESTATION version 4 to a limited number of investors, the
Company has, since February 22, 1999, offered only its 2000I software products.
The Company's 2000I software products contain numerous new features,
functions and improvements when compared to the prior versions, including the
following: (i) compatibility with Internet datafeeds; (ii) Internet access to
online brokerages, and to financial and other information accessible through the
Internet; (iii) 32-bit architecture; and (iv) Microsoft Component Object Model
(COM) technology (most notably, this technology enables users to run multiple
software applications within a single workspace).
The Company's software products, each of which operates in a Microsoft
Windows environment, are currently marketed to individual investors and to
professionals who license such products on an individual basis. The 2000I
software is compatible with the following real-time Internet and broadcast
financial market datafeeds: BMI (broadcast); DBC Signal (broadcast); DTN Real
Time (broadcast); DTNstant (broadcast); InSite (Internet); P.C. Quote's
Hyperfeed (Internet and broadcast); Signal Online (Internet); and StockEdge
Online (Internet). Agreements are also in place to add as real-time datafeeds
later this year FutureSource's MDS network and stand-alone datafeeds
(broadcast), and Standard & Poor's ComStock's Xpressfeed (broadcast). The
pre-2000I versions were compatible with only the following real-time broadcast
datafeeds: BMI; DBC Signal; FutureSource; and Standard & Poor's ComStock.
In addition to being compatible with real-time datafeeds, the Company's
2000I software products are also able to access and display end-of-day data.
TRADESTATION 2000I is compatible with Dial Data's end of day data service;
however, with the release by the Company of its HISTORYBANK.COM data service,
TRADESTATION 2000I customers who use end-of-day (as opposed to real-time) data,
in order to use effectively the HISTORYBANK.COM FINANCIAL DATABASE included with
TRADESTATION 2000I, are required to use the Company's HISTORYBANK.COM DAILY
UPDATE SERVICE, as only the DAILY UPDATE SERVICE integrates seamlessly with the
FINANCIAL DATABASE. In order to access and display end-of-day data with
RADARSCREEN 2000I or OPTIONSTATION 2000I, HISTORYBANK.COM DAILY UPDATE SERVICE
needs to be used. The historical data that was included with the Company's
pre-2000I software seamlessly integrated with the Dial Data and Telescan
end-of-day financial market data services.
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
3
<PAGE>
combination. The evolution of TRADESTATION PROSUITE version 4, a product
combining (but not integrating) TRADESTATION and OPTIONSTATION, to OMEGA
RESEARCH ProSuite 2000I, an integrated suite of TRADESTATION 2000I, RADARSCREEN
2000I and OPTIONSTATION 2000I, is the Company's solution for investors active in
multiple markets, and for investors who are seeking a full range of tools to
help them design and historically test trading strategies to determine the best
times to buy and sell (TRADESTATION), then apply those tested strategies to
identify which securities should be bought or sold (RADARSCREEN), and then to
determine how to buy and sell, i.e., whether to buy or sell the underlying
security or one of several possible options on such security (OPTIONSTATION).
Omega Research's principal products currently are:
<TABLE>
<CAPTION>
LATEST
CURRENT OPERATING LIST INITIAL VERSION
PRODUCT VERSION SYSTEM PRICE RELEASE DATE RELEASE DATE
- ------- ------- --------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
OMEGA RESEARCH PROSUITE 2000I Microsoft Windows $4,799 1999 1999
TRADESTATION 2000I Microsoft Windows $2,399 1991 1999
RADARSCREEN 2000I Microsoft Windows $2,399 1999 1999
OPTIONSTATION 2000I Microsoft Windows $2,399 1996 1999
SUPERCHARTS REAL-TIME 4.0 Microsoft Windows $1,199 1996 1996
SUPERCHARTS END-OF-DAY 4.0 Microsoft Windows $ 395 1992 1996
</TABLE>
TRADESTATION 2000I. 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, or by e-mail. 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 and trading terms 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. The
Company's TRADESTATION product has been marketed worldwide to institutional
investors on a monthly subscription basis by Bridge Telerate. Bridge Telerate
and the Company are currently working to complete development of technical
compatibility between TRADESTATION 2000I and the Bridge technology (called
Bridgefeed) on which the Bridge Telerate datafeeds, as well as other Bridge
datafeeds, are to run. Additionally, under a recent agreement with FutureSource,
TRADESTATION 2000I is expected, once compatibility is developed, to be offered
worldwide by FutureSource to institutional investors on a monthly subscription
basis.
RADARSCREEN 2000I. RADARSCREEN is a new Omega Research product,
officially released in February 1999 as part of OMEGA RESEARCH PROSUITE 2000I.
RADARSCREEN is expected to be available as a separate product in the second
quarter of 1999. RADARSCREEN enables investors to scan up to hundreds or
thousands (depending upon the data service and computer hardware used) of stocks
or other securities to identify favorable buying and selling opportunities based
upon their own investment criteria, which may be designed through the use of
EASYLANGUAGE and the POWEREDITOR.
4
<PAGE>
The program also alerts the investor in real time when the criteria are met, and
updates dynamically in real time as new securities meet the criteria or
securities fail to continue to meet the criteria. RADARSCREEN can also alert the
investor by alpha-numeric pager or e-mail.
OPTIONSTATION 2000I. OPTIONSTATION is an options trading analysis
product for stock, index and futures options which enables investors, without
requiring them to be options experts or mathematicians, to explore complex
trading strategies. Specifically, OPTIONSTATION is designed to sort through all
of the possible options positions on one or more securities and identify the
most favorable risk-reward profile based upon user-defined assumptions.
EASYLANGUAGE and the POWEREDITOR can also now be used with OPTIONSTATION to
customize the user's options analyses. 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 OptionStation Position
Analysis and OptionStation Position Chart features enable investors to design
and customize options positions and then graphically view and analyze each
position's profitability and risk. The program will alert the investor in real
time when the investor's specified criteria have been met. Also, the investor
can be notified of the alert via an alpha-numeric pager or by e-mail.
OMEGA RESEARCH PROSUITE 2000I. OMEGA RESEARCH PROSUITE is the Company's
premium product, as it includes, as an integrated suite, TRADESTATION 2000I,
OPTIONSTATION 2000I and RADARSCREEN 2000I. Due to the utilization of Microsoft
COM technology, all three programs (plus additional third party programs, such
as, e.g., Excel spreadsheets) may be viewed and utilized simultaneously within a
single workspace. OMEGA RESEARCH PROSUITE is marketed to investors who trade in
multiple markets and to investors who are seeking a full range of analysis
tools. For example, an investor who uses OMEGA RESEARCH PROSUITE may use
TRADESTATION to conduct analysis to determine the optimum time to buy or sell
stocks or futures based upon his or her own trading strategies, then use
RADARSCREEN to scan the markets to identify which stocks or futures he or she
wants to buy or sell based upon such trading strategies, and then use
OPTIONSTATION to determine whether, based upon his or her market assumptions, an
option strategy may be preferable to trading the underlying securities.
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 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. EASYLANGUAGE is included to a limited degree in
SUPERCHARTS.
HISTORYBANK.COM. HISTORYBANK.COM is the Company's new historical
financial market database and end-of-day financial market data service.
HISTORYBANK.COM FINANCIAL DATABASE is a database on CD-ROM that contains more
than 30 years of daily financial market price and volume data that is included
at no additional cost with TRADESTATION 2000I, OPTIONSTATION 2000I, RADARSCREEN
2000I and OMEGA RESEARCH PROSUITE 2000I. HISTORYBANK.COM FINANCIAL DATABASE is
also offered separately for a one-time license fee of $995.00, but given that
its data format is currently technically compatible only with the Company's
2000I software products, independent sales are not expected to be material.
HISTORYBANK.COM DAILY UPDATE SERVICE
5
<PAGE>
offers seamlessly integratable updates of the data delivered through the
Internet after the close of the markets each trading day. HISTORYBANK.COM is
expected to serve as a complete data solution for Omega Research customers who
require data only on an end-of-day basis, and as a supplementary data "refresh"
service for Omega Research customers who use real-time data delivered by a
third-party datafeed compatible with the Company's 2000I software products.
HISTORYBANK.COM end-of-day updates may be obtained as either a "daily" (open,
high, low, close) presentation, or as an "intra-day" (tick-by-tick)
presentation. HISTORYBANK.COM DAILY UPDATE SERVICE, while operational, is still
under construction and is currently being offered at no charge for an
introductory promotional period expected to terminate later in 1999. Following
the introductory promotional period, the Company expects to charge a monthly
subscription rate of $29.99 to $49.99 for the service. The data offered by
HISTORYBANK.COM (both historical and daily) includes features such as
adjustments for stock splits (including reverse splits), futures continuous
contracts, historical implied volatility options data, and extensive symbol
maintenance that gives effect to bankruptcies, mergers and symbol changes in
order to enhance the accuracy of historical charts displayed using the Company's
software products.
ADDITIONAL PRODUCTS AND SERVICES. The Company offers additional
products and services, such as OMEGAWORLD, the Company's annual system trading
and development conference, the SYSTEM TRADING AND DEVELOPMENT CLUB, a
bi-monthly CD-ROM and accompanying booklet that describes and demonstrates
sample trading systems designed using EASYLANGUAGE, OMEGA RESEARCH MAGAZINE, a
quarterly magazine about system trading and development currently distributed
free of charge to the Company's customer base, and seminars, workshops and
instructional videotapes designed to enhance investors' abilities to use fully
and effectively the Company's products (which are often offered free of charge).
In addition, the Company sometimes markets investment education products (e.g.,
software, videotapes, and/or seminars) of well-known traders, sharing with such
traders revenues or profits from such promotions. The Company also markets
PORTFOLIO MAXIMIZER, a software application that is used to evaluate trading
systems developed with TRADESTATION or SUPERCHARTS (PORTFOLIO MAXIMIZER 2000, a
32-bit upgrade, is expected to be available later in 1999). These additional
products and services are intended to complement the Company's principal
investment analysis products. Additional products and services currently account
for, and are expected in the foreseeable future to continue to account for, a
minor portion of the Company's revenues. Last year, the Company discontinued
WALL STREET ANALYST, its introductory charting and analysis package.
SALES AND MARKETING
The Company believes one of its most important assets and a key
competitive advantage is its installed base of investment analysis software
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, and (ii) marketing additional and/or new
products to its entire installed customer base. The Company is seeking to
benefit from this advantage with its 2000I line of products. The Company is or
expects to be marketing: TRADESTATION 2000I and OPTIONSTATION 2000I as upgrades
to customers who own the prior versions of TRADESTATION and OPTIONSTATION; OMEGA
RESEARCH PROSUITE 2000I to customers who own the prior versions of TRADESTATION
and/or OPTIONSTATION; and RADARSCREEN 2000I to its entire customer base (either
separately or by offering OMEGA RESEARCH PROSUITE 2000I).
The Company markets its products using a combination of methods,
including inbound telesales, the use of domestic and international distributors
and other resellers, and, most recently, online sales through its web site.
Marketing efforts in support of sales include print media and
6
<PAGE>
television advertising, direct mail, advertising on the Company's web site,
hundreds of sales seminars conducted annually throughout the United States, and
establishment of strategic marketing and other strategic partner relationships
with data vendors, online brokerages and software and service solution
providers.
In February 1999, the Company launched a redesigned and expanded web
site. In addition to online ordering and payment for virtually all Company
products and services, the new web site includes the following features: online
registration for Company workshops and conferences and online subscriptions to
Company newsletters; expanded free access to downloadable technical files,
indicators and studies; online search functions that enable users to find Omega
Research product redistributors and user groups by geographic area; an expanded
industry events section; online search capabilities for locating Omega Research
Solution Providers; online search capabilities that allow users to find answers
to technical issues by having access to the Company's technical assistance
knowledge base; and comprehensive information about the Company's products and
services.
The majority of the Company's direct product sales are 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, delivery of product information to prospective purchasers, and
follow-up calls to the recipients of the product information to attempt to
complete the sale. The Company recently implemented 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.
The Company advertises its products in publications popular with
investors such as FUTURES, INVESTORS BUSINESS DAILY and TECHNICAL ANALYSIS OF
STOCKS & COMMODITIES. The Company also advertises on a regular basis on the CNBC
and CNN-FN television networks, and certain local television and radio 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 may include flyers, brochures,
videotapes, books or demo CDs. In addition, the Company publishes OMEGA RESEARCH
MAGAZINE, a quarterly periodical that contains articles and features on system
trading and development and advertises the Company's products and those of its
solution providers. The magazine is currently distributed free of charge to the
Company's installed customer base.
The Company has developed a presence in the institutional investor
market through its relationship with Bridge Telerate. TRADESTATION was
introduced by Dow Jones Markets (which was purchased by Bridge in May 1998) to
institutional investors in January 1996 as DOW JONES TRADESTATION. Bridge
Telerate also has the right to market SUPERCHARTS to its data subscribers;
however, the Company believes it is unlikely that this will occur in the
foreseeable future, if at all. The Company believes that relationships with
institutional data vendors, such as the Bridge Telerate relationship, will
facilitate the Company's efforts to increase the use of its products by
institutional investors. 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 anticipates that its 2000I software products will ultimately support a
network environment. This capability, if developed, would permit the Company,
from a technical standpoint, to market its 2000I software products directly to
institutions.
7
<PAGE>
The Company intends to continue to focus on expanding its international
presence and sales by continuing to develop its network of international
independent distributors of Omega Research products. As of December 31, 1998,
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. Approximately 10.3%, 9.7% and 11.2% of the Company's
revenues for the years ended December 31, 1998, 1997 and 1996, respectively,
were derived from customers outside of the United States. The Company also sells
directly to international investors in response to direct inquiries received
from abroad. International sales are made in United States dollars. The Company
believes that strategic relationships with foreign data vendors may be
beneficial in its efforts to expand in the international market. The Company is
in the early stages of its international sales and marketing efforts and,
therefore, no assurance can be given that these efforts will be successful.
STRATEGIC RELATIONSHIPS
Omega Research endeavors to establish and foster strategic marketing
and other strategic partner relationships with data vendors, software and
service solution providers, online brokerages and other relevant third parties.
BRIDGE TELERATE AGREEMENT. In August 1994, the Company entered into a
Software License, Maintenance and Development Agreement with Dow Jones Markets,
Inc. (then known as Dow Jones Telerate, Inc., now known as Telerate, Inc. and a
subsidiary of Bridge) under which Omega Research licenses to Bridge Telerate the
right to market and distribute TRADESTATION to its data subscribers worldwide,
who are primarily institutional investors (the "Bridge Telerate Agreement"). The
Company and Bridge Telerate are currently working to complete development of
technical compatibility between TRADESTATION 2000I and the Bridgefeed technology
on which the Bridge Telerate datafeeds are to run. As a result of Bridge's
ongoing conversion of Dow Jones Markets technology to Bridgefeed technology, and
the technical requirement that such Bridgefeed technology be made compatible
with TRADESTATION 2000I (which was first available to Bridge on February 1,
1999), the Bridge Telerate/Omega Research relationship has, from a technical
development/ maintenance point of view, been in a transitional stage, which is
expected to continue until development and testing of compatibility of
Bridgefeed and TRADESTATION 2000I, and installation of the combined
technologies, are completed. Installation of TradeStation 2000I with Bridgefeed
on all Bridge Telerate terminals that currently use TRADESTATION is also
required from a Year 2000 compliance perspective. See also "Product Development
and Year 2000 Compliance."
The Bridge Telerate Agreement expires in January 2002. The Bridge
Telerate Agreement requires Bridge Telerate to use commercially reasonable
efforts to market TRADESTATION, to market the product under a name including
"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 Bridge Telerate, but is obligated to provide limited technical support to
Bridge Telerate managers.
During the term of the Bridge Telerate Agreement, Omega Research is not
permitted to enter into a similar licensing arrangement regarding TRADESTATION
with five enumerated competitors of Bridge Telerate. Bridge Telerate is not
prohibited by the agreement from offering to its data service subscribers its
own or another company's investment analysis software.
In February 1999, the Company entered into a similar agreement with
FutureSource. It is expected that FutureSource will commence offering
TRADESTATION 2000I on a subscription basis as
8
<PAGE>
part of its recently-released Market Data Server (MDS) datafeeds during the
third or fourth quarter of 1999. Under the agreement, which has approximately a
3 1/2 year term, the Company will, once technical compatibility between
TRADESTATION 2000I and FutureSource's MDS datafeeds is completed, be paid a per
subscription royalty, subject to minimum monthly royalties. FutureSource's
license to market TRADESTATION 2000I is nonexclusive.
CROSS-MARKETING AGREEMENTS. The Company currently has written
agreements with other data vendors, some of which 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 for the development and
maintenance of technical compatibility between one or more of the Company's
software products and the data vendors' data services, and 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. In addition, in
January 1998, the Company entered into a cross-marketing agreement with E*Trade
Group, Inc. which provides for direct mail promotions to each other's customer
lists and other cross-marketing benefits. That agreement was recently extended
to December 31, 1999 to provide for development of a technical interface between
the Company's 2000I software and E*TRADE's online brokerage services and other
co-marketing transactions. The Company has one other similar agreement with an
online brokerage firm and is seeking to negotiate additional similar agreements
with other online brokerages. The Company currently plans to charge a flat
monthly fee to online brokerage firms for including the interface in the
Company's 2000I software. Such fees are not expected to be material in 1999, and
the extent to which such fees may be material after 1999 depends upon many
factors, including, but not limited to, the Company's ability to successfully
negotiate additional similar agreements with other online brokerage firms and
the perceived value of the interface to brokerage firms over time.
