SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999 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 8, 2000, based upon the closing market
price of the registrant's voting stock on The Nasdaq National Market on March 8,
2000, was approximately $35,842,000.
The registrant had 24,552,140 shares of common stock, $.01 par value,
outstanding as of March 8, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
The undersigned Registrant hereby amends the items, financial statements and
other portions of its Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 as set forth below.
LIST OF ITEMS AMENDED
Item Page
---- ----
Part II
6. Selected Financial Data 3
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 4
8. Financial Statements and Supplementary Data 25
Part IV
14.(a) Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25
TEXT OF AMENDMENTS
Each of the above listed Items is hereby amended by deleting the Item in its
entirety and replacing it with the respective Item included hereinafter and
filed herewith.
Subsequent to the filing of Omega Research, Inc.'s Consolidated Financial
Statements for each of the three years ended December 31, 1999 on Form 10-K and
in connection with its review of a registration statement on Form S-4 related to
the proposed merger with onlinetradinginc.com corp. ("OnlineTrading.com") (see
Note 15 of Notes to Consolidated Financial Statements elsewhere in this report),
the Staff of the Securities and Exchange Commission ("SEC") expressed concern
about the method of accounting for revenue recognition of licensing fees used by
Omega Research, Inc. (the "Registrant" or the "Company") and its method of
accounting for the acquisition of Window On WallStreet Inc. ("Window On
WallStreet"). As a result of consultation with the Staff of the SEC, the Company
restated certain of its annual and quarterly financial statements as discussed
below.
As a result of the restatement, (i) beginning in 1999, revenues with respect to
the Company's sales of its 2000i products are recognized on an as due basis in
accordance with the payment terms of the sales; and (ii) the Company's October
1999 merger with Window On WallStreet was accounted for under the purchase
method of accounting.
Accordingly, the purpose of this amendment is to restate the Company's
historical consolidated financial statements to reflect these changes. The
Company is amending and restating only those items of its Form 10-K that are
affected by the restatement adjustments listed above. The Form 10-K still speaks
as of December 31, 1999 (except as otherwise expressly noted therein or herein),
and the items herein have been modified or updated as required to reflect the
effects of the restatement adjustments to the consolidated financial statements.
1
<PAGE>
The restatement, as it relates to revenue recognition, relates solely to the
timing thereof and has no impact on cash flow. The primary effect of this change
is to shift a portion of the 1999 and early 2000 net revenues and operating
income to 2000 and, to a lesser extent, to 2001. This shift in timing of revenue
recognition does not change the Company's expectations that its change in
business model will result in net losses at least through the first quarter of
2001. The revenue recognition timing changes do not impact revenue recognition
for the Company's Internet subscription services or other revenues, or any of
the Company's planned service offerings, which are expected to generate the
majority of the Company's revenues in the future. The amounts reported for 1997
and 1998 are the same as the Company had previously reported prior to the Window
On WallStreet acquisition in its Annual Report on Form 10-K for the year ended
December 31, 1998 filed with the SEC on March 30, 1999. See Note 2 of Notes to
Consolidated Financial Statements elsewhere in this report.
2
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated 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
Consolidated Financial Statements and Notes thereto included elsewhere in this
report. The Consolidated Statement of Operations Data presented below for each
of the years in the three-year period ended December 31, 1999 and the
Consolidated Balance Sheet Data as of December 31, 1999 and 1998 have been
derived from the Company's Consolidated Financial Statements included on pages
F-1 through F-25 of this report, which have been audited by Arthur Andersen LLP.
The Consolidated Balance Sheet Data as of December 31, 1997 has been derived
from audited financial statements not included in this report. The Consolidated
Statement of Operations Data presented below for the years ended December 31,
1996 and 1995 and the Consolidated Balance Sheet Data as of December 31, 1996
and 1995 have been derived from unaudited financial statements not included in
this report. See also Note 14 of Notes to Consolidated Financial Statements for
quarterly financial information for fiscal years 1999 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA (1):
Net revenues:
Licensing fees (2)................................ $ 16,218 $ 22,006 $ 24,365 $ 13,943 $ 7,913
Other revenues.................................... 7,519 6,211 4,861 3,877 1,502
--------- --------- --------- --------- ---------
Total net revenues............................. 23,737 28,217 29,226 17,820 9,415
Total operating expenses............................. 30,218 25,633 20,432 10,798 6,127
(Loss) income from operations........................ (6,481) 2,584 8,794 7,022 3,288
Historical net (loss) income......................... (3,723) 1,956 9,874 7,082 3,312
Pro forma net income (3)............................. N/A N/A 5,451 4,285 2,004
Historical (loss) earnings per share:
Basic............................................. $ (0.16) $ 0.09 $ 0.49 $ 0.36 $ 0.17
Diluted........................................... (0.16) 0.09 0.47 0.34 0.16
Pro forma earnings per share (3):
Basic............................................. N/A N/A $ 0.27 $ 0.22 $ 0.10
Diluted........................................... N/A N/A 0.26 0.21 0.10
Weighted average shares outstanding:
Basic............................................. 22,759 22,256 20,172 19,480 19,480
Diluted........................................... 22,759 22,758 20,885 20,541 20,541
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (1):
Cash and cash equivalents..............................$ 2,176 $ 7,437 $ 12,324 $ 142 $ 311
Marketable securities.................................. 1,695 5,737 1,015 -- --
Working capital........................................ 15,695 25,635 24,170 3,629 1,997
Total assets........................................... 39,559 29,642 27,470 5,803 3,288
Shareholders' equity .................................. 34,496 27,492 25,233 4,835 2,970
</TABLE>
------------------
(1) The selected financial data as of and for the year ended December 31, 1999
has been restated. The amounts above for 1995 through 1998 are the same as
the Company had previously reported prior to the Window On WallStreet
acquisition since the Company is accounting for that transaction under the
purchase method of accounting and not under the pooling-of-interest method
of accounting. See Note 2 of Notes to Consolidated Financial Statements.
(2) Prior to 1999, licensing fees were recognized in full (net of provision for
anticipated returns) upon shipment. Upon the release of the Company's 2000i
product line, the Company began recognizing sales on an as due basis in
accordance with the payment terms of the sale (generally over a period of
up to 12 to 16 months). See Note 1 of Notes to Consolidated Financial
Statements.
(3) 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. Upon terminating its S corporation election, the
Company was required to record a non-recurring credit. See Note 9 of Notes
to Consolidated 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 Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained in this report.
Overview
Omega Research was incorporated in 1982 to develop, market and sell
trading strategy software tools to traders. The Company's current products and
services provide traders with the ability to develop, historically test and
computer automate trading strategies and to access streaming real-time charts,
quotes and news via the Internet.
The Company is in the process of changing its business model. The
Company has taken steps to transform itself from a trading strategy client
software company to an on-line brokerage firm that intends to provide to active
traders a best-of-breed, Internet-based trading platform: One that incorporates
and seamlessly integrates powerful trading strategy development tools,
historical and streaming real-time market data and news, and a direct access
electronic order execution system. The Company's historical business model has
consisted of sales of client software products, payment for which is committed
to in full by the customer at the time of sale. Under the new business model,
the Company will seek to derive recurring revenues from customers by offering
monthly subscription services for trading strategy development tools integrated
with streaming real-time market data and news for which a monthly fee is
payable, and by offering on-line brokerage services for which commissions are
payable. The Company
4
<PAGE>
believes that it will be able to leverage its historical success in selling
trading strategy tools to build a subscriber base of active traders that will
use its on-line brokerage services or, at a minimum, its trading strategy
subscription services.
To support the change in the business model, the Company expects to
increase significantly its sales and marketing, product development and
infrastructure expenditures. As a result, the Company expects to incur net
losses at least through the first quarter of 2001. These anticipated losses
could reduce the Company's available cash resources, increase its capital
requirements and require the Company to seek debt and/or equity financing. See
"Liquidity and Capital Resources" below.
On February 22, 1999, the Company released its latest generation of
premium software products, branded "2000i," which included upgrade versions of
its then existing products and new products. Accordingly, as of February 22,
1999, the Company's client software product line consisted of TradeStation
2000i, RadarScreen 2000i, OptionStation 2000i, Omega Research ProSuite 2000i and
SuperCharts 4. See "ITEM 1. BUSINESS - Overview and Recent Developments" and -
"Products and Services."
Through 1999, substantially all of the Company's licensing fees were
derived from the licensing of client software products to individual traders.
The Company's client 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 and the Omega Research ProSuite (see Note 13 of
Notes to Consolidated Financial Statements). For sales of most of the Company's
client software products, customers have typically provided the Company with a
credit card number and were billed for their purchases automatically and on a
monthly basis over the course of up to 12 months and, for Omega Research
ProSuite 2000i sales, over the course of up to 16 months. The concentration of
the Company's marketing efforts will migrate towards its subscription services
during 2000. Furthermore, as a result of the Company's transition from a seller
of client software to a provider of Internet subscription services, it is
expected that net revenues will be adversely impacted. Revenues from licensing
fees are expected to decrease quarter over quarter in 2000 and it is difficult
to predict when, if at all, or to what extent, revenues from the Company's
Internet subscription services will offset such reductions.