OMEGA RESEARCH SOLUTION PROVIDER NETWORK. The Company continues to
develop 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. This is attributable chiefly to
EASYLANGUAGE, the Company's proprietary computer language comprised of
English-like statements and trading terms that can be used by investors and
third-party developers to describe their own trading ideas and strategies.
EASYLANGUAGE can be used with all of the 2000I software products; in the prior
versions, it was usable only with TRADESTATION and, to a limited degree, with
SUPERCHARTS. Accordingly, third-party developers are now able to develop
software products using any one or more of the Company's software products as a
platform. A number of 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 AND YEAR 2000 COMPLIANCE
The Company believes that its future success depends in part on its
ability to maintain and improve its core software technologies, enhance and
develop new versions of its existing products and develop new products that meet
an expanding range of customer requirements. To date, with
9
<PAGE>
the exception of PORTFOLIO MAXIMIZER, the Company has relied primarily on
internal development of its products. The Company performs all quality assurance
and develops documentation and other training materials internally. In 1998,
1997 and 1996, product development expenses were approximately $3.3 million,
$1.9 million and $1.0 million, respectively. The Company may, in the near
future, explore acquisitions of, or strategic or other relationships with,
quality software development companies as a means of expanding its product
development resources.
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 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 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 customers. Any failure by the Company to anticipate
or to respond quickly to changing market conditions, or any significant delays
in the development or introduction of new products and/or enhancements, 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.
The Company's newest versions of its products, TRADESTATION 2000I,
RADARSCREEN 2000I, OPTIONSTATION 2000I, OMEGA RESEARCH PROSUITE 2000I,
SUPERCHARTS 2000I and PORTFOLIO MAXIMIZER 2000 (SUPERCHARTS 2000I and PORTFOLIO
MAXIMIZER 2000 are scheduled to be released later in 1999) are Year 2000
compliant (or, as to SUPERCHARTS 2000I and PORTFOLIO MAXIMIZER 2000, will be
upon release). This is the case because both the Omega Research server, called
GlobalServer, on which such applications run, and the applications themselves,
recognize and utilize century mark or 3- or 4-digit, rather than 2-digit, dates.
The most recent prior shipping versions of the Company's products,
TRADESTATION 4, OPTIONSTATION 1.2, TRADESTATION PROSUITE 4 and SUPERCHARTS 4
(which is the current shipping version until SUPERCHARTS 2000I is released) all
utilize Julian dating, in which each day is identified sequentially, as opposed
to being identified as a 2-digit date for a particular year. The use of Julian
dating, accordingly, does not raise any Year 2000 issues. However, these
versions do permit users to enter dates using the 2-digit year format.
Therefore, 2-digit years, such as 01 and 02, that are input are currently read
by those programs as 1901 and 1902, even though 2001 and 2002 is what
10
<PAGE>
is likely intended. Further, futures contracts with expiration dates beyond
December 31, 1999 are not currently identified as post Year 2000 dates by those
programs. The Company expects to offer, on or before June 30, 1999, to all
registered customers in good-payment standing of those versions, an appropriate
solution to such Year 2000 issues. It is possible that such solution may
eliminate a user's ability to analyze data prior to 1920. The Company currently
offers on its web site a "work-around" solution that may be used until such
solution is delivered. The Company also expects to offer an appropriate Year
2000 solution to registered users of PORTFOLIO MAXIMIZER on or prior to June 30,
1999. The Company has not incurred any material expenditures to date
specifically to provide Year 2000 solutions for its products. During the first
and second quarters of 1999, the Company expects to utilize internal resources
having an approximate aggregate value of under $100,000 to provide all requisite
Year 2000 solutions.
As stated above, the Company expects to complete its Year 2000 solution
for TRADESTATION 4, OPTIONSTATION 1.2, TRADESTATION PROSUITE 4, SUPERCHARTS 4
and PORTFOLIO MAXIMIZER by no later than June 30, 1999. However, there can be no
assurance that unanticipated difficulties will not delay the Company's Year 2000
efforts, or that modifications made will not adversely affect existing
functionality of those products in ways not currently anticipated by the
Company. There will be no Year 2000 modifications or solutions for any versions
of the Company's products introduced prior to those versions specifically
mentioned above, or for any other products not specifically named above, or any
discontinued products, such as WALL STREET ANALYST and SYSTEM WRITER.
In November of 1998, Bridge Telerate expressed to the Company concerns
as to whether the Bridge Telerate subscribers using TRADESTATION would receive,
in a timely fashion, the Year 2000 compliant TRADESTATION 2000I upgrade, and
made certain demands in this regard. As a result, the parties discussed in
November 1998 that delivery to Bridge Telerate of TRADESTATION 2000I by the end
of January should be sufficient time for the parties to develop and test
compatibility between TRADESTATION 2000I and the latest Bridgefeed technology on
which Telerate data is to be delivered, and for Bridge Telerate to install such
upgrade on all existing Bridge Telerate terminals using TRADESTATION. The
Company in fact delivered the TRADESTATION 2000I upgrade to Bridge Telerate on
Monday, February 1, 1999 and, at Bridge's request, development of compatibility
commenced February 16, 1999. Notwithstanding the Company's adherence to Bridge's
timetable, no assurances can be given that development or installation delays,
should they occur, would not result in Bridge Telerate deciding to implement, in
whole or in part, an alternative Year 2000 solution for its TradeStation clients
(e.g., not implementing the TRADESTATION 2000I upgrade and replacing
TRADESTATION with Bridge or other third-party software), which, if that
occurred, could have a material adverse effect on the Company's financial
expectations under the Bridge Telerate Agreement.
In general, the Company's failure to deliver appropriate Year 2000
solutions in a timely fashion, or at all, would render all pre-2000I versions of
the Company's products, including those for which the Company has decided to
provide no solutions, essentially useless, which could result in material
adverse effects on the Company and its financial condition, results of
operations and prospects. However, the Company does not expect to encounter any
material difficulties in providing acceptable Year 2000 solutions in a timely
fashion for TRADESTATION 4, OPTIONSTATION 1.2, TRADESTATION PROSUITE 4,
SUPERCHARTS 4 OR PORTFOLIO MAXIMIZER. Inasmuch as the Year 2000 solutions
described above are, the Company believes, the only viable and practical
solutions, and are achievable in a timely manner, the Company has no contingency
plans. See "Management's
11
<PAGE>
Discussion and Analysis of Financial Condition and Results of Operations -
Forward-Looking Statements; Business Risks - POTENTIAL LIABILITY TO CUSTOMERS."
CUSTOMER SUPPORT AND TRAINING
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, electronic mail and fax. The majority of these services
are provided during the first sixty days of ownership of an Omega Research
product and the related costs associated with such support are accrued at the
date of sale. The Company also provides a substantial amount of technical
support information on its web site.
PRODUCT-USE TRAINING. The Company considers product-use training
important to try 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 other
materials generally included with its products, and currently provides extensive
online documentation and technical assistance information on its web site. In
addition, the Company conducts across the United States in various cities
numerous user-education workshops (approximately 100 are currently scheduled for
1999) to better educate its customers about the Company's products.
COMPETITION
The market for investment analysis software is intensely competitive
and rapidly changing, and there appears to be substantial consolidation
occurring in the industry, which can be broadly considered to include investment
analysis software companies, data providers and brokerages and other companies
that offer trading execution systems and facilities to investors. The Company
believes that due to anticipated growth of the market for investment analysis
software, and other factors, competition, as well as consolidation, 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 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: Aspen
Graphics; Equis International, Inc. (Metastock), a subsidiary of Reuters PLC;
Track Data Corporation (AIQ Trading Expert Pro); Window on Wall Street, Inc.
(Day Trader); and Worden Brothers, Inc. (TeleChart 2000). Window on Wall Street
announced more than a year ago that it would be releasing Day Trader Pro, an
enhanced version of its Day Trader product that may permit a user who knows
EASYLANGUAGE to develop personal trading systems using Day Trader Pro. As far as
the Company is aware, this product has still not been released, but may be
released in the near future. The Company also competes with investment analysis
solutions available on the Internet, many of which are available for free, and
believes that investment analysis software that is available on the Internet
either for free or at modest prices will increase in sophistication over time.
In addition, the Company faces competition from data vendors, all of which offer
investment analysis software products of increasing sophistication and
functionality, and brokerages, many of which offer or may soon offer
12
<PAGE>
investment analysis software products of increasing sophistication and
functionality. Because investment software is not the principal business of
these companies, they may have competitive pricing advantages over the Company
by deciding, for example, to offer investment software at modest prices or for
free to their customers or clients who utilize their core services. 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 or brokerages. There can be no assurance that the Company
will be able to compete effectively with its competitors, adequately educate
potential customers as to the benefits that the Company's products provide, or
continue to offer such software solutions. Additionally, data vendors and
brokerages are the Company's existing and potentially future strategic partners,
and increased direct competition with them could adversely affect, or result in
a decrease of the benefits to the Company from, those strategic relationships.
Many of the Company's existing and potential competitors, which include
large, established software companies that do not currently focus on the
investment analysis software market, as well as large, national brokerages that
are focusing more closely on investment analysis software, 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.
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 trademarks
TRADESTATION and OPTIONSTATION, and registrations in the United States for the
trademark SUPERCHARTS, and is seeking registrations in the United States for the
trademarks EASYLANGUAGE, POWEREDITOR, OMEGA RESEARCH, RADARSCREEN and PROSUITE.
The Company uses a "click-wrap" license on its web site (for online orders), and
in its products (for other types of sales), 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
13
<PAGE>
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. Further, the Company's 2000I
software is not protected from piracy by a hardware security block, as were the
prior versions, which may increase the incidence of piracy of the Company's
2000I software as compared to the incidence of piracy of prior versions. 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.
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. 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 or markets products licensed
from others generally, 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.
EMPLOYEES
As of December 31, 1998, the Company had 177 full-time equivalent
employees consisting of 45 in product development (including software
engineering, product management, documentation and quality assurance), 108 in
sales and marketing (including sales, marketing, customer support and order
fulfillment), and 24 in general administration (including executive management,
finance, information technology services 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 R. Cruz or Ralph L. Cruz, the Company's Co-Chief
Executive Officers, 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.
14
<PAGE>
ITEM 2. PROPERTIES.
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 recently entered into a sublease and lease amendment
with respect to its corporate headquarters which, taken together, have the
effect of significantly expanding these facilities as of July 1, 1999 from
approximately 17,300 square feet to approximately 51,000 square feet. The
Company also leases approximately 1,100 square feet of space in Boca Raton,
Florida from which the Company conducts certain ancillary operations. Such lease
expires in June 1999, and the Company has a one-year renewal option. 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 1999. The
Company's corporate headquarters contain all of the Company's facilities except
for fulfillment and ancillary operations. The Company believes that its existing
facilities (as such facilities will be expanded as of July 1, 1999) are adequate
to support its existing operations and that, if needed, it will be able to
obtain suitable additional facilities on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
On January 28, 1998, a class action lawsuit, captioned RICHARD M.
RHODES V. WILLIAM R. CRUZ; RALPH L. CRUZ; OMEGA RESEARCH, INC.; BANCAMERICA
ROBERTSON STEPHENS; LEHMAN BROTHERS; AND HAMBRECHT & QUIST (Case No.
98-0174-CIV-Lenard), was filed in the United States District Court for the
Southern District of Florida. The suit alleged that the defendants violated
Sections 11 and 12 of the Securities Act of 1933 (the "Securities Act") by
allegedly making misrepresentations and omissions of material facts in
connection with the initial public offering of the Company's Common Stock and in
connection with the Company's financial condition. The alleged
misrepresentations and omissions concerned, among other things, the receipt of
proceeds of the initial public offering by William R. Cruz and Ralph L. Cruz and
the Company's TRADESTATION sales. The suit also alleged that William R. Cruz and
Ralph L. Cruz violated Section 15 of the Securities Act based on the same
alleged conduct as described above.
On March 1, 1999, the court dismissed all of the claims in the suit,
most with prejudice. The plaintiffs were granted the right to replead, within
ten days following the date of the order, the claims that were dismissed without
prejudice. To the Company's knowledge, the plaintiffs did not replead those
claims. The Company intends to oppose vigorously any further claims, or any
appeals, which are brought by the plaintiffs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
COMMON STOCK INFORMATION
The Company's Common Stock, par value $.01 per share, is quoted under
the symbol "OMGA" on The Nasdaq Stock Market (Nasdaq National Market).
The Company completed an initial public offering pursuant to a
Registration Statement that was declared effective on September 30, 1997 at an
offering price of $11.00 per share. Prior to the initial public offering, the
Company's Common Stock was not listed or traded on any organized market system.
The high and low closing sales prices based on actual transactions for the
Company's Common Stock on The Nasdaq Stock Market during each of the quarters
presented are as follows:
<TABLE>
<CAPTION>
High Low
---- ---
Closing Sales Price
------------------------
<S> <C> <C>
1997:
Fourth Quarter...................... 11 1/2 4 7/8
1998:
First Quarter....................... 5 3/8 2 3/4
Second Quarter...................... 6 3 5/8
Third Quarter....................... 4 5/8 2 1/8
Fourth Quarter...................... 3 1 3/16
1999:
First Quarter....................... 14 5/16 2 15/16
(through March 17)
</TABLE>
As of March 17, 1999, there were 32 holders of record of the Common
Stock, and, based upon information previously provided to the Company by
depositories and brokers, the Company believes it has in excess of 3,700
beneficial owners.
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. The Company did not
distribute any dividends during the year ended December 31, 1998. During 1997
and 1996, the Company distributed cash dividends in the aggregate amount of
$16.5 million (including the Dividend described in the following paragraph which
was paid immediately prior to the consummation of the Company's initial public
offering) and $5.2 million, 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 R.
Cruz and Ralph
16
<PAGE>
L. 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.
Of the total amount of dividends paid in 1997, the Company's Board of
Directors declared and paid a dividend of $15.4 million to the Company's then
existing shareholders (the "Dividend") immediately prior to the consummation of
the Company's initial public offering. The Dividend was equal to the Company's
estimate at that time of its cumulative taxable income prior to its conversion
to a C corporation to the extent such taxable income had not been previously
distributed. Subsequent to the payment of the Dividend, the Company
preliminarily determined that the actual cumulative taxable income would be less
than was originally estimated. Accordingly, in the fourth quarter of 1997, the
recipients of the Dividend repaid $800,000, plus interest, to the Company.
During the third quarter of 1998, upon finalization of the Company's 1997 tax
returns and final determination of S corporation earnings at the date of the
conversion to a C corporation, the recipients of the Dividend repaid an
additional $135,000, plus interest, to the Company, reducing the Dividend to
$14.5 million. See Note 4 of Notes to Financial Statements.
RECENT SALES OF UNREGISTERED SECURITIES
During the fourth quarter of 1998, the Company granted to 165 employees
options to purchase an aggregate of 1,060,371 shares of Common Stock pursuant to
the Company's Amended and Restated 1996 Incentive Stock Plan (the "Incentive
Plan"). During the fourth quarter of 1998, the Board of Directors increased,
subject to shareholder approval, the authorized number of shares under the
Incentive Plan from 3,000,000 to 4,500,000. In connection with this increase,
and included in the total options granted during the fourth quarter of 1998,
were 365,000 options granted to officers and certain other senior management
personnel of the Company that are subject to shareholder approval of the
aforementioned increase of authorized shares being obtained within one year
following such Board action.
All such options vest ratably over a five-year period and are
exercisable at prices ranging from $1.59 to $1.66 per share, which was the fair
market value of the Company's Common Stock on the respective dates on which the
options were granted. The options expire, if they remain unexercised, on the
tenth anniversary of the date on which they were granted.
All the foregoing options were granted by the Company in reliance upon
the exemption from registration available under Section 4(2) of the Securities
Act.
Other than as described above, the Company did not issue or sell any
unregistered securities during the fourth quarter of 1998.
USE OF PROCEEDS
The Company's initial public offering was effected pursuant to a
Registration Statement on Form S-1 (File No. 333-32077) which was declared
effective by the Securities and Exchange Commission on September 30, 1997. For a
description of the use of proceeds of the Company's initial public offering, see
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997.
17
<PAGE>
ITEM 6. 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 report. The Statement of
Income Data presented below for each of the years in the three-year period ended
December 31, 1998 and the Balance Sheet Data as of December 31, 1998 and 1997
have been derived from the Company's Financial Statements included on pages F-1
through F-18 of this report, which have been audited by Arthur Andersen LLP. The
Statement of Income Data presented below for the years ended December 31, 1995
and 1994 and the Balance Sheet Data as of December 31, 1996, 1995 and 1994 have
been derived from audited financial statements not included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues:
Licensing fees ............................... $ 22,006 $ 24,365 $ 13,943 $ 7,913 $ 7,853
Other revenues ............................... 6,211 4,861 3,877 1,502 707
-------- -------- -------- -------- --------
Total net revenues ...................... 28,217 29,226 17,820 9,415 8,560
-------- -------- -------- -------- --------
Operating expenses:
Cost of licensing fees ...................... 1,798 1,849 1,717 876 831
Product development ......................... 3,318 1,890 1,041 652 492
Sales and marketing ......................... 14,382 11,272 5,618 3,561 2,712
General and administrative .................. 6,135 5,421 2,422 1,038 798
-------- -------- -------- -------- --------
Total operating expenses ................ 25,633 20,432 10,798 6,127 4,833
-------- -------- -------- -------- --------
Income from operations ....................... 2,584 8,794 7,022 3,288 3,727
Other income, net ............................... 424 146 60 24 18
-------- -------- -------- -------- --------
Income before income taxes .................. 3,008 8,940 7,082 3,312 3,745
Income tax provision (benefit) ................. 1,052 (934) -- -- --
-------- -------- -------- -------- --------
Income before pro forma income tax adjustments 1,956 9,874 7,082 3,312 3,745
Pro forma income taxes (1) ...................... -- 3,256 2,797 1,308 1,479
Non-recurring tax credit (2) .................... -- 1,167 -- -- --
-------- -------- -------- -------- --------
Pro forma net income (1)(2) ..................... $ 1,956 $ 5,451 $ 4,285 $ 2,004 $ 2,266
======== ======== ======== ======== ========
Pro forma earnings per share: (1)(2)
Basic ........................................ $ 0.09 $ 0.27 $ 0.22 $ 0.10 $ 0.12
Diluted ...................................... $ 0.09 $ 0.26 $ 0.21 $ 0.10 $ 0.11
Weighted average shares outstanding:
Basic ........................................ 22,256 20,172 19,480 19,480 19,480
Diluted ...................................... 22,758 20,885 20,541 20,541 20,541
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.. $ 7,437 $12,324 $ 142 $ 311 $ 129
Marketable securities ..... 5,737 1,015 -- -- --
Working capital ........... 25,635 24,170 3,629 1,997 936
Total assets .............. 29,642 27,470 5,803 3,288 2,197
Shareholders' equity ...... 27,492 25,233 4,835 2,970 1,811
</TABLE>
- ------------
(1) The Company was treated as an S corporation for federal and state income
tax purposes prior to September 30, 1997. Pro forma income taxes have been
provided as if the Company had been a C corporation for all periods prior
to September 30, 1997.