Historically, the Company's revenues have been derived principally from
two sources: (i) licensing fees for use of the Company's client 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 and, beginning in October 1999,
revenue from the Company's Financial Data Cast Network ("FDCN") subscription
service. Prior to February 1999, licensing fees were recognized upon product
shipment in accordance with Statement of Position ("SOP") 97-2, Software Revenue
Recognition and an estimate for returns was provided in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 48, Revenue Recognition
When Right of Return Exists. Beginning in 1999 with the launch of the Company's
2000i product line, changes in the Company's client software product sales,
including introduction of a new, higher-priced product and longer financing
terms, were deemed to alter the predictability of return reserves and the future
collectibility of receivables. Accordingly, all 2000i product sales are
recognized as they become due (generally over the 12 to 16 month financing terms
for these sales, as monthly payments are due). The revenue recognition changes
relate solely to the timing of revenue recognition with
5
<PAGE>
respect to sales of 2000i products and have no impact on cash flow. The 2000i
products are legacy products of the Company. These revenue recognition timing
changes do not impact revenue recognition for the Company's Internet
subscription services or other revenues, or any of the Company's planned service
offerings, which are expected to generate the majority of the Company's revenues
in the future. See Note 1 of Notes to Consolidated Financial Statements.
The Company provides client software customers with a 30-day right of
return and, prior to 1999, recorded a provision for estimated returns at the
time of sale. To maintain a positive, customer-friendly environment, the Company
has historically accepted returns in excess of 30 days. Approximately, 90% of
all returns accepted under the 30-day right of return policy are initiated
within 60 days following the date of sale. The reserve for returns and the
provision for bad debts, in accordance with SFAS No. 48, were estimated based on
historical experience and other relevant factors. Actual returns processed were
$7.4 million, $22.1 million and $13.4 million in 1999, 1998 and 1997,
respectively. The decrease in actual returns in 1999 was due to the change in
the recognition of 2000i licensing fee revenue to an as due basis. The increase
in actual returns processed in 1998 when compared to 1997 occurred on a gradual
basis from the beginning to the end of 1998. Management believes this increase
relates to an expanded marketing and sales effort which included television
advertising, and an increasing public awareness of trading, which resulted in
the Company reaching a broader audience that included more individuals who may
not have necessarily been suited to use the Company's products. The Company
maintained an allowance for returns of approximately $83,000, $7.4 million and
$4.2 million at December 31, 1999, 1998 and 1997, respectively. Actual returns
processed during 1999 (for sales made on or prior to December 31, 1998) and 1998
(for sales made on or prior to December 31, 1997) were approximately $7.4
million and $4.3 million, respectively. Additionally, the Company maintained an
allowance for bad debts of $716,000, $3.7 million and $3.2 million as of
December 31, 1999, 1998 and 1997, respectively. Provision for bad debts was
$25,000, $2.2 million and $2.5 million in 1999, 1998 and 1997, respectively. The
decrease in bad debts during 1999 was due to the change in the recognition of
2000i licensing fees to an as due basis. The Company wrote off $3.0 million,
$1.7 million and $52,000 in delinquent accounts in 1999, 1998, and 1997,
respectively.
While the Company has no obligation to perform future services
subsequent to shipment of client software, for a limited time, the Company
voluntarily provides support on its web site, periodic "bug" fixes, and
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. The costs associated with these services are insignificant
in relation to product sales value and are accrued at the date the software is
delivered. As of December 31, 1999, 1998 and 1997, the Company had accrued
$161,000, $174,000 and $166,000, respectively.
The Company began to implement the change in its business model with
its October 1999 acquisition of Window On WallStreet, a provider of
Internet-based streaming real-time market data through its FDCN subscription
service. The Consolidated Financial Statements contained herein reflect the
transaction under the purchase method of accounting. In November 1999, the
Company announced that it would focus on serving active on-line traders by
offering a new monthly subscription, Internet-based trading strategy portal that
is to be named TradeStation.com. TradeStation.com is expected to be launched by
the end of 2000. On January 19, 2000, the Company signed a definitive, 100%
share-exchange merger agreement with
6
<PAGE>
OnlineTrading.com, a direct access on-line broker. That merger is expected to be
accounted for as a pooling-of-interests. OnlineTrading.com provides electronic
order execution technology that directly accesses ECN's, exchanges and market
makers in order to provide OnlineTrading.com's customers with high-speed and
efficient order execution that avoids traditional market maker participation and
brokerage order-flow arrangements. The Company launched its first Internet
subscription service, WindowOnWallStreet.com, on January 25, 2000.
WindowOnWallStreet.com offers streaming real-time charts, quotes and news,
powered by certain of the Company's award-winning trading tools. See "ITEM 1.
BUSINESS - Overview and Recent Developments" and - "Products and Services."
The majority of the Company's other revenues for the year ended
December 31, 1999 were derived from royalties associated with a licensing
agreement with Bridge Telerate relating to TradeStation. Under that agreement,
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 remaining other revenues has
been comprised of fees and commissions paid to the Company pursuant to
cross-marketing agreements with data service vendors and other third parties,
revenues from the FDCN subscription service and revenues generated from
OmegaWorld, the Company's annual conference for users of Omega Research
products. The Company's decision to focus its marketing resources on
WindowOnWallStreet.com and future Internet subscription services is expected to
result in reduced commission revenue from data service vendors. However, it is
difficult to predict when, if at all, or to what extent, revenues from the
Company's Internet subscription services will offset such reductions. Other
revenues are recognized as earned in accordance with the terms of the applicable
contract; Internet subscription services are recognized monthly as service is
provided; and, with respect to OmegaWorld, at the time the conference is
conducted.