(2) Upon terminating its S corporation election, the Company was required to
record a non-recurring credit. See Note 7 of Notes to Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH "SELECTED FINANCIAL
DATA" AND THE FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS CONTAINED
HEREIN.
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, TRADESTATION, was introduced to institutional investors by
Bridge Telerate in January 1996.
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 and
other third parties. Licensing fees are recognized upon product shipment in
accordance with Statement of Position ("SOP") 97-2, SOFTWARE REVENUE
RECOGNITION. See Note 1 of Notes to Financial Statements. While the Company has
no obligation to perform future services subsequent to shipment, the Company
voluntarily provides telephone, electronic mail and fax 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.
On February 22, 1999, the Company officially released its next
generation of premium software products, branded "2000I," which includes upgrade
versions of its existing products and new products. Accordingly, as of February
22, 1999, the Company's software product line consists of TRADESTATION 2000I,
RADARSCREEN 2000I, OPTIONSTATION 2000I, OMEGA RESEARCH PROSUITE 2000I and
SUPERCHARTS 4 (SUPERCHARTS 2000I is expected to be released later in 1999).
Prior to February 22, 1999, the Company marketed three principal software
products: TRADESTATION (version 4), OPTIONSTATION (version 1.2) and SUPERCHARTS
(version 4). See "Business - Overview and Recent Developments" and "Business -
Products."
The Company also launched in the first quarter of 1999 HISTORYBANK.COM,
an end-of-day financial market data service consisting of two components:
HISTORYBANK.COM FINANCIAL
19
<PAGE>
DATABASE, a database on CD-ROM that contains more than 30 years of financial
market price and volume data that is included with TRADESTATION 2000I,
RADARSCREEN 2000I, OPTIONSTATION 2000I and OMEGA RESEARCH PROSUITE 2000I; and
HISTORYBANK.COM DAILY UPDATE SERVICE, an Internet data service that offers daily
updates of such data after the close of the markets. Currently, HISTORYBANK.COM
is being provided to customers free of charge and it is not anticipated that the
Company will begin charging for this service until later in 1999, when it is
anticipated that this service will be offered on a monthly subscription basis to
the Company's 2000I software customers. See "Business - Overview and Recent
Developments" and "Business - Products."
Substantially all of the Company's licensing fees have been derived
from the licensing of software products to individual investors. The Company's
investment analysis software products 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 their purchases automatically and on a monthly basis over the course of 12
months. During 1999, the Company began offering a 16-month payment term for
OMEGA RESEARCH PROSUITE 2000I sales.
The majority of the Company's other revenues for the year ended
December 31, 1998 were derived from royalties associated with a licensing
agreement with Bridge Telerate relating to TRADESTATION. Under an existing
agreement with Bridge Telerate, Bridge Telerate has the right to offer
TRADESTATION to its customers on a subscription basis. Bridge Telerate pays a
per unit royalty to the Company, subject to a minimum annual royalty commitment.
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 and other third parties and revenues generated from OMEGAWORLD,
the Company's annual conference for users of Omega Research products. The
Company's offering of HISTORYBANK.COM is expected to result in reduced
commission revenue from end-of-day data providers, and it is difficult to
predict when, if at all, or to what extent, HISTORYBANK.COM revenues will offset
such reductions. Other revenues are recognized as earned in accordance with the
terms of the applicable contract and, with respect to OMEGAWORLD, at the time
the conference is conducted.
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 and free audiotape or book offers, the Company
has reached a broader audience that 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 two
years. There can be no assurance that this trend will not continue, particularly
in light of the Company's recent decision to offer a 16-month payment term for
its most expensive product.
Approximately 7.9% of the Company's revenues for the year ended
December 31, 1998 were derived from customers outside of the United States and
Canada. The Company markets its products outside the United States and Canada
primarily through independent resellers and, to a lesser extent, through its
U.S. based telesales force in response to inbound inquiries from international
customers. The Company intends to focus increased resources on international
sales efforts and therefore
20
<PAGE>
believes that international revenues will increase as a percentage of total
revenues in the future. See "Business - Sales and Marketing."
In accordance with Statement of Financial Accounting Standards ("SFAS")
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. There
were no capitalized software development costs as of December 31, 1998 or 1997.
Capitalized software development costs, net of amortization, were $71,000 at
December 31, 1996. 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
Internal Revenue Code of 1986, as amended (the "Code"), and, as a result, the
Company's earnings prior to September 30, 1997 (the effective date of the
Company's initial public offering) were taxed at the federal level directly to
the Company's shareholders (the State of Florida does not have a personal income
tax). Effective September 30, 1997, the Company terminated its S corporation
election and became subject to corporate-level federal and state income taxes.
As a result of terminating this election, the Company was required to record a
non-recurring credit (the "SFAS No. 109 Credit"). The SFAS No. 109 Credit
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 SFAS No. 109 Credit, net of a $1.8 million provision for income
taxes payable, was approximately $1.2 million as of September 30, 1997, the date
the S corporation election was terminated. See "Income Taxes" below.
The pro forma income tax adjustments for the years ended December 31,
1997 and 1996 in the Company's historical financial statements reflect 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 periods prior to September 30, 1997. In addition, the
non-recurring net tax credit of $1.2 million has been excluded from pro forma
net income.
21
<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>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Net Revenues:
Licensing fees...................... 78.0% 83.4% 78.2%
Other net revenues.................. 22.0 16.6 21.8
----- ---- ----
Total revenues................ 100.0 100.0 100.0
----- ---- ----
Operating expenses:
Cost of licensing fees.............. 6.4% 6.3% 9.6%
Product development................. 11.7 6.5 5.9
Sales and marketing................. 51.0 38.6 31.5
General and administrative.......... 21.7 18.5 13.6
----- ---- ----
Total operating expenses...... 90.8 69.9 60.6
----- ---- ----
Income from operations................... 9.2% 30.1% 39.4%
===== ==== ====
AS A PERCENTAGE OF LICENSING FEES:
Operating expenses:
Cost of licensing fees.............. 8.2% 7.6% 12.3%
Product development................. 15.1 7.8 7.5
Sales and marketing................. 65.3 46.3 40.2
General and administrative.......... 27.9 22.2 17.4
----- ---- ----
Total operating expenses...... 116.5% 83.9% 77.4%
===== ==== ====
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET REVENUES
TOTAL NET REVENUES. The Company's total net revenues were $28.2 million
in 1998 compared to $29.2 million in 1997.
LICENSING FEES. Licensing fees were $22.0 million in 1998 as compared
to $24.4 million in 1997, primarily due to a decrease in net sales of all of the
Company's principal products. The Company believes that licensing fees in 1998
were impacted by slower than anticipated demand for its products, which was
first experienced during the fourth quarter of 1997. Management believes that
the slower demand was due in part to customer delays in decision making in
anticipation of the release of the Company's 2000I software products, which were
released on February 22, 1999. No assurances can be given that the marketplace
will accept the 2000I software products.
22
<PAGE>
OTHER REVENUES. Other revenues increased 28% from $4.9 million in 1997
to $6.2 million in 1998, primarily due to an increase in minimum royalties under
the Company's license agreement with Bridge Telerate, and, to a lesser extent,
revenues generated from OMEGAWORLD, the Company's annual conference for users of
Omega Research products.
OPERATING EXPENSES
COST OF LICENSING FEES. Cost of licensing fees consists primarily of
product media, packaging and storage and inventory costs. Cost of licensing fees
was approximately $1.8 million in both 1998 and 1997. Cost of licensing fees as
a percentage of licensing fees increased slightly in 1998, primarily due to a
one-time payment made to a third party in conjunction with the development of
certain technology for the Company.
PRODUCT DEVELOPMENT. Product development expenses include expenses
associated with the development of new products, enhancements to existing
products, testing of products and the creation of documentation, and consist
primarily of salaries, other personnel costs and depreciation of computer and
related equipment. Product development expenses increased from $1.9 million in
1997 to $3.3 million in 1998 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 8% in 1997 to 15% in 1998, primarily
due to increased personnel and related expenses as well as decreased licensing
fees. The Company anticipates that the absolute dollar amount of product
development expense will increase for the foreseeable future as the Company
seeks to develop new products and enhance existing products.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
marketing programs, including advertising, brochures, direct mail programs and
seminars to promote the Company's products to investors, sales commissions,
salaries for the customer support center and marketing personnel, other
personnel costs, web site design and administration costs, and shipping
expenses. Sales and marketing expenses were $14.4 million in 1998 compared to
$11.3 million in 1997, primarily due to increased marketing and sales personnel,
increased advertising (including print advertising, the use of sales seminars,
television advertising and direct mailers), increased shipping costs and costs
related to OMEGAWORLD, offset by decreased communications expenses. Sales and
marketing expenses as a percentage of licensing fees increased from 46% in 1997
to 65% in 1998 as a result of the increased marketing expenses discussed above
and decreased licensing fees. The Company expects the level of sales and
marketing expenses, including advertising and promotional costs, to depend on
the level of sales. Sales and marketing expenses are expected to increase as the
Company promotes the benefits of upgrading to the 2000I software products to its
customer base and when such software begins to gain acceptance in the
marketplace. However, no certainty can be given as to when or if such acceptance
will be gained.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee-related costs for administrative personnel such as
executive, human resources, finance and information systems employees, as well
as professional fees, rent and other facilities expense, and provision for bad
debt. General and administrative expenses were $6.1 million in 1998 compared to
$5.4 million in 1997 primarily as a result of increased professional fees
related to the defense of the class action lawsuit brought against the Company
in 1998, costs of being a public company and expenses related to the
implementation and lease of a new telephone system, partially offset by a
23
<PAGE>
decrease in bad debt expense. General and administrative expenses as a
percentage of licensing fees increased from 22% in 1997 to 28% in 1998 primarily
as a result of the increase in those expenses and decrease in net licensing
fees. The Company believes that the absolute dollar amount of its general and
administrative expenses in the future will depend, to a large extent, on the
level of provision required for bad debt, the level of hiring of additional
personnel to support the expected growth of the Company, and the extent, if any,
to which the Company enters new markets or related businesses.
OTHER INCOME, NET
Other income, net consists primarily of investment income from cash and
cash equivalents. The Company generally invests in overnight investments, tax
exempt commercial paper and investment grade short-term municipal bonds. The
amount of interest income fluctuates based on the amount of funds available for
investment and the prevailing interest rates. Other income, net increased from
$146,000 in 1997 to $424,000 in 1998, primarily due to income earned on the
proceeds from the Company's initial public offering.
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET REVENUES
TOTAL NET REVENUES. The Company's total net revenues were $29.2 million
in 1997 as compared to $17.8 million in 1996.
LICENSING FEES. Licensing fees were $24.4 million in 1997 as compared
to $13.9 million in 1996, primarily due to an increase in TRADESTATION sales
and, to a lesser extent, the introduction of OPTIONSTATION in September 1996.
The Company believes that the increased TRADESTATION sale 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 increased its reserves for returns
during 1997 to provide for the impact that its new marketing efforts have had
and are expected to continue to have on returns.
OTHER REVENUES. Other revenues increased 25% from $3.9 million in 1996
to $4.9 million in 1997, primarily due to an increase in minimum royalties under
the Company's license agreement with Bridge Telerate and, to a lesser extent,
increased cross-marketing commissions from data vendors that resulted from an
increase in licensing fees.
OPERATING EXPENSES
COST OF LICENSING FEES. Cost of licensing fees were $1.8 million in
1997 as compared to $1.7 million in 1996. Cost of licensing fees as a percentage
of licensing fees improved from 12% in 1996 to 8% in 1997, primarily due to
increased unit sales of higher-priced products as a percentage of total unit
sales.
PRODUCT DEVELOPMENT. Product development expenses increased from $1.0
million in 1996 to $1.9 million in 1997, primarily due to an increase in the
number of individuals employed in product development. Product development
expenses as a percentage of licensing fees did not change significantly in 1997
as compared to 1996.
24
<PAGE>
SALES AND MARKETING. Sales and marketing expenses were $11.3 million in
1997 as compared to $5.6 million in 1996, primarily due to increases in
advertising (including print advertising, the use of sales seminars, television
advertising and direct mailers), commissions, personnel costs for the customer
support center, telephone expenses and shipping costs. Sales and marketing
expenses as a percentage of licensing fees increased from 40% in 1996 to 46% in
1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$5.4 million in 1997 as compared to $2.4 million in 1996, primarily due to
increases in the provision for bad debts associated with increased revenues and
reaching a broader audience of customers, increases in personnel, professional
fees and other related expenses required to manage the growth of the Company,
and rent related to the Company's new corporate headquarters. General and
administrative expenses as a percentage of licensing fees increased from 17% in
1996 to 22% in 1997.
OTHER INCOME, NET
Other income, net increased from $60,000 in 1996 to $146,000 in 1997,
primarily due to increased income earned on the proceeds from the Company's
initial public offering.
INCOME TAXES
For income tax purposes, the Company was an S corporation prior to
September 30, 1997. Accordingly, net income and related timing differences which
arose in the recording of income and expense items for financial reporting and
tax reporting purposes were included in the individual tax returns of the S
corporation shareholders. Effective September 30, 1997, the Company terminated
its S corporation election, and, as a result, adopted SFAS No. 109, ACCOUNTING
FOR INCOME TAXES. SFAS No. 109 requires that deferred income tax balances be
recognized based on the differences between the financial statement and income
tax bases of assets and liabilities using the enacted tax rates.
Upon adoption of SFAS No. 109 during the third quarter of 1997, the
Company recorded a benefit for income taxes which reflects the SFAS No. 109
Credit, a non-recurring deferred income tax credit of approximately $3.0 million
partially offset by a $1.8 million provision for income taxes payable. The SFAS
No. 109 Credit recognized net deferred tax assets arising from book and tax
basis differences that arose primarily as a result of accounts receivable
reserves. The $1.8 million in income taxes payable relate to federal and state
income taxes owed by the Company as a result of an approximate $4.6 million in S
corporation taxable earnings which were recognized by the Company for tax
purposes in the fourth quarter of 1997 and the year ended December 31, 1998.
The pro forma income tax adjustments for the years ended December 31,
1997 and 1996 in the Company's historical financial statements reflect 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 1996 and the first nine months of 1997. The effective tax rates for
year ended December 31, 1998 and for the fourth quarter of 1997 were 35.0% and
33.4%, respectively, and are below the 38.6% statutory rate as a result of the
impact of tax-free investment income.
25
<PAGE>
VARIABILITY OF RESULTS
The operating results for any quarter are not necessarily indicative of
results for any future period or for the full year. The Company's quarterly
revenues and operating results have varied in the past and are likely to vary
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, level and rate of acceptance of releases of new products
and/or enhancements, increased competition, variations in the mix of sales, and
announcements of new products and/or enhancements by the Company or its
competitors and other factors. Such fluctuations may result in volatility in the
price of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking Statements;
Business Risks."
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash and cash equivalents of
approximately $7.4 million, investments in short term marketable securities of
$5.7 million, and working capital of approximately $25.6 million. Marketable
securities consist of investment grade municipal bonds maturing, on average,
within a year.
Cash provided by operating activities totaled $1.0 million, $3.3
million and $5.6 million in 1998, 1997 and 1996, respectively. The decrease in
net cash provided by operations in 1998 was primarily attributable to lower net
income and $3.1 million in payments for income taxes that were made during 1998.
The Company began paying taxes in the fourth quarter of 1997 and, in addition,
paid during 1998 $900,000 of the $1.8 million tax liability recognized in
September 1997. The decrease in net cash provided by operations in 1997 was
primarily attributable to an increase in the growth of accounts receivable
balances during 1997, and the payment of $900,000 of the $1.8 million tax
liability recognized in September 1997.
The Company's investing activities used cash of $6.1 million, $2.0
million and $541,000 in 1998, 1997 and 1996, respectively. The principal use of
cash in investing activities in 1998 and 1997 was for investments in marketable
securities, net of marketable securities that matured. The balance of such
investing activities during 1998, 1997 and 1996 was primarily for capital
expenditures related to the acquisition of computer and related equipment and
software required to support expansion of the Company's operations. During 1997,
investing activities also used cash as a result of 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 provided cash of $190,000 in 1998.