In accordance with 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, 1999 or 1998. In the future, the Company believes that the time
between the technological feasibility of the Company's Internet-based services
and the general release of such services will be insignificant, and, as a
result, 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.
7
<PAGE>
The pro forma income tax adjustments for the year ended December 31,
1997 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 Omega Research (as a stand-alone company, prior to its merger with
Window On WallStreet) for the period 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.
Results of Operations
The results of operations for the three years ended December 31, 1999 have
been restated. The amounts below for 1997 through 1998 are the same as the
Company had previously reported prior to the Window On WallStreet acquisition in
its Annual Report on Form 10-K for the year ended December 31, 1998 (filed with
the SEC on March 30, 1999) since the Company is accounting for that transaction
under the purchase method of accounting. See Note 2 of Notes to Consolidated
Financial Statements. The following table presents, for the periods indicated,
certain items in the Company's consolidated statement of operations reflected as
a percentage of total net revenues:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
NET REVENUES:
Licensing fees 68.3 % 78.0 % 83.4 %
Other revenues 31.7 22.0 16.6
------ ------ -------
Total net revenues 100.0 100.0 100.0
------ ------ -------
OPERATING EXPENSES:
Cost of licensing fees 8.1 6.4 6.3
Product development 19.8 11.7 6.5
Sales and marketing 76.5 51.0 38.6
General and administrative 19.1 21.7 18.5
Amortization of goodwill 0.3 -- --
Amortization of other intangible assets 3.5 -- --
------ ------ -------
Total operating expenses 127.3 90.8 69.9
------ ------ -------
(Loss) income from operations (27.3) % 9.2 % 30.1 %
====== ====== =======
</TABLE>
Years Ended December 31, 1999 and 1998
Net Revenues
Total Net Revenues. The Company's total net revenues decreased 16% from
$28.2 million in 1998 to $23.7 million in 1999.
8
<PAGE>
Licensing Fees. Licensing fees decreased 26% from $22.0 million in 1998
to $16.2 million in 1999, primarily due to a change in the method for
recognizing revenue on sales of the Company's 2000i products in 1999. Prior to
1999, licensing fees were recognized in full (net of provision for anticipated
returns) upon shipment. Upon the release of the Company's 2000i product line at
the beginning of 1999, the Company began recognizing sales on an as due basis in
accordance with the payment terms of the sale (generally over a period of up to
12 to 16 months) as changes in the Company's product sales, including
introduction of a new, higher-priced product and longer financing terms, were
deemed to alter the predictability of return reserves and the future
collectibility of receivables. As a result of the Company's focus on building
its Internet subscriber base, it is expected that licensing fees will decrease
quarter over quarter as the balance of the 1999 product sales are recognized and
the number of new licensing fee transactions decrease. It is difficult to
predict when, if at all, or to what extent, revenues from the Company's Internet
subscription services will offset such reductions in licensing fees.
Other Revenues. Other revenues increased 21% from $6.2 million in 1998
to $7.5 million in 1999, primarily due to an increase in minimum royalties of
$1.0 million under the Company's license agreement with Bridge Telerate,
revenues generated from OmegaWorld, the Company's annual conference for users of
Omega Research products, and the addition of two months of revenues from FDCN,
the Company's real-time market data subscription service acquired in the October
1999 acquisition of Window on WallStreet.
Operating Expenses
Cost of Licensing Fees. Cost of licensing fees consisted primarily of
costs related to data redistribution, product media, packaging and storage and
inventory costs. Cost of licensing fees was approximately $1.9 million in 1999
as compared to $1.8 million in 1998. Cost of licensing fees as a percentage of
licensing fee revenue increased from 8% in 1998 to 12% in 1999, primarily due to
the 1999 shift in recognition of revenue to an as due basis in accordance with
the payment terms of the sale, partially offset by the impact of a one-time
payment made to a third party in conjunction with the development of certain
technology for the Company during 1998.
Product Development. Product development expenses included expenses
associated with the development of new products and services, enhancements to
existing products and services, testing of products and services and the
creation of documentation, and consisted primarily of salaries, other personnel
costs and depreciation of computer and related equipment. Product development
expenses increased from $3.3 million in 1998 to $4.7 million in 1999 primarily
due to increased personnel and related costs of $1.2 million due to an increase
in the number of individuals employed in product development from 45 at December
31, 1998 to 72 at December 31, 1999 (inclusive of 13 product development
employees from Window On WallStreet). Product development expenses as a
percentage of total net revenues increased from 12% in 1998 to 20% in 1999
primarily due to an increase in personnel and related costs and the change in
1999 revenue recognition of 2000i licensing fees to an as due basis. The Company
anticipates that the absolute dollar amount of product development expense will
increase for the foreseeable future as the Company develops new products and
services in connection with its new business model and enhances existing
products and services.