The majority ($135,000) of the cash provided during 1998 related to the
repayment of the excess portion of the Dividend distributed on September 30,
1997. On September 30, 1997, the Company terminated its S corporation status for
income tax purposes, and as a result became subject to federal and state income
taxes on its earnings. In conjunction with the Company becoming a C corporation,
the Company declared and paid the Dividend to its then-current shareholders as
an estimate, at that time, of its cumulative taxable income prior to its
conversion to a C corporation to the extent such taxable income had not been
previously distributed. Subsequent to the payment of the Dividend, the
26
<PAGE>
Company preliminarily determined that the actual cumulative taxable income would
be less than was originally estimated. Accordingly, in the fourth quarter of
1997, the recipients of the Dividend repaid $800,000, plus interest, to the
Company. During the third quarter of 1998, upon finalization of the Company's
1997 tax returns and final determination of S corporation earnings at the date
of conversion to a C corporation, the recipients of the Dividend repaid an
additional $135,000, plus interest, to the Company. See "Market for Registrant's
Common Equity and Related Stockholder Matters - Dividend Policy."
The balance of the cash provided during 1998 related to the issuance of
common stock from the Company's 1997 Employee Stock Purchase Plan and the
exercise of stock options under the Company's Incentive Plan. Cash provided
during 1997 of $10.9 million was primarily attributable to $27.4 million of net
proceeds from the Company's initial public offering completed during the fourth
quarter of 1997, offset by cash distributions totaling $16.5 million (net of the
1997 repayment discussed above) to the Company's S corporation shareholders
prior to the Company's initial public offering. A portion of the distributions
were financed with a $15 million short-term bank loan which was repaid with the
proceeds of the initial public offering. Cash used for financing activities of
$5.2 million during 1996 was primarily for distributions to the Company's
shareholders.
The Company recently entered into a sublease and lease amendment for
additional space at its corporate headquarters which commences July 1, 1999 and
is co-terminous with the Company's existing lease. Monthly lease payments for
the expansion space for July 1, 1999 through April 30, 2000 are approximately
$26,000 and are approximately $58,000 for the final 2 1/4 years. Additionally,
during the fourth quarter of 1998, in connection with the installation of a new
telephone system, the Company entered into a 4-year operating lease.
Assuming there is no significant change in the Company's business, the
Company believes that existing cash and liquid asset balances and cash flow from
operations will be sufficient to meet its normal working capital and capital
expenditure requirements for at least the next 12 months.
RECENTLY ISSUED ACCOUNTING STANDARDS
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("ACSEC") issued SOP 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE. SOP 98-1 establishes criteria for determining which costs of developing or
obtaining internal-use computer software should be charged to expense and which
should be capitalized. SOP 98-1 is effective for all transactions entered into
in fiscal years beginning after December 15, 1998. The Company will adopt SOP
98-1 prospectively effective January 1, 1999. Management does not believe that
the adoption of SOP 98-1 will have a material effect on the Company's financial
position or results of operations.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION.
SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components which will be presented in association
with a company's financial statements. Comprehensive income is defined as the
change in a business enterprise's equity during a period arising from
transactions, events or circumstances relating to non-owner sources, such as
27
<PAGE>
foreign currency translation adjustments and unrealized gains or losses on
available-for-sale securities. It includes all changes in equity during a period
except those resulting from investments by or distributions to owners. The
Company adopted SFAS No. 130 as of January 1, 1998 and such adoption did not
have an impact on the disclosures herein, as comprehensive income is equal to
net income for all periods presented.
SFAS No. 131 establishes standards for the way that public companies
report selected information about operating segments in annual and interim
financial reports to shareholders. It also establishes standards for related
disclosures about an enterprise's business segments, products, services,
geographic areas and major customers. SFAS No. 131 supersedes SFAS No. 14,
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE, but retains the
requirement to report information about major customers and requires that a
public company report financial and descriptive information about its reportable
operating segments. Generally, financial information is required to be reported
on the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. SFAS No. 131 requires that a
public company report a measure of segment profit or loss, certain specific
revenue and expense items and segment assets. The Company adopted SFAS No. 131
effective December 31, 1998. Management evaluates and operates the business of
the Company as a single segment. As a result, no additional disclosure was
required.
YEAR 2000 COMPLIANCE
The Company recently implemented a new customer integrated support and
general ledger system and a new telephone system, each of which, according to
the respective vendors, complies with all known Year 2000 requirements. Although
the Company has not undertaken further evaluation of Year 2000 compliance issues
with respect to its vendors, and does not intend to, the Company does not
believe that it will encounter significant difficulties with respect to Year
2000 compliance issues that its vendors may experience because the products and
services that the Company obtains from its vendors are generally not Year 2000
date sensitive, other than telecommunications services. Nevertheless, to the
extent the Company's vendors experience Year 2000 difficulties with their
internal billing and shipping systems or otherwise, the Company may face delays
in obtaining certain products and services. In the event that the Company's
telecommunications services are materially disrupted as a result of Year 2000
difficulties (which would be applicable to businesses using telecommunications
services generally), material adverse effects to the Company's financial
condition and results of operations would likely be suffered. Other than general
Year 2000 compliance failures relating to telecommunications services, which the
Company has no reason to believe will occur and are, in any event, not within
the Company's control, the Company does not expect that its vendors' Year 2000
difficulties, to the extent they exist, will have a significant effect on the
Company's business or operations. Accordingly, the Company has not developed,
and has no current plans to develop, any contingency plans relating to its
vendors' potential Year 2000 difficulties. See "Business - Product Development
and Year 2000 Compliance" for a discussion of Year 2000 implications with
respect to the Company's products.
FORWARD-LOOKING STATEMENTS; BUSINESS RISKS
This report contains statements that are forward-looking within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. When used in this report, the words "believes," "estimates,"
"plans," "expects," "intends," "anticipates," "may," "prospect," "should,"
"looking forward" and similar
28
<PAGE>
expressions as they relate to the Company or its management are intended to
identify the forward-looking statements. These statements are based on current
expectations and beliefs concerning future events that are subject to risks and
uncertainties. Actual results may differ materially from the results suggested
herein and from the results historically experienced. Factors that may cause or
contribute to such differences and impact future events, and business risks of
and for the Company generally, include, but are not limited to, the items
described below, as well as in other sections of this report and other of the
Company's public filings, and in the Company's press releases, any of which
could have a material adverse effect on the results of operations, financial
condition and prospects of the Company:
/bullet/ Product Upgrades and New Products; Customer Acceptance; Risk of Product
Defects. The Company, in February 1999, introduced its 2000I line of
software products, which includes both upgrade versions of its existing
principal products (other than SUPERCHARTS) and new products. If
customer acceptance of such product upgrades and/or new products does
not meet the Company's expectations (due to technical difficulties or
errors in the products, increased hardware or software requirements to
use the products, unfavorable critical reviews, or other reasons), its
financial condition, results of operations and prospects for growth
would be materially adversely affected. Similarly, should competing
products enter the marketplace before or near to the time the Company's
product upgrades and/or new products have gained customer acceptance,
or should the Company fail to market effectively its product upgrades
and/or new products, or should the Company hereafter be unable to
develop and introduce timely and successfully additional new products
and further upgrades, the Company's business and prospects could be
materially adversely affected.
The Company's 2000I software is not compatible with the Microsoft
Windows 3.1 operating system and will require Windows 95, Windows 98,
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. In addition, the 2000I software has higher
minimum and recommended hardware requirements than do the 16-bit
versions of the Company's products (i.e., the pre-2000I versions). To
the extent existing users of the Company's 16-bit products decide not
to upgrade their hardware, and to the extent that prospective customers
do not own the appropriate hardware and are unwilling to acquire it,
such users and prospective customers will not upgrade to, or purchase,
any of the Company's 2000I software, which could have a material
adverse effect on the Company's revenues. Additionally, although the
Company has no reason at this time to believe the following would
occur, a failure by the Company to deliver appropriate Year 2000
solutions to its customers or its licensees (including Bridge Telerate
and FutureSource) who need them in a timely manner would have a
material adverse effect on the Company's financial condition, results
of operations and prospects. See "POTENTIAL LIABILITY TO CUSTOMERS,"
"Business - Product Development and Year 2000 Compliance" and "Business
- Strategic Relationships - BRIDGE TELERATE AGREEMENT."
All software contains errors, particularly new, highly-complex,
innovative software products. The Company's 2000I software has been,
from a technical development perspective, virtually re-architected (as
compared to the pre-2000I, 16-bit versions of the Company's software).
Such re-architecture includes a new server, called GlobalServer, on
which each of the 2000I software applications run. The source code for
GlobalServer is completely new, i.e., it contains no lines of source
code from the prior server software. Additionally, the 2000I software's
migration to 32-bit architecture and Microsoft Component Object Model
(COM) technology, which is a fairly recent software technology, and the
addition of numerous new
29
<PAGE>
features and functions, have resulted in substantial re-architecture of
all of the 2000I software applications as well. As a result of the
re-architecture, it has been, and, as to work not yet finished, will
be, necessary for the Company and each of the data vendors with which
the Company's 2000I line is or is to be compatible to redevelop such
compatibility. Additionally, some of those datafeeds are new (as in
recently-developed), not new, but not previously compatible with any of
the Company's software, or, even if compatible with the Company's prior
software versions, substantially modified.
Due to the re-architecture of the Company's principal products,
including, but not limited to, the new GlobalServer, the migration to
32-bit architecture, the incorporation of COM technology and Internet
connectivity, and the addition of numerous features and functions,
there is a substantial risk of technical errors in the 2000I software.
From this perspective, all of the 2000I software should be viewed as
new products, and not upgrades, subject to the risks of technical
errors inherent to new, highly-complex, innovative software generally,
as well as subject to being affected by the risk of technical errors or
difficulties in new or recent technologies, such as COM, therein
incorporated. Further, the requirement of essentially new development
of compatibility with all datafeeds heightens the risk of material
technical errors that relate to the interface of the 2000I software
with one, some or all of such datafeeds. Technical errors or
difficulties in the datafeeds themselves (many of which are
newly-developed or recently modified), or in relevant compatibility
work performed by developers employed by the data vendors, over which
the Company has little control, heightens even further these risks.
Further still, the Company has had no prior experience developing
technical compatibility with Internet datafeeds, or developing
"Internet-centric" products generally, which further heighten the risks
of material technical problems or difficulties that may be experienced
by users. In particular, a potentially important feature of the 2000I
software, in addition to the capability to access and display
Internet-delivered data, is to access online brokerages and financial
information through the Internet. Many of the same risks described
above with respect to developing datafeed interfaces apply to
development of these interfaces as well.
The Company's release and implementation of its HISTORYBANK.COM
historical and daily update financial data service will require users
of the Company's 2000I software who use data on an end-of-day (as
opposed to real-time) basis to use the Company's end-of-day data
service in order to benefit optimally from use of the 2000I software
and the historical data included with the 2000I software.
HISTORYBANK.COM, while operational, is still under construction. Some
technical difficulties and errors currently exist in HISTORYBANK.COM
that need to be corrected, and to the extent those or other technical
difficulties exist or arise in the content, presentation of content, or
delivery of HISTORYBANK.COM financial market data, or delays occur in
the full implementation of HISTORYBANK.COM (as it is not yet fully
implemented), or there is a failure of customer acceptance of
HISTORYBANK.COM for those or other reasons, the Company's sales of its
2000I software could be materially adversely affected, including, but
not limited to, potentially material increases in returns.
Additionally, the Company has virtually no experience operating any
type of data service, and no experience whatever operating a
monthly-subscription, fee-based data service, and the success of
HISTORYBANK.COM (and the prospects of adverse results with respect to
software sales if HISTORYBANK.COM proves to be problematic or
undesirable in any material way) are therefore subject to all risks
inherent in engaging in a new business or business segment, including
the risks that the Company may be unable to successfully acquire and
retain the appropriate personnel, administrative infrastructure and
know-how,
30
<PAGE>
and the risk of aggressive reactions or responses from end-of-day data
providers who will have become direct competitors. See "Business -
Products" and "Business - Competition."
Accordingly, there is a substantial risk that conditions, events or
difficulties relating to the Company's product upgrades and new
products, including technical errors or difficulties, of one or more of
the types described above, if one or more occur, will materially and
adversely affect customer acceptance of the product upgrades and/or new
products, or otherwise negatively impact sales thereof, resulting in a
material adverse effect upon the Company's financial condition, results
of operations and prospects.
/bullet/ Potential Fluctuations in Quarterly Operating Results. The Company's
quarterly revenues and operating results have fluctuated significantly
in the past, including the fourth quarter of 1997 (when compared to the
other quarters of that year) and during 1998 (when compared to 1997),
and will likely fluctuate in the future. These fluctuations may be
expected to be even greater during 1999, and possibly thereafter, due
to the unpredictability of the volume and timing of upgrade orders, and
of customer acceptance generally, of the Company's 2000I software.
Causes of such significant fluctuations may include, but are not
limited to, the following factors: significantly uneven volume of
upgrade orders over the next several quarters; deferral of revenue
relating to upgrade commitments; significantly uneven new product
orders over the next several quarters, as a result of the rate of
customer acceptance of the Company's 2000I software, particularly
RADARSCREEN (a brand new product) and OMEGA RESEARCH PROSUITE (a new
product at a materially higher price point than prior Company
offerings), or for other reasons; the ability of the Company to ship
orders for new products and upgrades on a timely basis; the timeliness
and success of the release of SUPERCHARTS 2000I expected later in 1999;
the number, timing and significance of additional 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 strategies (which have undergone significant change in the
last six months and are expected to continue to evolve); the extent to
which Company products are paid for over periods exceeding twelve
months; the extent, if any, to which the Company begins to offer its
products on a periodic subscription or "leased" basis (as opposed to a
"one-time-sale" basis); the extent, if any, to which the Company's
business shifts towards institutional sales, and the timing thereof;
changes in demand for the Company's products; changes in operating
expenses; 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 and market factors, including changes in the securities and
financial markets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Variability of
Results."
/bullet/ Risk of Returns. Revenues are recognized by the Company at the time the
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
product return rate has increased significantly over the last several
quarters and there can be no assurance that this trend will not
continue. In 1997 and in 1998, the Company increased its returns
reserve in response to the increased return rate. In the event that
returns materially increase over historical rates as a result of
decreased customer acceptance of the 2000I software (as compared to the
prior versions), 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, results of
operations and prospects may be
31
<PAGE>
materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview."
/bullet/ Competition. The market for investment analysis software is intensely
competitive and rapidly changing, and there appears to be substantial
consolidation occurring in the industry, which can be broadly
considered to include investment analysis software companies, data
providers and brokerages and other companies that offer trading
execution systems and facilities to investors. The Company believes
that due to anticipated growth of the market for investment analysis
software and related products and services generally, and other
factors, competition, as well as consolidation, will substantially
increase and intensify in the future. The Company believes that 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. See "Business - Product Development
and Year 2000 Compliance" and "Business - Competition."
/bullet/ 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 and strategic relationships, 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 and middle management
groups and administrative infrastructure, and its ability to attract,
hire and retain skilled employees, particularly in the product
management and product development, marketing and sales, and web site
design and administration areas. See "Business - Overview and Recent
Developments," "Business - Products" and "Business - Employees."
/bullet/ 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. See "RISKS
ASSOCIATED WITH RELIANCE ON THE INTERNET" and "Business - Employees."
/bullet/ Risks Associated with Reliance on the Internet. The Company has
developed as part of its 2000i software Internet connectivity
capabilities in several respects. The Company has also adjusted its
marketing and customer support approaches to be more
"Internet-centric." The Company believes that future sales of its
products and the future growth of the Company will depend upon its
continuing to adopt the Internet as a medium for commerce and
communication, and as a significant means of delivery of high-quality
financial market data, marketing materials and customer support. There
can be no assurance that the Company has successfully developed and
implemented such Internet capabilities, or effectively adjusted its
marketing and customer support approaches, or will continue
successfully to do so. Further, the Company is and will be relying
increasingly on its web site and related systems, and the Internet
generally, to roll out new products and services, to maximize the use
and cost-efficiency of its software products, to deliver financial
market data, to accept orders and payments, to track and account for
orders and payments and fulfill reporting obligations under marketing
agreements with third parties, to register attendees for seminars and
events, to market its products, and to provide technical information
and assistance to its customers. There is also the risk that, over
time, the Internet may not prove to be a viable commercial
32
<PAGE>
marketplace because of a failure to continue 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. See "PRODUCT UPGRADES AND NEW PRODUCTS;
CUSTOMER ACCEPTANCE; RISK OF PRODUCT DEFECTS" and "Business - Products"
and "Business - Sales and Marketing."
/bullet/ 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, trading or the use of investment analysis tools,
or the willingness to make expenditures for investment analysis tools,
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.
/bullet/ Dependence on Relationship with Bridge Telerate. The Company is party
to a Software License, Maintenance and Development Agreement with
Bridge Telerate relating to TRADESTATION. The agreement provides a
substantial minimum royalty stream over the next three years, the loss
of which would materially adversely affect the Company's revenues and
earnings in those years. While the agreement is non-cancelable, there
can be no assurance that the Company's anticipated royalties and other
anticipated benefits from its relations with Bridge Telerate will be
realized. As a result of the acquisition by Bridge of Dow Jones Markets
last year, the Company is less certain of how, or to what extent,
Bridge Telerate will market TRADESTATION to its subscribers.
Additionally, Bridge Telerate has expressed strong concerns over
whether the Year 2000 compliant TRADESTATION 2000I, installation of
which in all Bridge Telerate TRADESTATION terminals is the only
currently-viable Year 2000 solution for such Bridge Telerate
subscribers, will be able to be implemented in a manner timely enough
to satisfy certain Bridge Telerate institutional customers. See
"Business - Strategic Relationships."
/bullet/ Product Concentration. Since its introduction in 1991, sales of
TradeStation have accounted for a majority of the Company's total
revenues and may 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 that is
not offset by increased demand for other of the Company's principal
software products would have a material adverse effect on the Company's
business, financial condition and results of operations. The level of
customer acceptance of TRADESTATION 2000I is expected to affect the
Company's results of operations beginning in the first quarter of 1999.
See "Business - Products" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview."
/bullet/ 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, end-of-day and historical financial market data from
services that are technically compatible with the Company's products
and, in the future, with respect to historical and end-of-day data,
from the Company. The Company currently depends nearly entirely upon
relationships with third-party data vendors to ensure such access, and
it currently has cross-marketing and other agreements with several data
vendors. Most of the data vendors with which the Company has developed
33
<PAGE>
technical compatibility (including those with which it has
cross-marketing and other 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. The Company's introduction of HISTORYBANK.COM may
accelerate one or more of those actions on the part of data vendors.
See "Business - Strategic Relationships," "Business - Products" and
"Business - Competition."
Further, the Company is party to separate agreements with two data
vendors that contemplate development of compatibility between one or
more of the Company's 2000I software products and such data vendors'
respective datafeeds later in 1999. There can be no assurance that such
capabilities will be successfully developed in a timely manner, if at
all. Failure of the Company to develop such compatibilities in a timely
manner, or at all, would result in loss by the Company of some or all
of its financial benefits under such agreements.
/bullet/ Accounts Receivable. 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 12-16 (depending on the product)
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 exceed historical levels. The risk of
non-collection of accounts receivable has been increased by the
Company's recent decision to permit payment for its most expensive
product, OMEGA RESEARCH PROSUITE, over a 16-month period (12 months
having previously been the longest payment period). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Overview."
/bullet/ Risks Associated with Entry into Institutional Market. The Company has
historically sold its products to individuals and has limited
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, a market in which it has no meaningful experience. The
Company's success in the institutional market will depend, in part,
upon its ability to successfully develop network versions of its
products. See "Business - Sales and Marketing."
/bullet/ Intellectual Property. The Company's success is heavily dependent on
its proprietary technology. The Company relies on a combination of
copyright, trade secret and trademark laws, nondisclosure agreements
and other contractual provisions and technical measures to protect its
proprietary rights. Policing unauthorized use of the Company's products
is difficult, however, and the Company is unable to determine the
extent to which piracy of its software products exists. 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. The
Company's elimination from the 2000I software of the hardware security
block used with the prior versions may increase the incidence of
34
<PAGE>
piracy (as compared to incidence of piracy of prior versions) and
result in reduced revenues to the Company. See "Business - Intellectual
Property."
/bullet/ POTENTIAL LIABILITY TO CUSTOMERS. 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, or inaccurate data,
which could result in litigation against the Company. This risk may be
heightened with respect to use of the 2000I software due to its
capability of interfacing with online brokerage firms to complete
executions of buy or sell alerts generated by use of the programs, and
by the Company's decision to provide financial market information to
its customers, which routinely contain errors and omissions, but which
are nevertheless relied upon by customers in making investment
decisions using the Company's software. In addition, there can be no
assurance that unanticipated difficulties will not delay the Company's
Year 2000 compliance efforts, or that compliance modifications will not
adversely affect the Company's products in ways not currently
anticipated by the Company, or that customers will not assert that the
Company has or had an obligation to provide Year 2000 solutions for
older versions of existing products or for discontinued products, any
of which occurrences could result in claims by customers. Any such
litigation could result in substantial damages and significant cost to
the Company in terms of the deployment of its financial and managerial
resources. See "PRODUCT UPGRADES AND NEW PRODUCTS; CUSTOMER ACCEPTANCE;
RISK OF PRODUCT DEFECTS" and "Business - Product Development and Year
2000 Compliance."
/bullet/ RISK OF PENDING CLASS ACTION. On January 28, 1998, a class action
lawsuit was filed against the Company, its Co-Chief Executive Officers
and the lead underwriters for the Company's initial public offering
alleging that the defendants violated Sections 11 and 12 of the
Securities Act by allegedly making misrepresentations and omissions of
material facts in connection with the initial public offering of the
Company's Common Stock and in connection with the Company's financial
condition. The alleged misrepresentations and omissions concerned,
among other things, the receipt of proceeds of the initial public
offering by William R. Cruz and Ralph L. Cruz and the Company's
TRADESTATION sales. The suit also alleged that William R. Cruz and
Ralph L. Cruz violated Section 15 of the Securities Act based on the
same alleged conduct described above. The plaintiffs sought
certification of a class consisting of all persons who purchased the
Company's Common Stock in the initial public offering or between
October 4, 1997 and January 6, 1998 (excluding, in general, persons who
are related to or have interests in common with the defendants). On
behalf of themselves and the class, the plaintiffs sought damages,
interest, costs and expenses, including attorneys' and experts' fees
and other appropriate relief. While the Company has consistently
maintained that the lawsuit is without merit and has contested the
lawsuit vigorously, the costs of the litigation increased in 1998, and
may continue to increase, the Company's general and administrative
expenses. In addition, if the lawsuit proceeds, management time and
attention may be diverted as the Company responds to the allegations
raised therein.
All of the claims in this lawsuit were dismissed March 1, 1999, most
with prejudice. The plaintiffs were granted the right to replead,
within ten days following the date of the order, the claims that were
dismissed without prejudice. To the Company's knowledge, the plaintiffs
did not replead those claims. In the event the Company does not
ultimately prevail in the lawsuit (as a result of a successful appeal
by the plaintiffs or other reasons), class damages could be substantial
and could materially adversely affect the Company's financial
35
<PAGE>
condition. See "Legal Proceedings" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Years Ended
December 31, 1998 and 1997 - OPERATING EXPENSES - GENERAL AND
ADMINISTRATIVE EXPENSES."
/bullet/ RISK OF INTELLECTUAL PROPERTY 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, or result in the Company being unable to use intellectual
property which is integral to one or more of its products. See
"Business - Intellectual Property."
/bullet/ 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. See
"Business - Sales and Marketing."
/bullet/ FUTURE CAPITAL NEEDS. The Company believes that it has sufficient funds
to meet normal working capital needs at least through 1999. 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 1999 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. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and notes thereto and the report of the
independent auditors thereon set forth on pages F-1 through F-18 herein are
filed as part of this report and incorporated herein by reference.
The Financial Statement Schedule and the report of the independent
auditors thereon set forth on pages S-1 through S-3 herein are filed as part of
this report and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
36
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from the Company's 1999 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the Company's 1999 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the Company's 1999 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from the Company's 1999 definitive proxy
statement to be filed, pursuant to General Instruction G(3) to the Form 10-K.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements. The Financial Statements and
notes thereto and the report of the independent
auditors thereon set forth on pages F-1 through F-18
herein are filed as part of this report and
incorporated herein by reference.
2. Financial Statement Schedules. The Financial
Statement Schedule and the report of the independent
auditors thereon set forth on pages S-1 through S-3
herein are filed as part of this report and
incorporated herein by reference.
3. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 - Second Amended and Restated Articles of Incorporation of Omega
Research, Inc.+
3.2 - Second Amended and Restated Bylaws of Omega Research, Inc.+
10.1 - Omega Research, Inc.
Amended and Restated 1996
Incentive Stock Plan, as
amended through February
13, 1998 (incorporated by
reference to Exhibit 10.1
to the Company's Quarterly
Report on Form 10-Q for the
fiscal quarter ended June
30, 1998).*
10.2 - Omega Research, Inc. 1997 Nonemployee Director Stock Option
Plan, as amended ++.
10.3 - Software License, Maintenance and Development Agreement between
Dow Jones Markets, Inc. and the Company, as amended
(TRADESTATION Agreement).+
10.4 - Software License, Maintenance and Development Agreement between
Dow Jones Markets, Inc. and the Company (SUPERCHARTS
Agreement). +
10.5 - Standard Office Building Lease between 8700 Flagler, Ltd. and
the Company, as amended by Memorandum of Commencement Date. +
10.6 - S Corporation Tax Allocation and Indemnification Agreement.
/circle/
10.7 - Form of Indemnification Agreement. +
38
<PAGE>
10.8 - Omega Research, Inc. 1997
Employee Stock Purchase
Plan, as amended by
Amendment to Omega Research
1997 Employee Stock
Purchase Plan (incorporated
by referenced to Exhibit
10.1 to the Company's
Quarterly Report on Form
10-Q for the fiscal quarter
ended September 30, 1998).*
10.9 - Form of non-competition agreement. +
10.10 _ Letter Agreement dated October 27, 1997 from Dow Jones Markets,
Inc. to Omega Research, Inc.++
10.11 Sublease (for fourth floor
of 8700 Flagler Building)
and Modification of Lease
Agreement (filed herewith).
23.1 - Consent of Arthur Andersen LLP (filed herewith).
27.1 - Financial Data Schedule (filed herewith).
</TABLE>
------------
+ Previously filed as part of
Registration Statement No.
333-3207 on Form S-1 filed with
the Commission on July 25, 1997.
/circle/ Previously filed as part of
Amendment No.1 to Registration
Statement No. 333-3207 filed with
the Commission on August 25,
1997.
++ Previously filed as part of
Annual Report on Form 10-K for
the fiscal year ended December
31, 1997.
* Indicates a management contract
or compensatory plan or
arrangement.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1998.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OMEGA RESEARCH, INC.
By: /S/ WILLIAM R. CRUZ
--------------------------------------------
William R. Cruz
Co-Chairman of the Board of Directors and
Co-Chief Executive Officer
By: /S/ RALPH L. CRUZ
--------------------------------------------
Ralph L. Cruz
Co-Chairman of the Board of Directors and
Co-Chief Executive Officer
Dated: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/S/ WILLIAM R. CRUZ Co-Chairman of the Board and March 29, 1999
- ------------------------------------ Co-Chief Executive Officer
William R. Cruz (Co-Principal Executive Officer)
/S/ RALPH L. CRUZ Co-Chairman of the Board and March 29, 1999
- ------------------------------------ Co-Chief Executive Officer
Ralph L. Cruz (Co-Principal Executive Officer)
/S/ SALOMON SREDNI Vice President of Operations, March 29, 1999
- ------------------------------------ Chief Financial Officer and Director
Salomon Sredni (Principal Financial and
Accounting Officer)
/S/ PETER A. PARANDJUK Director March 29, 1999
- ------------------------------------
Peter A. Parandjuk
/S/ MARC J. STONE Director March 29, 1999
- ------------------------------------
Marc J. Stone
/S/ CHRISTOS M. COTSAKOS Director March 29, 1999
- ------------------------------------
Christos M. Cotsakos
/S/ BRIAN D. SMITH Director March 29, 1999
- ------------------------------------
Brian D. Smith
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
OMEGA RESEARCH, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants ........................................F-2
Balance Sheets as of December 31, 1998 and 1997............................................F-3
Statements of Income for the years ended December 31, 1998, 1997 and 1996..................F-4
Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996....F-5
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996..............F-6
Notes to Financial Statements..............................................................F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Omega Research, Inc.:
We have audited the accompanying balance sheets of Omega Research, Inc. (a
Florida corporation) as of December 31, 1998 and 1997, and the related
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
February 5, 1999.
F-2
<PAGE>
<TABLE>
<CAPTION>
OMEGA RESEARCH, INC.
BALANCE SHEETS
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,436,980 $12,323,515
Marketable securities 5,736,958 1,014,590
Accounts receivable, net 9,246,474 9,438,218
Inventories 131,659 146,821
Other current assets 692,273 520,537
Deferred income taxes 4,541,000 2,963,000
----------- -----------
Total current assets 27,785,344 26,406,681
PROPERTY AND EQUIPMENT, net 1,670,925 971,511
OTHER ASSETS 185,854 91,626
----------- -----------
Total assets $29,642,123 $27,469,818
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,082,521 $ 1,119,202
Accrued expenses 1,067,499 608,947
Income taxes payable -- 509,000
----------- -----------
Total current liabilities 2,150,020 2,237,149
----------- -----------
COMMITMENTS & CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 25,000,000 shares
authorized, none issued and outstanding -- --
Common stock, $.01 par value; 100,000,000
shares authorized, 22,269,964 and 22,246,108
issued and outstanding at December 31, 1998
and 1997, respectively 222,700 222,461
Additional paid-in capital 23,913,877 23,745,251
Retained earnings 3,355,526 1,264,957
----------- -----------
Total shareholders' equity 27,492,103 25,232,669
----------- -----------
Total liabilities and shareholders' equity $29,642,123 $27,469,818
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
OMEGA RESEARCH, INC.
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
NET REVENUES:
Licensing fees $22,005,324 $ 24,364,990 $13,943,234
Other revenues 6,211,181 4,861,284 3,876,928
----------- ------------ -----------
Total net revenues 28,216,505 29,226,274 17,820,162
----------- ------------ -----------
OPERATING EXPENSES:
Cost of licensing fees 1,798,078 1,848,993 1,716,884
Product development 3,318,310 1,890,392 1,041,131
Sales and marketing 14,381,923 11,272,290 5,617,931
General and administrative 6,134,608 5,420,760 2,421,638
----------- ------------ -----------
Total operating expenses 25,632,919 20,432,435 10,797,584
----------- ------------ -----------
Income from operations 2,583,586 8,793,839 7,022,578
OTHER INCOME, net 423,961 146,474 59,436
----------- ------------ -----------
Income before income taxes 3,007,547 8,940,313 7,082,014
INCOME TAX PROVISION (BENEFIT) 1,052,000 (934,000) --
----------- ------------ -----------
Income before pro forma income
tax adjustments 1,955,547 9,874,313 7,082,014
PRO FORMA INCOME TAX
ADJUSTMENTS (Note 1):
Pro forma income taxes for periods
prior to September 30, 1997 -- 3,255,731 2,797,396
Non-recurring tax credit -- 1,167,000 --
----------- ------------ -----------
Pro forma net income $ 1,955,547 $ 5,451,582 $ 4,284,618
=========== ============ ===========
PRO FORMA EARNINGS PER
SHARE (Note 8):
Basic $ 0.09 $ 0.27 $ 0.22
=========== ============ ===========
Diluted $ 0.09 $ 0.26 $ 0.21
=========== ============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
OMEGA RESEARCH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
ADDITIONAL
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
---------- -------- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
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
Issuances of common stock 2,766,108 27,661 27,412,784 -- -- 27,440,445
Cash distributions to shareholders, net -- -- -- (16,532,826) -- (16,532,826)
Non-cash distributions to shareholders -- -- -- (506,781) -- (506,781)
Conversion from S corporation to
C corporation -- -- (3,792,091) 3,792,091 -- --
Compensation expense on stock
option grants -- -- 122,041 -- -- 122,041
Net income -- -- -- 9,874,313 -- 9,874,313
---------- -------- ------------ ------------ ------- ------------
BALANCE, December 31, 1997 22,246,108 222,461 23,745,251 1,264,957 -- 25,232,669
Issuances of common stock 23,856 239 54,749 -- -- 54,988
Compensation expense on stock
option grants -- -- 113,877 -- -- 113,877
Repayment of distributions -- -- -- 135,022 -- 135,022
Net income -- -- -- 1,955,547 -- 1,955,547
---------- -------- ------------ ------------ ------- ------------
BALANCE, December 31, 1998 22,269,964 $222,700 $ 23,913,877 $ 3,355,526 $ -- $ 27,492,103
========== ======== ============ ============ ======= ============
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
OMEGA RESEARCH, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before pro forma income tax adjustments $ 1,955,547 $ 9,874,313 $ 7,082,014
Adjustments to reconcile income before pro forma income
tax adjustments to net cash provided by operating activities:
Depreciation and amortization 466,628 606,820 353,852
Provision for doubtful accounts 2,222,834 2,450,736 830,430
Compensation expense on stock option grants 113,877 122,041 4,767
Deferred income tax benefit (1,578,000) (2,963,000) --
(Increase) decrease in:
Accounts receivable (2,031,091) (7,531,906) (3,223,458)
Inventories 15,162 (54,633) (57,465)
Other current assets (171,736) (514,847) (558)
Other assets 128,672 (1,315) (46,800)
Increase (decrease) in:
Accounts payable (36,681) 636,540 278,739
Accrued expenses 458,552 123,758 371,284
Income taxes payable (509,000) 509,000 --
------------ ------------ -----------
Net cash provided by operating activities 1,034,764 3,257,507 5,592,805
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,166,041) (899,296) (530,733)
Capitalized software development costs -- (29,358) (10,346)
Purchases of marketable securities (5,722,368) (1,014,590) --
Proceeds from maturity of marketable securities 1,000,000 -- --
Acquisition of data rights and customer lists (222,900) (40,000) --
------------ ------------ -----------
Net cash used in investing activities (6,111,309) (1,983,244) (541,079)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 54,988 27,440,445 --
Repayments from (distributions to) shareholders, net 135,022 (16,532,826) (5,221,561)
Proceeds from borrowings of short-term debt -- 15,000,000 --
Repayment of borrowings of short-term debt -- (15,000,000) --
------------ ------------ -----------
Net cash provided by (used in) financing activities 190,010 10,907,619 (5,221,561)
------------ ------------ -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (4,886,535) 12,181,882 (169,835)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,323,515 141,633 311,468
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,436,980 $ 12,323,515 $ 141,633
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ -- $ 17,979 $ --
============ ============ ===========
Cash paid for income taxes $ 3,138,740 $ 1,520,000 $ --
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTION:
Effective June 30, 1997, the Company declared a dividend
distributing land and a building with a carrying value of
$506,781, to its shareholders.
</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 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 products provide investors with the ability to
historically test and computer automate trading strategies.