9
<PAGE>
Sales and Marketing. Sales and marketing expenses have consisted
primarily of marketing programs, including advertising, brochures, direct mail
programs and seminars to promote the Company's client software products to
investors, sales commissions, salaries for the customer support center and
marketing personnel, other personnel costs, web site maintenance and
administration costs, and shipping expenses. Sales and marketing expenses were
$18.2 million in 1999 compared to $14.4 million in 1998, primarily due to
increased personnel and related costs of $2.8 million due to a 60% increase in
marketing and sales personnel from 108 at December 31, 1998 to 173 at December
31, 1999 (inclusive of 16 sales and marketing employees from Window On
WallStreet), increased travel expenses and increased costs related to
OmegaWorld. Sales and marketing expenses as a percentage of total net revenues
increased from 51% in 1998 to 77% in 1999 primarily due to the change in 1999
revenue recognition of 2000i licensing fees to an as due basis.
General and Administrative. General and administrative expenses consist
primarily of employee-related costs for administrative personnel such as
executive, human resources, finance and information technology employees,
professional fees, rent, provision for bad debts (1998 only) and other
facilities expense. General and administrative expenses were $4.5 million in
1999 compared to $6.1 million in 1998 primarily as a result of a decrease in bad
debt expense of $2.2 million related to the 1999 shift in licensing fee revenue
recognition to an as due basis, and decreased consulting and professional
expenses of $528,000 mainly as a result of the favorable settlement of the class
action law suit brought against the Company in 1998, partially offset by an
increase in personnel and related costs and facility expenses. General and
administrative expenses as a percentage of total net revenues improved from 22%
in 1998 to 19% in 1999, primarily as a result of a decrease in bad debt expense
partially offset by the change in 2000i licensing fee revenue recognition to an
as due basis. The Company believes that the absolute dollar amount of its
general and administrative expenses in the future will depend, to a large
extent, on the level of hiring of additional personnel to support the expected
growth of the Company and the Company's change in its business model.
Amortization of Goodwill and Other Intangible Assets. The October 26,
1999 acquisition of Window on WallStreet was accounted for under the purchase
method of accounting. The excess purchase price paid (including acquisition
costs of $1.2 million) over the net book value of assets was allocated to
goodwill and other identifiable intangible assets (the value of which was
determined by an independent appraisal). Other intangible assets consist of
purchased technology and workforce, trademarks, patents, customer lists and
non-compete agreements with useful lives ranging from three to four years. In
1999, amortization of goodwill and other intangible assets was approximately
$68,000 and $824,000, respectively.
Other Income, Net
Other income, net consists primarily of investment income from cash and cash
equivalents and marketable securities. The Company generally invests in
overnight investments, tax exempt commercial paper and investment grade
short-term municipal bonds. The amount of interest income fluctuates based on
the amount of funds available for investment and the prevailing interest rates.
Other income, net was approximately $422,000 in 1999 and $424,000 in 1998.
10
<PAGE>
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.
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 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 increased from $1.9
million in 1997 to $3.3 million in 1998 primarily due to increased personnel and
related costs of $1.3 million due to a 55% increase in the number of individuals
employed in product development from 29 at December 31, 1997 to 45 at December
31, 1998. Product development expenses as a percentage of net revenues increased
from 7% in 1997 to 12% in 1998, primarily due to increased personnel and related
expenses as well as decreased licensing fees.
Sales and Marketing. Sales and marketing expenses were $14.4 million in
1998 compared to $11.3 million in 1997, primarily due to increased personnel and
related costs of $1.4 million due to a 21% increase in marketing and sales
personnel from 89 at December 31, 1997 to 108 at December 31, 1998, increased
advertising and promotional expenses (including print advertising, the use of
sales seminars, television advertising and direct mailers) of $1.1 million, and
to a lesser extent increased shipping costs and costs related to OmegaWorld,
partially offset by decreased communications expenses. Sales and marketing
expenses as a percentage of net revenues increased from 39% in 1997 to 51% in
1998 as a result of the increased marketing expenses discussed above and
decreased licensing fees.
General and Administrative. 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
11
<PAGE>
public company and expenses related to the implementation and lease of a new
telephone system, partially offset by a decrease in bad debt expense. General
and administrative expenses as a percentage of net revenues increased from 19%
in 1997 to 22% in 1998 primarily as a result of the increase in those expenses
and decrease in net licensing fees.
Other Income, Net
Other income, net increased from approximately $146,000 in 1997 to
$424,000 in 1998, primarily due to 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, which was 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 year ended December 31,
1997 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 calculated
those amounts based upon an estimated combined effective tax rate of 39.5% for
Omega Research for periods prior to September 30, 1997.