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. Cash and cash
equivalents consists primarily of overnight investments, tax exempt commercial
paper and short-term municipal bonds with an original maturity of three months
or less.
MARKETABLE SECURITIES
Marketable securities consist of investment grade municipal bonds maturing,
on average, within a year. The cost of these investments approximates fair
market value and management has designated the securities as available for sale.
ACCOUNTS RECEIVABLE
Accounts receivable are principally from individuals and distributors of the
Company's products. The Company performs periodic credit evaluations and
maintains allowances for potential credit losses of approximately $3.7 million
and $3.2 million at December 31, 1998 and 1997, respectively, and allowances for
potential returns of approximately $7.4 million and $4.2 million at December 31,
1998 and 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.
F-7
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Approximately 10.3%, 9.7% and 11.2% of the Company's revenues for the years
ended December 31, 1998, 1997 and 1996, respectively, were derived from
customers outside of the United States. International sales are made in United
States dollars.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, marketable securities,
accounts receivable and accounts payable approximate fair value as of December
31, 1998 and 1997.
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 straight-line method 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.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards ("SFAS") 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. 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. There
were no capitalized software development costs as of December 31, 1998 or 1997.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
F-8
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (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 ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION. SOP 97-2 requires
companies to defer revenue and profit recognition if four required criteria of a
sale are not met. In addition, SOP 97-2 requires revenue recognized from
software arrangements to be allocated to each element of the arrangement based
on the relative fair values of the elements, such as software products,
upgrades, enhancements, post contract customer support, installation, or
training. SOP 97-2 was adopted by the Company effective January 1, 1998 and did
not have a material impact on the Company's financial position or results of
operations.
While the Company has no obligation to perform future services subsequent to
shipment, the Company provides telephone and electronic mail 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.
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.
OTHER REVENUES
The Company has entered into various agreements with entities that market
and sell financial market data subscriptions. Except for the agreement described
in Note 9 (which is a royalty arrangement), the Company receives, in certain
cases, monthly payments in the nature of commissions 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.
ADVERTISING COSTS
Advertising costs are expensed when the initial advertisement is run and are
included in sales and marketing expenses in the accompanying statements of
income. Advertising costs for the years ended December 31, 1998, 1997 and 1996
were $5.8 million, $5.4 million and $4.8 million, respectively.
STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, in
accounting for stock-based transactions with non-employees, the Company records
F-9
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
compensation expense in the statement of income when these types of options are
issued. As permitted by SFAS No. 123, the Company accounts for its stock-based
compensation paid to employees in accordance with Accounting Principles Board
("APB") Opinion No. 25.
INCOME TAXES
For income tax purposes, the Company was an S corporation prior to September
30, 1997. Accordingly, net income and related timing differences which arise in
the recording of income and expense items for financial reporting and tax
reporting purposes were included in the individual tax returns of the S
corporation shareholders. Effective September 30, 1997, the Company terminated
its S corporation election, and, as a result, adopted SFAS No. 109, ACCOUNTING
FOR INCOME TAXES. SFAS No. 109 requires that deferred income tax balances be
recognized based on the differences between the financial statement and income
tax bases of assets and liabilities using the enacted tax rates (see Note 7).
PRO FORMA INCOME TAX ADJUSTMENTS
The pro forma income tax adjustments included in the accompanying statements
of income for the years ended December 31, 1997 and 1996 are for informational
purposes only. Pro forma income taxes have been provided at an estimated
effective rate of 39.5% for periods prior to September 30, 1997. In addition, a
non-recurring tax credit of $1.2 million has been excluded from pro forma net
income (see Note 7).
PRO FORMA EARNINGS PER SHARE
Earnings per share is calculated in accordance with SFAS No. 128, EARNINGS
PER SHARE. SFAS No.128 requires a dual presentation of basic 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 (see Note 8).
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. Such
estimates include established reserves for returns and reserves for potentially
uncollectable accounts receivable.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("ACSEC") issued SOP 98-1, ACCOUNTING
FOR THE
F-10
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1
establishes criteria for determining which costs of developing or obtaining
internal-use computer software should be charged to expense and which should be
capitalized. SOP 98-1 is effective for all transactions entered into in fiscal
years beginning after December 15, 1998. The Company will adopt SOP 98-1
prospectively effective January 1, 1999. Management does not believe that the
adoption of SOP 98-1 will have a material effect on the Company's financial
position or results of operations.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, REPORTING COMPREHENSIVE INCOME, and No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components, which will be presented in association
with a company's financial statements. Comprehensive income is defined as the
change in a business enterprise's equity during a period arising from
transactions, events or circumstances relating to non-owner sources, such as
foreign currency translation adjustments and unrealized gains or losses on
available-for-sale securities. It includes all changes in equity during a period
except those resulting from investments by or distributions to owners. The
Company adopted SFAS No. 130 as of January 1, 1998 and such adoption did not
have an impact on the disclosures herein as comprehensive income is equal to net
income for all periods presented.
SFAS No. 131 establishes standards for the way that public companies report
selected information about operating segments in annual and interim financial
reports to shareholders. It also establishes standards for related disclosures
about an enterprise's business segments, products, services, geographic areas,
and major customers. SFAS No. 131 supersedes SFAS No. 14, FINANCIAL REPORTING
FOR SEGMENTS OF A BUSINESS ENTERPRISE, but retains the requirement to report
information about major customers and requires that a public company report
financial and descriptive information about its reportable operating segments.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. SFAS No. 131 requires that a public company
report a measure of segment profit or loss, certain specific revenue and expense
items, and segment assets. The Company adopted SFAS No. 131 effective December
31, 1998. Management evaluates and operates the business of the Company as a
single segment. As a result, no additional disclosure was required.
F-11
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
USEFUL LIFE
IN YEARS 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Computers and software 3-5 $ 2,648,974 $ 1,553,091
Furniture and equipment 3-5 413,075 445,909
Leasehold improvements 5 122,449 97,976
Autos 5 110,205 110,205
----------- -----------
3,294,703 2,207,181
Accumulated depreciation
and amortization (1,623,778) (1,235,670)
----------- -----------
$ 1,670,925 $ 971,511
=========== ===========
</TABLE>
(3) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Payroll and related accruals $ 542,218 $314,378
Accrued technical support costs 173,500 165,666
Deferred revenue 105,035 47,395
Other 246,746 81,508
---------- --------
$1,067,499 $608,947
========== ========
</TABLE>
(4) SHAREHOLDERS' EQUITY
SHARE SPLIT
Effective January 29, 1997, the Company authorized an increase in the amount
of its authorized common stock to 100 million shares 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.
PREFERRED STOCK
On July 16, 1997, the Company authorized 25 million 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.
INITIAL PUBLIC OFFERING
On October 6, 1997, the Company closed on its initial public offering of 2.6
million shares of common stock of the Company at $11.00 per share (the "Initial
Public Offering").
F-12
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On November 5, 1997, the Company closed on the underwriters' purchase of 158,108
additional shares of common stock pursuant to the exercise of a portion of their
over-allotment option granted in the Initial Public Offering. Total proceeds to
the Company, net of underwriting discounts and offering expenses of
approximately $2.9 million, were $27.4 million.
DISTRIBUTIONS TO SHAREHOLDERS
On September 30, 1997, the Company terminated its S corporation status and
the Company became a C corporation making it subject to federal and state income
taxes on its earnings. In conjunction with the Company becoming a C corporation,
the Company declared and paid a cash dividend payable to the Company's existing
shareholders of $15.4 million (the "Dividend"). The Dividend was equal to the
Company's estimate at that time of its cumulative taxable income prior to its
conversion to a C corporation to the extent such taxable income had not been
previously distributed. Subsequent to the payment of the Dividend, the Company
preliminarily determined that the actual cumulative taxable income would be less
than was originally estimated. Accordingly, in the fourth quarter of 1997, the
recipients of the Dividend repaid $800,000, plus interest, to the Company.
During the third quarter of 1998, upon finalization of the Company's 1997 tax
returns and final determination of S corporation earnings at the date of
conversion to a C corporation, the recipients of the Dividend repaid an
additional $135,000, plus interest, to the Company reducing the Dividend to
$14.5 million.
STOCK OPTION PLANS
The Company had reserved 3,000,000 shares of its common stock for issuance
under its Amended and Restated 1996 Incentive Stock Plan (the "Option Plan").
Under the Option 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
Compensation Committee of the Board of Directors. 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. The options issued under the
Plan generally vest ratably over a five-year period.
During the fourth quarter of 1998, the Board of Directors increased, subject
to shareholder approval, the authorized shares under the Option Plan from
3,000,000 to 4,500,000. In connection with this increase, an additional 365,000
options were granted to officers and certain other senior management personnel
of the Company subject to shareholder approval being obtained within one year
following such Board action.
The Company has reserved 175,000 shares of its common stock for issuance
under its 1997 Director Stock Option Plan, as amended (the "Director Plan").
Under the Director Plan, an independent director is awarded an initial grant of
up to 75,000 non-qualified stock options and annual grants of up to 3,000
non-qualified stock options. The terms of each option grant are determined by
the Board of Directors.
F-13
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
OPTION PRICE PER SHARE
NUMBER -------------------------------
OF SHARES LOW HIGH WEIGHTED
--------- ------ ------ --------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1996 582,000 $ 1.25 $ 1.25 $ 1.25
Granted 559,175 1.25 11.00 4.90
Cancelled (25,350) 2.00 11.00 3.51
Exercised (8,000) 1.25 1.25 1.25
---------
Outstanding, December 31, 1997 1,107,825 1.25 11.00 3.04
Granted 1,856,216 1.59 5.34 2.27
Cancelled (59,355) 2.00 11.00 4.70
Exercised (11,350) 1.25 2.00 1.47
---------
Outstanding, December 31, 1998 2,893,336 1.25 11.00 2.52
=========
</TABLE>
Additional information regarding options outstanding at December 31, 1998
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
RANGE OF -------------------------------------------- ----------------------------
EXERCISABLE NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
PRICES OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
----------------- AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
LOW HIGH 12/31/98 LIFE PRICE 12/31/98 PRICE
------ ------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 1.25 $ 1.66 1,641,371 9.2 $1.50 219,800 $1.25
2.00 3.00 718,540 8.8 2.79 44,900 2.65
3.03 4.16 253,675 7.5 3.40 1,500 4.00
4.59 6.00 152,500 9.0 5.07 27,800 5.14
7.00 7.25 60,500 8.6 7.17 12,100 7.17
11.00 11.00 66,750 8.7 11.00 17,350 11.00
------ ------- --------- --- ----- ------- -----
$ 1.25 $ 11.00 2,893,336 8.9 $2.52 323,450 $2.54
====== ======= ========= === ===== ======= =====
</TABLE>
All options issued during 1996 were issued to key employees at an exercise
price that was subsequently determined to be approximately $291,000 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, approximately $341,000 below fair value as determined by an
independent appraisal. These differences are being amortized over the five-year
vesting period of the related stock options. For the years ended December 31,
1998, 1997 and 1996, the Company recorded compensation expense of approximately
$114,000, $122,000 and $5,000, respectively. Included in compensation expense in
1998 and 1997, was approximately $7,000 and $23,000, respectively, related to
options issued to a consultant of the Company, accounted for under the
provisions of SFAS No. 123. Options to purchase 323,450 and 110,900 shares were
exercisable at December 31, 1998 and 1997. No options were exercisable at
December 31, 1996.
The Company, as permitted by SFAS No. 123, applies the APB Opinion No. 25
for options granted to employees. Accordingly, no compensation is recognized for
such grants
F-14
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 No. 123, the Company's pro forma net income (and pro forma
earnings per share on a diluted basis) for the years ended December 31, 1998,
1997 and 1996 would have been approximately $1.4 million ($0.06 per share), $5.2
million ($0.25 per share) and $4.3 million ($0.21 per share), respectively. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes model with the following assumptions:
<TABLE>
<CAPTION>
1/1/97 - 10/1/97 -
1996 9/30/97 12/31/97 1998
---- -------- ---------- ----
<S> <C> <C> <C> <C>
Risk free interest rate 7% 7% 7% 5%
Dividend yield -- -- -- --
Volatility factors 70% 70% 81% 81%
Weighted average life (years) 7 7 7 5
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In July 1997, the Board of Directors of the Company adopted and the
shareholders approved the 1997 Employee Stock Purchase Plan (the "Purchase
Plan") and reserved 500,000 shares of common stock pursuant to the exercise of
nontransferable options granted to participating employees. The exercise price
for the option for each six-month Purchase Plan period is 85% of the lesser of
the fair market value of the Company's common stock on the first or last
business day of the Purchase Plan period. The Purchase Plan provides for the
first options to be granted for the Purchase Plan Period which commenced January
1, 1998. During the year ended December 31, 1998, 12,506 shares of common stock
were issued under the plan at an average price of $3.06.
(6) EMPLOYEE BENEFIT PLAN
The Company provides retirement benefits through a defined contribution
401(k) plan (the "401(k) Plan") which was established during 1994. Employees
become eligible based upon meeting certain service requirements. The Company
matches employee contributions based upon a formula defined in the 401(k) Plan.
There was no matching contribution accrued under the 401(k) Plan at December 31,
1998. Matching contributions accrued under the 401(k) Plan amounted to
approximately $63,000 and $62,000 in 1997 and 1996, respectively.
F-15
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES
The components of income tax provision (benefit) for the years ended
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Current taxes:
Federal $ 2,254,000 $ 1,739,894
State 376,000 289,106
----------- ----------
Total current taxes 2,630,000 2,029,000
----------- ----------
Deferred tax benefit:
Federal (1,353,000) (2,540,811)
State (225,000) (422,189)
----------- ----------
Total deferred tax benefit (1,578,000) (2,963,000)
----------- ----------
Total income tax provision (benefit) $ 1,052,000 $ (934,000)
=========== ==========
</TABLE>
Deferred income taxes are recorded when revenues and expenses are recognized
in different periods for financial statement and tax return purposes. The
temporary differences that created deferred income taxes are as follows:
<TABLE>
<S> <C> <C>
Deferred tax assets:
Reserves and allowances $4,351,000 $2,900,000
Other 410,000 283,000
---------- ----------
Total deferred tax assets 4,761,000 3,183,000
Valuation allowance (220,000) (220,000)
---------- ----------
Deferred income taxes, net $4,541,000 $2,963,000
========== ==========
</TABLE>
The effective tax rate for the year ended December 31, 1998 was 35.0% and
was slightly below the 38.6% statutory rate as a result of the impact of tax
free investment income and state income taxes. The difference between the
reported income tax benefit for the year ended December 31, 1997 and the
provision computed by applying the statutory federal rate currently in effect is
primarily due to recognition by the Company of a non-recurring net benefit for
income taxes of $1.2 million upon adoption of SFAS No. 109 during the third
quarter of 1997, as well as the fact that no income taxes were provided during
the first nine months of 1998 while the Company was an S corporation for income
tax reporting purposes.
The $1.2 million benefit for income taxes recorded during the third quarter
of 1997 is comprised of a non-recurring deferred income tax credit (the "SFAS
109 Credit") of approximately $3.0 million partially offset by a $1.8 million
provision for income taxes payable. The SFAS 109 Credit recognized net deferred
tax assets arising from book and tax basis differences that arose primarily as a
result of accounts receivable reserves. The $1.8 million in income taxes payable
relate to federal and state income taxes owed by the Company as a result of an
approximate $4.6 million in S corporation taxable earnings paid by the Company
during the fourth quarter of 1997 and the year-ended December 31, 1998.
F-16
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) PRO FORMA EARNINGS PER SHARE
Weighted average shares outstanding for the years ended December 31, 1998,
1997 and 1996 are calculated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding (basic) 22,255,627 20,171,527 19,480,000
Impact of dilutive options after applying
the treasury stock method 502,286 713,148 1,061,000
---------- ---------- ----------
Weighted average shares outstanding (diluted) 22,757,913 20,884,675 20,541,000
---------- ---------- ----------
Options outstanding which are not included
in the calculation of diluted earnings
per share because their impact is antidilutive 415,250 78,075 --
========== ========== ==========
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has five non-cancelable operating leases for facilities. The
only significant operating leases are for the Company's corporate headquarters.
The original lease is for five and one-half years and commenced in February
1997. In December of 1998 and in February of 1999, the Company entered into a
sub-lease and a lease for additional space commencing in December 1998 for a
combined term of approximately three and one-half years. In connection with the
installation of a new telephone system, the Company entered into a 4 year
operating lease which commenced in November 1998.
Future minimum lease payments as of December 31, 1998 under all operating
leases are as follows:
<TABLE>
<S> <C>
1999 $ 528,802
2000 926,558
2001 1,070,182
2002 701,488
----------
$3,227,030
==========
</TABLE>
Total rent expense for 1998, 1997 and 1996 was approximately $329,000,
$256,000 and $47,000, respectively.
BRIDGE TELERATE ROYALTY AGREEMENT
The Company has entered into a Software License, Maintenance and Development
Agreement (the "Agreement") with Dow Jones Markets, Inc. (then known as Dow
Jones Telerate, Inc., now known as Telerate, Inc., and a subsidiary of Bridge
Information Systems, Inc.) ("Bridge Telerate"). Under the Agreement, the Company
modified one of its software products to create a Bridge Telerate version and
granted Bridge Telerate
F-17
<PAGE>
OMEGA RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
a license to promote, market, sublicense and distribute the Bridge Telerate
version for six years. During 1998, 1997 and 1996, the Company earned
approximately $3.0, $2.2 and $1.5 million, respectively, in royalties (based
upon minimum royalty requirements) under the terms of this Agreement.
LITIGATION
On January 28, 1998, a class action lawsuit CAPTIONED RICHARD M. RHODES V.