The effective tax rate for 1999 approximated the 38.6% statutory rate.
The effective tax rate for 1998 was 35%, below the 38.6% statutory rate
primarily as a result of the impact of tax-free investment income.
Variability of Results
The operating results for any quarter are not necessarily indicative of
results for any future period or for the full year. The Company's quarterly
revenues and operating results have varied in the past, and are likely to vary
even further from quarter to quarter in the future due to the Company's
transition to a new business model. Such fluctuations may result in volatility
in the price of the 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
12
<PAGE>
operations are likely to be adversely affected because a relatively small amount
of the Company's expenses varies with its revenues in the short term. In
addition, operating results may fluctuate based upon the timing, level and rate
of acceptance of releases of new products and services and/or enhancements,
increased competition, variations in the revenue mix, and announcements of new
products and services and/or enhancements by the Company or its competitors and
other factors. Such fluctuations may result in volatility in the price of the
Common Stock. See Note 14 of Notes to Consolidated Financial Statements for
quarterly financial information.
Liquidity and Capital Resources
As of December 31, 1999, the Company anticipated that its available
cash resources and cash flows from operations would be sufficient to meet its
presently anticipated working capital and capital expenditure requirements
through the year 2000. However, the Company is experiencing a period of net
losses which is expected to continue at least through the first quarter of 2001.
Further, as the Company transitions to its new business model, it may need to
raise additional funds in order to execute that transition, support more rapid
expansion, develop new or enhanced services and products, respond to competitive
pressures, and acquire complementary businesses or technologies and/or take
advantage of unanticipated opportunities. The Company has also recently
substantially increased its rental obligations under real property, facilities
and equipment leases. The Company's future liquidity and capital requirements
will depend upon numerous factors, including the period of time it takes the
Company to execute its transition to its new business model, and customer
acceptance thereof, costs and timing of expansion of research and development
and marketing efforts and the success of such efforts, the success of the
Company's existing and new product and service offerings, and competing
technological and market developments. The Company's forecast of the period of
time through which its financial resources will be adequate to support its
operations involves risks and uncertainties, and actual results could vary. The
factors described earlier in this paragraph, as well as other factors, will
impact the Company's future capital requirements and the adequacy of its
available funds. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the shareholders of the Company will be
reduced, shareholders may experience additional dilution in net book value per
share or such equity securities may have rights, preferences or privileges
senior to those of the holders of the Company's common stock.
There can be no assurance that additional financing (debt or equity),
if required, will be available when needed on terms favorable to the Company, if
at all. If adequate funds are not available on acceptable terms, the Company may
be unable to complete effectively its transition to its new business model,
develop or enhance its services and products, take advantage of future
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on the Company's business, financial condition, results
of operations and prospects.
As of December 31, 1999, the Company had cash and cash equivalents of
approximately $2.2 million, investments in short term marketable securities of
$1.7 million, and working capital of approximately $15.7 million. Marketable
securities consist of investment grade municipal bonds maturing, on average,
within a year.
13
<PAGE>
Cash used in operating activities in 1999 totaled approximately $2.8
million, compared to cash provided by operating activities of approximately $1.0
million and $3.3 million in 1998 and 1997, respectively. The decrease in net
cash provided by operations in 1999 was primarily due to an increase over 1998
in cash paid for income taxes of $3.8 million by Omega Research prior to the
Window On WallStreet acquisition, and the overall increase in the income tax
assets related to 1999 losses, partially offset by decreases in accounts
receivable. The decrease in net cash provided by operations in 1998 was
primarily attributable to lower net income of the Company and an increase in
cash paid for income taxes of $1.6 million. The Company began paying taxes in
the fourth quarter of 1997 and, in addition, paid during 1998 the remaining
$900,000 of the $1.8 million tax liability recognized in September 1997.
The Company's investing activities provided cash of $1.2 million during
1999 and used cash of $6.1 million and $2.0 million in 1998 and 1997,
respectively. During 1999, cash provided from investing activities was made up
of $4.0 million of proceeds from maturity of marketable securities primarily
offset by capital expenditures related to the acquisition of computer and
related equipment and software required to support expansion of the Company's
operations as well as $1.1 million (net of cash acquired) paid for costs
associated with the acquisition of Window on WallStreet. 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 and 1997 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.
In 1999, the Company's financing activities used cash of $3.6 million
as compared to cash provided of $190,000 and $10.9 million in 1998 and 1997,
respectively. Net cash used in financing activities during 1999 was related to
the repayment of existing debt of Window On WallStreet of $4.1 million, offset
by proceeds from 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 Stock Plan.
Cash provided during 1998 related primarily to the repayment of the
excess portion of the Dividend distributed on September 30, 1997. See "ITEM 5.
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 Stock Plan.
Cash provided during 1997 of $10.9 million was primarily attributable
to $27.4 million of net proceeds from Omega Research'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 was financed with a $15 million
short-term bank loan which was repaid with the proceeds of the initial public
offering.
14
<PAGE>
Recently Issued Accounting Standards
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities-Deferral of
FASB Statement No. 133. SFAS No. 137 defers for one year the effective date of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 will now apply to all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS No. 133, as amended by SFAS No. 138, will require the
Company to recognize all derivatives on the balance sheet as either assets or
liabilities measured at fair value. Derivatives that do not qualify for hedge
accounting must be adjusted to fair value through income. The Company will adopt
SFAS No. 133 effective for the year ended December 31, 2001. The Company
believes that the adoption of SFAS No. 133 will not have a material impact on
its consolidated financial statements, as it has entered into no derivative
contracts and has no current plans to do so in the future.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), Revenue Recognition in Financial Statements, to provide guidance on
the recognition, presentation and disclosure of revenue in financial statements.
The Company will be required to adopt SAB 101 by the fourth quarter of 2000. The
adoption of SAB 101 is not expected to have a material impact on the financial
statements of the Company.
In March 2000, the Emerging Issues Task Force reached a consensus on
Issue No. 00-2, Accounting for Web Site Development Costs, which applies to all
web site development costs incurred for the quarters beginning after June 30,
2000. The consensus states that the accounting for specific web site development
costs should be based on a model consistent with AICPA Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. Accordingly, certain web site development costs that are currently
expensed as incurred may be capitalized and amortized. The adoption of Issue No.
00-2 is not expected to have a material impact on the financial statements of
the Company.
Year 2000 Compliance
The Company has not encountered any significant difficulties with
respect to Year 2000 compliance issues with respect to its customer integrated
support and general ledger system, its telephone system, or any vendor products
or services. See "ITEM 1. 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," "contemplates," "may," "will," "assuming," "prospect,"
"should," "could," "looking forward" and similar expressions, to the extent
used, are intended to identify the forward-looking statements. All
forward-looking 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.
15
<PAGE>
Factors that may cause or contribute to such differences and impact future
events and the results of those 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 in other of the Company's public
filings, and in the Company's press releases, particularly those released during
and subsequent to the 1999 third quarter, any of which could have a material
adverse effect on the business, results of operations, financial condition and
prospects of the Company:
o Change in Business Model. The Company is in the process of changing its
business model from a trading strategy client software company to an
on-line brokerage firm that provides an Internet platform of trading
strategy tools and streaming real-time market data and news, and trade
execution through a direct access electronic order execution system. The
Company has limited experience in the real-time market data industry (all
of such experience has been acquired by Window On WallStreet, and Window On
WallStreet had only one year of experience operating a real-time data
service at the time it was acquired by Omega Research). The Company has no
experience in the brokerage services industry, and will rely completely
upon the experience of OnlineTrading.com, assuming and subject to the
closing of its pending merger with that brokerage firm. OnlineTrading.com
itself has only been providing brokerage services for approximately four
years, and mostly to institutional investors (as opposed to the individual
active traders the Company seeks to attract). The Company's lack of
experience in key components of its new business model, even after
considering the experience of Window On WallStreet and, once acquired,
OnlineTrading.com, is substantial, and may result in delays, mistakes and
liabilities unlikely to happen to a company that has more experience. Such
delays, mistakes and liabilities, if and to the extent they occur, may
cause material adverse effects upon the Company's business, financial
condition, results of operations and prospects. See "ITEM 1. - BUSINESS -
Overview and Recent Developments."
If customer acceptance of the Company's Internet-based trading strategy
tools, real-time market data services or on-line brokerage services does
not meet the Company's expectations (due to technical difficulties or
errors in the products or services, unfavorable critical reviews, failure
to market effectively, the introduction by others of more-accepted products
and services, or other reasons), the Company's business, financial
condition, results of operations and prospects would be materially
adversely affected. All software, including Internet-based software,
contains errors, particularly new, highly-complex, innovative products or
services. Accordingly, there is a substantial risk that the Company's
Internet-based trading strategy tools, real-time market data services and
on-line brokerage services in development will contain numerous technical
errors, some of which may be significant and deeply, negatively impact
customer acceptance of such products and services.