WILLIAM R. CRUZ; RALPH L. CRUZ; OMEGA RESEARCH, INC.; BANCAMERICA ROBERTSON
STEPHENS; LEHMAN BROTHERS; AND HAMBRECHT & QUIST (Case No. 98-0174-CIV-Lenard),
was filed in the United States District Court for the Southern District of
Florida. The suit alleges that the defendants violated Sections 11 and 12 of the
Securities Act of 1933 (the "Securities Act") by allegedly making
misrepresentations and omissions of material facts in connection with the
Initial Public Offering of the Company's Common Stock and in connection with the
Company's financial condition. The alleged misrepresentations and omissions
concern, among other things, the receipt of proceeds of the Company's initial
public offering by William R. Cruz and Ralph L. Cruz and the Company's
TRADESTATION sales. The suit also alleges that William R. Cruz and Ralph L. Cruz
violated Section 15 of the Securities Act based on the same alleged conduct as
described above.
On March 1, 1999, the court dismissed all of the claims in the suit, most
with prejudice. The plaintiffs were granted the right to replead, within ten
days following the date of the order, the claims that were dismissed without
prejudice. To the Company's knowledge, the plaintiffs did not replead those
claims. The Company intends to oppose vigorously any further claims, or any
appeals, which are brought by the plaintiffs.
In addition to the above, 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.
F-18
<PAGE>
<TABLE>
<CAPTION>
OMEGA RESEARCH, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants on Schedule.............. S-2
Schedule II - Valuation and Qualifying Accounts
for the years ended December 31, 1998, 1997 and 1996...................... S-3
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To Omega Research, Inc.:
We have audited in accordance with generally accepted auditing standards the
financial statements included in this Form 10-K and have issued our report
thereon dated February 5, 1999. Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The accompanying
Schedule II is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
February 5, 1999.
S-2
<PAGE>
<TABLE>
<CAPTION>
OMEGA RESEARCH, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts $3,229,166 $ 2,222,834 $ (1,729,000) $ 3,723,000
Allowance for returns 4,150,000 25,336,754 (22,136,754) 7,350,000
---------- ----------- ------------ -----------
Allowance for doubtful accounts and returns $7,379,166 $27,559,588 $(23,865,754) $11,073,000
========== =========== ============ ===========
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $ 830,430 $ 2,450,736 $ (52,000) $ 3,229,166
Allowance for returns 1,797,000 15,737,063 (13,384,063) 4,150,000
---------- ----------- ------------ -----------
Allowance for doubtful accounts and returns $2,627,430 $18,187,799 $(13,436,063) $ 7,379,166
========== =========== ============ ===========
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful accounts $ 134,000 $ 830,430 $ (134,000) $ 830,430
Allowance for returns 252,000 5,340,000 (3,795,000) 1,797,000
---------- ----------- ------------ -----------
Allowance for doubtful accounts and returns $ 386,000 $ 6,170,430 $ (3,929,000) $ 2,627,430
========== =========== ============ ===========
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- ------------
<S> <C>
3.1 - Second Amended and Restated Articles of Incorporation of Omega Research,
Inc.+
3.2 - Second Amended and Restated Bylaws of Omega Research, Inc.+
10.1 - Omega Research, Inc. Amended and Restated 1996 Incentive
Stock Plan, as amended through February 13, 1998
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1998).*
10.2 - Omega Research, Inc. 1997 Nonemployee Director Stock Option Plan, as
amended ++.
10.3 - Software License, Maintenance and Development Agreement between Dow Jones
Markets, Inc. and the Company, as amended (TRADESTATION Agreement).+
10.4 - Software License, Maintenance and Development Agreement between Dow Jones
Markets, Inc. and the Company (SUPERCHARTS Agreement). +
10.5 - Standard Office Building Lease between 8700 Flagler, Ltd. and the
Company, as amended by Memorandum of Commencement Date. +
10.6 - S Corporation Tax Allocation and Indemnification Agreement. /circle/
10.7 - Form of Indemnification Agreement. +
10.8 - Omega Research, Inc. 1997 Employee Stock Purchase Plan,
as amended by Amendment to Omega Research 1997 Employee
Stock Purchase Plan (incorporated by referenced to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1998).*
10.9 - Form of non-competition agreement. +
10.10 _ Letter Agreement dated October 27, 1997 from Dow Jones Markets, Inc. to
Omega Research, Inc.++
10.11 - Sublease (for fourth floor of 8700 Flagler Building) and
Modification of Lease Agreement (filed herewith). 65
23.1 - Consent of Arthur Andersen LLP (filed herewith). 76
27.1 - Financial Data Schedule (filed herewith). 77
</TABLE>
- ------------
+ Previously filed as part of Registration Statement No. 333-3207 on Form
S-1 filed with the Commission on July 25, 1997.
/circle/ Previously filed as part of Amendment No.1 to Registration Statement
No. 333-3207 filed with the Commission on August 25, 1997.
++ Previously filed as part of Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
* Indicates a management contract or compensatory plan or arrangement.
EXHIBIT 10.11
SUBSUBLEASE
This subsublease is made as of the 4th day of December, 1998, by and
between TIGER DIRECT, INC., a Delaware corporation, whose address is 8700 West
Flagler, 4th floor, Miami, Florida (the "Subsublessor") and Omega Research,
Inc., whose address is 8700 West Flagler Street, Suite 250, Miami, Florida (the
"Subsublessee").
WITNESSETH:
WHEREAS, pursuant to a Sublease dated January 31, 1996 and Amendment To
Sublease dated December 15, 1997, a copy of which is attached hereto as Exhibit
A (the "Prime Sublease"), Coastal Fuels Marketing, Inc., a Florida Corporation
("Sublessor") subleased to Subsublessee certain premises (the "Prime Sublease
Premises") situated in the 8700 West Flagler Building (the "Office Building")
located at 8700 West Flagler, Miami, Florida; and
WHEREAS, Subsublessor desires to subsublet to Subsublessee and
Subsublessee desires to subsublease from Subsublessor a portion of the Prime
Sublease Premises demised to Subsublessor in and by the Prime Sublease;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties agree as follows:
1. DEFINITIONS. Capitalized terms used herein shall have the meanings
assigned thereto in the Prime Sublease unless otherwise defined herein or unless
the context otherwise requires.
2. SUBSUBLEASED PREMISES
(a) Subsublessor hereby subsubleases to Subsublessee and Subsublessee
hereby hires and takes from Subsublessor that portion of the Prime Sublease
Premises containing approximately Two Thousand Two Hundred (2,200) rentable
square feet on the Third (3rd) Floor of the Office Building ("Third Floor") and
the entire Fourth (4th) Floor of the Office Building containing approximately
Thirty-two Thousand Three Hundred Eight (32,308) rentable square feet ("Fourth
Floor"), as described on Exhibit B-1 and B-2 attached hereto (the "Subsubleased
Premises").
(b) Subsublessee shall accept the Subsubleased Premises in their
"AS-IS" condition. Such "AS-IS" condition shall not include, unless purchased by
Subsublessee under a separate agreement, the UPS Battery system (located on the
Fourth Floor and owned by TigerDirect) and wooden and glass bookshelves in the
executive area of the Subsubleased Premises. Subsublessor shall remove these
items prior to occupancy of Subsublessee.
3. TERM
(a) The term of this Subsublease for the Third Floor shall commence on
December 7, 1998 (the "Initial Term Commencement Date"), and subject to the
terms and conditions hereof, terminate thirty (30) days following the Term
Commencement Date.
(b) The term of this Subsublease for the Fourth Floor shall commence on
July 1, 1999 or, if Subsublessor is unable to move to its new premises by that
date, August 1, 1999 (the "Term Commencement Date"), and, subject to the terms
and conditions hereof, terminate on April 30, 2000.
(c) Subsublessor and Subsublessee understand and acknowledge that the
Term Commencement Date above is subject to delivery of Subsublessor's new
premises located at 7797 West Flagler Street and Subsublessor and Subsublessee
agree that Subsublessor shall in no event have any liability whatsoever to
Subsublessee for any delay of the Term Commencement Date. In the event
Subsublessor cannot deliver the Fourth Floor by August 1, 1999, then, as and for
Subsublessee's sole and exclusive remedy, Subsublessee shall be granted a Rent
credit in the amount of twice the amount of Rent (computed on a daily prorated
basis) otherwise due for each day thereafter until
Page 1 of 7
<PAGE>
Subsublessor tenders possession in accordance with the terms and conditions of
the Subsublease and Subsublessor shall continue to fulfill its rent and all
other obligations under the Prime Sublease until delivery of the Fourth Floor to
Subsublessee.
4. RENT.
(a) The rental rate for the portion of the Third Floor of the
Subsubleased Premises shall be One thousand Seven Hundred Forty One and 67/100
Dollars ($1,741.67) per month (Nine and 50/100 Dollars ($9.50) per rentable
square foot per year), plus applicable sales tax. Subsublessee shall pay rent to
Subsublessor in advance, without demand, set off or deduction, on the Initial
Term Commencement Date and thereafter on the first day of each and every
calendar month during the term hereof, at such place as Subsublessor may from
time to time in writing designate. If applicable, rent for any period of
occupancy during the term which is less than one (1) month shall be a pro rata
portion of the monthly installment.
(b) The rental rate for the entire Fourth Floor of the Subsubleased
Premises shall be Twenty-five Thousand Five Hundred Seventy-seven and 17/100
Dollars ($25,577.17) per month (Nine and 50/100 Dollars ($9.50) per rentable
square foot per year), plus applicable sales tax. Subsublessee shall pay rent to
Subsublessor in advance, without demand, set off or deduction, on the Term
Commencement Date and thereafter on the first day of each and every calendar
month during the term hereof, at such place as Subsublessor may from time to
time in writing designate. If applicable, rent for any period of occupancy
during the term which is less than one (1) month shall be a pro rata portion of
the monthly installment.
(c) PLACE FOR PAYMENT. Unless directed otherwise by Subsublessor, rent
shall be sent by United States mail, postage prepaid, to Subsublessor at the
following address:
Attn: Gilbert Fiorentino
Tiger Direct, Inc.
8700 Flagler St.
Fourth Floor
Miami, FL 33174
or may be paid directly to Sublessor as acknowledged in the attached
consent of Sublessor.
(d) INTEREST. If any sum due hereunder is not received by Subsublessor
within five (5) days of its due date and written notice of nonpayment,
Subsublessee shall pay Subsublessor interest on any such outstanding amount at
the lesser of the rate of fifteen percent (15%) per annum or the highest rate
permitted by applicable law, from the date on which such amount is due until
such amount is received by Subsublessor.
(e) Subsublessor will arrange for the furnishing of electricity to the
Subsubleased Premises, at no additional charge to Subsublessee, twenty-four
hours per day, seven days per week, save and except that if Subsublessee shall
request chilled water or cooling energy to the Subsubleased Premises during
hours when air conditioning is not other wise furnished by the Overlandlord
under the Overlease (as such terms are hereinafter defined in the Consent of
Overlandlord attached hereto), Subsublessee shall be responsible for the payment
to Over landlord of Overlandlord's customary charges therefor, as the same may
be in effect from time to time. At all times however, Subsublessee may elect, at
its sole option, to obtain directly from the applicable utilities company, after
hours air conditioning (by utilizing the separately metered after hours air
conditioning units unless contained in and servicing the Subsubleased Premises).
In such event, all electricity charges applicable to Subsublessee's use of the
separately metered after-hours air conditioning units shall be paid by
Subsublessee directly to the applicable utilities company.
Page 2 of 7
<PAGE>
5. PROVISIONS OF PRIME SUBLEASE.
(a) The provisions of the Prime Sublease are incorporated herein and
made a part of this Subsublease by reference with the same force and effect as
though set forth herein in full. With the exception of the modifications set
forth in this Subsublease, this Subsublease is subject and subordinate to the
terms, covenants and provisions of the Prime Sublease. Subsublessee covenants
that it will (i) at its own cost and expense, promptly perform and observe the
duties and obligations of Subsublessor under the Prime Sublease with respect to
the Subsubleased Premises as fully as if it were the Subsublessor, (ii) comply
with all restrictions and requirements of the Prime Sublease applicable to
Subsublessor thereunder, and (iii) will not do, cause or omit to do any act or
thing whereby an event of default shall occur under the Prime Sublease, or which
would, after notice or lapse of time, constitute an event of default under the
Prime Sublease.
(b) Notwithstanding any other provision hereof, the termination or
expiration of the Prime Sublease for any reason shall automatically result in
the termination of this Subsublease one day prior to such expiration or
termination of the Prime Sublease, and all obligations of Subsublessor and
Subsublessee hereunder shall cease as of the day preceding such expiration or
termination of the Prime Sublease. Subsublessor shall in no event be liable to
Subsublessee for any loss or damage occasioned by, or resulting from, the
expiration or termination of the Prime Sublease or this Subsublease.
6. USE AND OCCUPANCY. The Subsubleased Premises shall be used and
occupied for general office use for software company performing all functions
necessary to the development, marketing, sale, support and distribution of
computer software programs and for no other purpose other than general office
use, unless the prior written consent of Sublessor and 8700 Flagler, LTD.
("Overlandlord) is obtained. Sublessor, Overlandlord and Subsublessor make no
warrants or representations, express or implied, that Subsublessee's use is in
conformity with applicable laws, ordinances, rules and regulations.
7. INSURANCE AND INDEMNIFICATION OF SUBSUBLESSOR.
(a) Subsublessee will indemnify and save harmless Subsublessor and
Sublessor from and against any and all liabilities, obligations, damages,
penalties, claims, costs, charges and expenses, including reasonable attorneys'
fees, which may be imposed upon or incurred by or asserted against Subsublessor
or Sublessor by reason of any act or omission of the Subsublessee occurring
during the term of this Subsublease, except to the extent caused by
Subsublessor's or Sublessor's negligence. Subsublessee shall maintain with
respect to the Subsubleased Premises all insurance required of the Subsublessor
to be maintained with respect to the Prime Sublease Premises under the Prime
Sublease.
(b) Subsublessor hereby indemnifies and holds harmless Subsublessee and
its officers, employees, shareholders, directors, agents, and each of their
respective successors and assigns, from and against any and all liabilities,
obligations, damages, penalties, claims, costs, charges and expenses, including
reasonable attorneys' fees and disbursements, which may be imposed upon or
incurred by or against any of them by reason of any act or omission of the
Subsublessor or its officers, employees, shareholders, directors, agents or
invitees, and each of their respective successors and assigns, occurring at any
time prior to or during the term of this Subsublease, except to the extent
caused by Subsublessee's negligence.
8. NO WARRANTIES. Except as otherwise expressly provided herein,
Subsublessor does not make any representations or warranties of Sublessor under
the Prime Sublease and does not undertake to perform or observe any of the
terms, covenants and conditions on the part of Sublessor to be performed or
observed, but Subsublessor agrees to use its best efforts to cause Sublessor
under the Prime Sublease to perform or observe such terms, covenants and
conditions; provided, however, Subsublessor shall not be obligated to institute
any judicial action or proceeding against Sublessor or enforce performance or
observance by Sublessor of such terms, covenants and conditions.
Page 3 of 7
<PAGE>
9. SUBSUBLESSOR'S PERFORMANCE.
(a) The performance by Subsublessor of its obligations under the Prime
Sublease shall, for all purposes of this Subsublease, be deemed to be the
performance of such obligations by Subsublessor of the Prime Sublease
incorporated herein by reference, and Subsublessor's obligations herein shall be
limited to the extent to which such obligations are performed by Sublessor under
the Prime Sublease. Subsublessor warrants that to the best of Subsublessor's
knowledge neither Sublessor nor Subsublessor is in default under the Prime
Sublease and no condition exists which with the passage of time or the giving of
notice or both would constitute a default. Subsublessor warrants that the copy
of the Prime Sublease attached hereto as Exhibit "A" is a true and complete copy
of the Prime Sublease and Subsublessor has not assigned its interest in the
Prime Sublease. Subsublessor shall send to Subsublessee copies of any notices of
default sent by Sublessor to Subsublessor with respect to the Prime Sublease.
(b) Subsublessor hereby grants to Subsublessee the right to deal
directly with the Sublessor to seek performance of all Sublessor's obligations
under the Prime Sublease, insofar as such obligations relate to the Subsubleased
Premises. Subsublessor will cooperate with Subsublessee in attempting to obtain
such performance by Sublessor, which cooperation may include, in the case of a
material default by Sublessor that is not otherwise remedied, cooperating in any
legal action against Sublessor brought by Subsublessee. Subsublessor shall not
terminate the Prime Sublease or mutually agree with the Sublessor to rescind the
Prime Sublease, except as permitted under this Subsublease and except for any
action which is accomplished in a manner that Subsublessee's rights and
obligations to the Subsubleased Premises are not adversely affected.
Subsublessor shall not modify or amend any of the terms of the Prime Sublease if
such amendment or modification adversely affects any of Subsublessee's rights
hereunder or increases any of the Subsublessee's obligations hereunder. So long
as Subsublessee is not in default hereunder, Subsublessor shall not cause any
material default to occur under the Prime Sublease which if not cured would
adversely affect any of Subsublessee's rights hereunder or increase any of
Subsublessee's obligations hereunder.
10. TIME FOR REQUIRED ACTIONS. Whenever any provision of the Prime
Sublease which has been incorporated herein by reference requires Subsublessor
to take any action relating to the Subsubleased Premises within a certain period
of time after notice from Sublessor, then, upon notice from Subsublessor to
Subsublessee, Subsublessee shall take such action within said certain period of
time.
11. ASSIGNMENT OR SUBSUBLEASE. Subsublessee shall not assign this
Subsublease, or any part thereof, or further sublet all or any part of the
Subsubleased Premises.
12. SECURITY DEPOSIT. No security deposit shall be required.
13. CONFLICT OR INCONSISTENCY. In case of any conflict or inconsistency
between the provisions of the Prime Sublease and those of this Subsublease the
provisions hereof shall, as between the Subsublessor and Subsublessee, control.
14. PARKING.
(a) On the Initial Term Commencement Date until May 31, 1999
Subsublessee shall be entitled to use, no parking spaces at the Office Building
to which Subsublessor is presently entitled under the terms of the Prime
Sublease.
(b) On the Term Commencement Date until April 30, 2000, Subsublessee
shall be entitled to use, at no additional charge parking spaces at the Office
Building equal to one-half (1/2) of the number of parking spaces to which
Subsublessor is presently entitled under the terms of the Prime Sublease. Of
these spaces, eight (8) shall be reserved covered spaces to be designated by
Sublessor.
15. SIGNAGE. Upon occupancy of the Fourth Floor by Subsublessee,
Subsublessee will have the right
Page 4 of 7
<PAGE>
to place no more than two (2) signs, displaying Subsublessee's name, on the
North and East external walls of the Office Building in those locations
currently displaying Subsublessor's signage. Such signs shall be substituted in
lieu of Subsublessor's currently-displayed signs. The size, design and content
of the signs shall be subject to Overlandlord's review and approval prior to
installation. All costs of design, installation and maintenance of the signs
shall be borne by Subsublessee, and Subsublessee shall be responsible for
obtaining such municipal permit, if any, as may be needed to permit the
installation of such signs. At the termination of this Subsublease, Subsublessee
shall, at Subsublessee's sole cost, remove such signs and Subsublessee shall be
responsible for all costs necessary to repair any damage to the exterior of the
Office Building arising as a result of the installation, maintenance or removal
of Subsublessee's signs.
16. ENTIRE AGREEMENT. This Subsublease contains the entire agreement
between the parties hereto. This Subsublease may be modified only by an
agreement in writing signed by the authorized representatives of Subsublessor
and Subsublessee. Subsublessor and Subsublessee hereby expressly declare that no
representations have been made other than those expressly set forth herein.
17. BROKERS. Each party hereto represents and warrants to the other
that it has dealt with no broker or agent in connection with the negotiations or
the consummation of this Subsublease or any arrangements with respect thereto,
except for Larkin Schmidt Weldenbaum Commercial Real Estate, operating on behalf
of Subsublessor. Each party hereto agrees to indemnify and hold harmless the
other against and from all liabilities and expenses (including, without
limitation, counsel fees and disbursements in defending against such
liabilities), which may accrue by reason of, on account of, or growing out of,
or resulting from a breach by such party of such warranty and representation.
Subsublessor hereby acknowledges and agrees that it is responsible for all
commissions due and owing to Larkin Schmidt Weidenbaum Commercial Real Estate
for this transaction.
18. SUBLESSOR AND OVERLANDLORD'S CONSENT. This Subsublease is subject
to approval by Sublessor and Overlandlord, and shall not become effective unless
and until such approval is received.
19. REPRESENTATION OF SUBSUBLESSOR: Subsublessor hereby represents and
warrants unto Subsublessee that the Prime Sublease is current and in good
standing and that Subsublessor shall continue to cause the Prime Sublease to
remain current and in good standing during the term of this Subsublease.
IN WITNESS WHEREOF, this Subsublease has been duly executed the day and
year first above written.
WITNESSES: OMEGA RESEARCH, INC., a Florida corporation
/s/ Loren Costantino By: /s/ Marc J. Stone
- ------------------------- -------------------------------------
Its: VP
/s/ Mikki Blyskal
- -------------------------
WITNESSES: TIGER DIRECT, INC., a Delaware corporation
/s/ Andrea Fongyee By: /s/ Gilbert Fiorentino
- ------------------------- -------------------------------------
Its: C.E.O.
/s/ [ILLEGIBLE]
- -------------------------
Page 5 of 7
<PAGE>
CONSENT OF SUBLANDLORD
The undersigned, Coastal Fuels Marketing, Inc., a Florida corporation
("Sublandlord"), as Sublandlord under the Prime Sublease (as such term is
defined in that certain Subsublease dated as of December __, 1998 (the
"Subsublease"), between Tiger Direct, Inc., a Delaware corporation as
subsublessor ("Subsublessor"), and Omega Research, Inc., a Florida Corporation,
as Subsublessee ("Subsublessee"), respecting the premises more particularly
described therein (the "Subsublease Premises"), hereby consent to, in all
respects, the Subsublease.
Sublandlord acknowledges and consents to Subsublessee's payment of the
rent due under the Subsublease directly to Sublandlord, and agrees to credit all
such payments made by Subsublessee of rent under the Subsublease made directly
to Sublandlord against the rental obligations due from Subsublessor to
Sublandlord under the Prime Sublease.
Sublandlord further agrees that, in the event a default shall occur by
Subsublessor under the Prime Sublease, Sublandlord will deliver a copy of any
notice of default to Subsublessee at the same time that such notice is delivered
to Subsublessor. Notice to Subsublessee shall be deemed given if hand-delivered
or mailed by certified mail (or reputable overnight courier service) to
Subsublessee's premises at the 8700 West Flagler Building. Sublandlord further
agrees that provided Subsublessee shall not be in default (beyond any applicable
grace or curative period) in the performance of Subsublessee's obligations under
the Subsublease, Sublandlord shall take no action and shall in no way or manner
disturb the subsubtenancy of Subsublesee with respect to the Subsublease
Premises.
This Consent of Sublandlord is executed as of the 15th day of December,
1998.
COASTAL FUELS MARKETING, INC., a Florida
Corporation
By: /s/ Andrew C. McIntosh
-------------------------------------
Name: Andrew C. McIntosh
Title: Vice President
Page 6 of 7
<PAGE>
CONSENT OF OVERLANDLORD
The undersigned, Nationwide Theaters West Flagler, L.L.C.,
(Overlandlord) as successor in ownership to 8700 Flagler, Ltd, a Florida limited
partnership, by and through its managing agent, The Allen Morris Commercial Real
Estate Services Company, hereby joins in and consents to, in all respects, the
foregoing Subsublease dated as of December 4, 1998 (the "Subsublease"), between
Tiger Direct, Inc., a Delaware corporation, as subsublessor and Omega Research,
Inc., a Florida corporation, as subsublessee ("Subsublessee"), respecting the
premises more particularly described therein (the "Subsublease Premises").
This Consent of Overlandlord is executed as of the 3 Day of February,
1999.
NATIONWIDE THEATERS WEST FLAGLER,
L.L.C.,
By: The Allen Morris Commercial Real Estate
Services Company, as managing agent
By:/s/ Paul L. White
-------------------------------------
Name: Paul L. White
Title: President
Page 7 of 7
<PAGE>
THE ALLEN MORRIS COMPANY
MIAMI, FT. LAUDERDALE, WEST PALM BEACH, FT. MYERS, TAMPA, JACKSONVILLE,
TALLAHASSEE, ORLANDO, ATLANTA
MODIFICATION OF LEASE AGREEMENT
THIS MODIFICATION OF LEASE AGREEMENT, made and entered into as of the 22nd day
of February, 1999, by and between Nationwide Theaters West Flagler, L.L.C., a
Delaware limited liability company, as successor in interest to 8700 West
Flagler, Ltd., a Florida limited partnership, whose address for purposes hereof
is 1000 Brickell Avenue, 12th Floor, Miami, Florida 33131, hereinafter called
"Landlord" and Omega Research, Inc., a Florida corporation, whose address for
purposes herein is 8700 W. Flagler Street, Suite 250, Miami, Florida 33174,
hereinafter called "Tenant".
WITNESSETH:
WHEREAS, Landlord has leased to Tenant approximately 17,289 square feet
of Net Rentable Area on the Second (2nd) Floor of The 8700 Flagler Building
under Lease Agreement dated August 8, 1996 (hereinafter referred to as the
"Lease Agreement") commencing December 1, 1996 and terminating May 31, 2002; and
WHEREAS, by Memorandum of Commencement Date dated February 4, 1997, the
parties changed and amended the commencement date to February 17, 1997 and
expiration date to August 16, 2002; and
WHEREAS, Tenant desires to expand the Leased Premises and Landlord is
willing to grant said expansion,
NOW, THEREFORE, Landlord and Tenant do hereby agree to modify the
foregoing Lease Agreement as follows:
1. All capitalized terms used herein shall have the same meaning as the
capitalized terms in the Lease Agreement. In the event of any conflict between
the terms of this Modification of Lease Agreement and the Lease Agreement then
the terms of this Modification shall control.
2. LEASED PREMISES: That commencing May 1, 2000, the Leased Premises shall be
modified and amended to hereby incorporate an additional 34,725 square feet of
Net Rentable area consisting of the entire Fourth (4th) Floor of the Building
(see Exhibit "A") (referred to hereinafter as "Expansion Space") for a total Net
Rentable Area of 52,014 square feet in the Building.
3. BASE RENTAL FOR EXPANSION SPACE: That commencing May 1, 2000, Tenant agrees
to pay Landlord the additional Base Rental of One Million Five Hundred Eighty
Thousand Two Hundred Twenty and 96/100 Dollars ($1,580,220.96) plus applicable
sales tax for the Expansion Space at the rates and amounts outlined below in
accordance with the terms and conditions of the Lease Agreement herewith:
- --------------------------------------------------------------------------------
BASE RENTAL MONTHLY ANNUAL BASE
PERIOD TERM RATES INSTALLMENTS RENTAL
- --------------------------------------------------------------------------------
Year 1 05/01/00-04/30/01 $19.50 $56,428.13 $677,137.56
(12 months)
- --------------------------------------------------------------------------------
Year 2 05/01/01-04/30/02 $20.00 $57,875.00 $694,500.00
(12 months)
- --------------------------------------------------------------------------------
Year 3 05/01/02-08/16/02 $20.50 $59,321.88 $208,583.40
(3.5 months)
- --------------------------------------------------------------------------------
TOTAL BASE
RENTAL: $1,580,220.96
- --------------------------------------------------------------------------------
The total Base Rental for the total Net Rentable Area including 17,289 square
feet of Net Rentable Area on the Second Floor and the Expansion Space of 34,725
square feet of Net Rentable Area on the Fourth Floor for the period May 1, 2000
through August 16, 2002 shall be Two Million One Hundred Fifty-One Thousand Four
Hundred Seventy Eight and 48/100 Dollars ($2,151,478.48) plus applicable sales
tax.
4. TENANT IMPROVEMENTS: Tenant shall complete improvements to the Expansion
Space in accordance with plans and specifications to be approved by both
Landlord and Tenant, Landlord's approval not to be unreasonably withheld or
delayed. Landlord shall provide an allowance of $173,625 which is calculated
based upon $5.00 per square foot of Net Rentable Area for improvements for
finishing the Expansion Space. Said allowance shall be payable fifty (50%)
percent on May 1, 2000, upon presentation of paid invoices and releases of liens
equal to or greater than 50% of said allowance or 50% of the total cost of the
work, whichever is less. The remaining fifty (50%) percent shall be paid upon
presentation of paid invoices and releases of liens equal to or greater than
100% of said allowance or 100% of the total cost of the work, whichever is less.
<PAGE>
5. ADDITIONAL RENT: Effective May 1, 2000, for the purpose of calculating
Operating Expenses and Impositions, the provisions of Paragraph 4 of the Lease
Agreement the Base Year for the Expansion space shall be 2000; and the Tenants'
Proportionate Share for the Expansion Space shall be .2644. The provisions of
Paragraph 4 of the Lease Agreement shall remain the same for the original 17,289
square feet of Net Rentable Area on the Second Floor.
6. PARKING SPACES: Effective May 1, 2000, Landlord shall provide 128 parking
spaces to Tenant on a non-reserved basis for the Expansion space. Landlord shall
also provide an additional 12 covered parking spaces to Tenant on a reserved
basis for the Expansion Space as identified on Exhibit "B" attached hereto and
made a part hereof. If at any time during the Term, a tenant, occupying 25% of
the Building, other than State of Florida Department of Transportation Division
of Finance and Administration Bureau of Office of Toll Operations or OceanBank
of Miami, is permitted to mark its parking spaces reserved, not counting any
covered spaces which are permitted to be marked, and such tenant's total number
of reserved parking spaces is greater, as a percentage of such tenant's total
use of the parking facilities, than Omega Research's number of marked parking
spaces, then Omega Research shall be entitled to mark an equal number as a
percentage of Omega Research's total parking spaces under the Lease.
7. EXTERIOR SIGNAGE: Anything to the contrary notwithstanding in Paragraph 36 of
the Lease Agreement, effective July 1, 1999, Tenant shall be permitted at its
sole cost and expense to construct and erect exterior signage, up to two (2)
signs, for Tenant to be located near the top of the north and east sides of the
Building or a more centered location near the top of the Building. The design
and placement of Tenant's signage shall be subject to Landlord's written
approval not to be unreasonably withheld or delayed and subject to applicable
governmental statutes, ordinances and regulations. Tenant shall maintain and
fully insure, under a comprehensive, all risk policy, said signs and keep them
in good repair. Landlord shall have the right to relocate said signage at any
time during the Term at Landlord's expense if, and only if and at such time as
Tenant has, after giving effect to this Modification of Lease Agreement, fewer
than 34,725 square feet of Net Rentable Area and is not the Building's largest
Tenant in terms of Net Rentable Area leased.*
8. WAIVER OF DEFENSES & CLAIMS: Tenant does hereby confirm and ratify that, as
of the date hereof, the Lease Agreement is in good standing in full force and
effect, and that Tenant has no defenses, setoffs, counterclaims or cross claims
against Landlord.
9. APPLICATION OF LEASE AGREEMENT: All terms and conditions of the Lease
Agreement shall remain in full force and effect and shall be equally applicable
in all respects hereto, except as specifically and expressly modified or
provided herein.
IN WITNESS WHEREOF, the undersigned have executed this Modification of
Lease Agreement as of the date first above written.
LANDLORD: Nationwide Theaters West Flagler,
L.L.C., a Delaware limited liability
company
By: The Allen Morris Commercial Real Estate
Services Company, as Managing Agent
/s/ Loren H. Mongeon By: /s/ PAUL L. WHITE
- ----------------------- -------------------------------------------
Paul L. White, President
/s/ [ILLEGIBLE] Attest: /s/ MARY E. McEWIN
- ------------------------ ----------------------------------------
TENANT: Omega Research, Inc., a Florida
corporation
WITNESSES:
/s/ Mikki Blyskal By: /s/ MARC J. STONE
- ----------------------- -------------------------------------------
Marc J. Stone, Vice President & Secretary
/s/ Loren Costantino Attest:
- ------------------------ ----------------------------------------
* At the termination of the Lease, Tenant shall remove said signs and repair any
damage to the Building caused by their removal. This right to exterior
signage is not transferable to any successor, assignee or subtenant.
<PAGE>
EXHIBIT "A"
THIS MODIFICATION OF LEASE AGREEMENT, made and entered into as of the 22nd day
of February, 1999, by and between, Nationwide Theaters West Flagler, L.L.C., a
Delaware limited liability company, as successor in interest to 8700 West
Flagler, Ltd., a Florida limited partnership, whose address for purposes hereof
is 1000 Brickell Avenue, 12th Floor, Miami, Florida 33131, hereinafter called
"Landlord" and Omega Research, Inc., a Florida corporation, covering Expansion
Space approximately 34,725 net rentable square feet consisting of the entire
Fourth Floor of the building known as The 8700 Flagler Building, located at 8700
W. Flagler Street, Miami, Dade County, Florida 33174.
[FOURTH FLOOR PLAN]
<PAGE>
EXHIBIT "B"
THIS MODIFICATION OF LEASE AGREEMENT, made and entered into as of the 22nd day
of February, 1999, by and between, Nationwide Theaters West Flagler, L.L.C., a
Delaware limited liability company, as successor in interest to 8700 West
Flagler, Ltd., a Florida limited partnership, whose address for purposes hereof
is 1000 Brickell Avenue, 12th Floor, Miami, Florida 33131, hereinafter called
"Landlord" and Omega Research, Inc., a Florida corporation, covering Expansion
Space approximately 34,725 net rentable square feet consisting of the entire
Fourth Floor of the building known as The 8700 Flagler Building, located at 8700
W. Flagler Street, Miami, Dade County, Florida 33174.
[FOUR STORY OFFICE BUILDING
PHASE I]
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K into the Company's
previously filed Form S-8 Registration Statement File No. 333-40881.
/s/ ARTHUR ANDERSEN LLP
Miami, Florida,
March 29, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
OMEGA RESEARCH, INC. FINANCIAL DATA SCHEDULE
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE COMPANY'S FINANCIAL
STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001042814
<NAME> OMEGA RESEARCH, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,436,980
<SECURITIES> 5,736,958
<RECEIVABLES> 20,319,474
<ALLOWANCES> 11,073,000
<INVENTORY> 131,659
<CURRENT-ASSETS> 27,785,344
<PP&E> 3,294,703
<DEPRECIATION> 1,623,778
<TOTAL-ASSETS> 29,642,123
<CURRENT-LIABILITIES> 2,150,020
<BONDS> 0
0
0
<COMMON> 222,700
<OTHER-SE> 27,269,403
<TOTAL-LIABILITY-AND-EQUITY> 29,642,123
<SALES> 22,005,324
<TOTAL-REVENUES> 28,216,505
<CGS> 1,798,078
<TOTAL-COSTS> 21,612,007
<OTHER-EXPENSES> (423,961)
<LOSS-PROVISION> 2,222,834
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,007,547
<INCOME-TAX> 1,052,000
<INCOME-CONTINUING> 1,955,547
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,955,547
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