The Company's decision to change its business model also means that the
Company must develop and depend upon a different operational infrastructure
than the one which supported its client software business, and
substantially modify its approaches to product development and sales and
marketing. The Company's infrastructure must be changed to support three
separate kinds of businesses (development of trading strategy tools,
organization and delivery of streaming real-time data and news, and on-line
brokerage services) that need to be seamlessly integrated. This will
require substantial changes in the Company's information technology and
databases, its mechanisms and methods of delivery of products and services,
16
<PAGE>
its administrative functions, and its use of personnel resources. Product
development must change its focus to a large extent from client software to
Internet and web site-related technology, sales and marketing must change
its focus from high-priced client software sales to brokerage services
(commission revenues) and Internet-based, lower-priced, monthly
subscriptions for trading strategy tools integrated with streaming
real-time data and news (monthly subscription revenues). The Company has
virtually no prior experience in marketing these services, as Omega
Research has not ever been in those businesses, and Window On WallStreet
and OnlineTrading.com have engaged in little or no media advertising of
their respective services. There are substantial risks that the Company
will fail, to some degree, to sufficiently rebuild its infrastructure and
integrate the three key components of the new business model (trading
tools/real-time data/on-line brokerage services), and/or to re-focus its
product development and sales and marketing on the new business model. Such
failures, if and to the extent they occur, may cause material adverse
effects upon the Company's business, financial condition, results of
operations and prospects. See "ITEM 1. BUSINESS - Products and Services -
Sales and Marketing and - Product Development and Year 2000 Compliance."
The Company's transition to its new business model has placed, and will
continue to place, a 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 product
development, marketing and sales, web site design and information
technology.
Because the new business model is one with no historical record for the
Company, and, to the Company's knowledge, one with no historical record for
any other company, the Company's attempts to anticipate revenues and costs,
to prepare budgets which organize the implementation of the Company's
transition to the new business model, and to make decisions regarding
seeking to obtain third-party financing that may be required, will
generally be based upon theoretical assumptions. Future events and results
may differ drastically from those planned or anticipated, which, if
negative, would result in a material adverse effect on the Company's
business, financial condition, results of operations and prospects. See
"Potential Fluctuations in Quarterly Operating Results" below.
The substantial risks discussed above are magnified by the rapid pace at
which the Company is attempting to complete the transition to the new
business model. The Company is assuming that its pending merger with
OnlineTrading.com will close at the end of 2000 (even though there is risk
that the merger will close later or not at all) and that its new business
model will be fully launched in a relatively short period of time after
closing. If that occurs, the Company will have changed its business
entirely in a period of approximately one year. This rapid pace obviously
increases the likelihood of occurrence of the various possible mistakes and
failures discussed above, and increases the risks of the likelihood of
resulting material adverse effects that will damage the Company's business,
financial condition, results of operations and prospects.
o Failure to Close OnlineTrading.com Merger; Other Risks of Combination With
OnlineTrading.com. The Company's change to its new business model is
dependent upon
17
<PAGE>
closing of its pending merger with OnlineTrading.com. If that merger does
not occur, the Company's choices would be to modify its new business model
to exclude on-line brokerage services, to seek to develop arrangements to
integrate its trading strategy tools/streaming real-time data platform with
third-party on-line brokers, to search for a different on-line broker with
which to merge or create a joint venture relationship, or to create its own
on-line brokerage service. The Company does not believe that excluding
on-line brokerage services from its new business model or developing
integration arrangements with third-party on-line brokers are favorable
alternatives. The Company believes that integrated on-line brokerage
services are critical in meeting the current and evolving needs of the
active trader, and that the potential success of the new business model is
dramatically reduced if it includes only trading strategy tools and
streaming real-time data without integration of that platform with
electronic order execution services owned and provided by the Company.
Further, the Company believes that, in its new business model, brokerage
commissions are likely to become the Company's largest source of revenues.
Finding a new on-line broker partner may or may not be feasible, and in all
cases would cause a huge delay in the Company's transition to its new
business model. The Company's development of its own on-line brokerage
services would likely cause an even longer delay, as well as contain the
additional risk of the Company entering a heavily government-regulated
business in which it has no prior experience. The merger transaction
agreements are subject to conditions precedent which, if not fulfilled,
would result in failure to complete the merger with OnlineTrading.com.
Those conditions precedent include, but are not limited to, another company
making a superior proposal to merge with OnlineTrading.com which
OnlineTrading.com's Board of Directors believes it is duty-bound to accept,
satisfying all broker-dealer regulatory requirements relating to the merger
(including NASD approval), approval by the shareholders of the Company and
of OnlineTrading.com of the merger, the filing with the SEC and
effectiveness of a registration statement on Form S-4, and the listing of
the new holding company's shares on The Nasdaq National Market. Failure of
the merger to occur as and when planned, or at all, would have a material
adverse effect on the Company's business, financial condition, results of
operations and prospects. See "ITEM 1. BUSINESS - Overview and Recent
Developments."
Assuming the merger does occur, the success of the Company's new business
model will be dependent, in part, upon the two companies being able to
rapidly integrate with one another from technological, operational and
marketing aspects. The two companies are currently working on the
completion of OnlineTrading.com's first proprietary order routing and
execution technology, the integration of that technology with
TradeStation.com (which itself is currently under development) in order to
be able to provide electronic order execution from the TradeStation.com
platform, and the required operational, information technology and
marketing integrations. Given the rapid pace and the number of items
currently in development, there are substantial risks that the necessary
completions and integrations will not occur as or when planned, contain
significant errors or problems, or will not be completed in a manner that
results in timely commercial viability. To the extent such errors, problems
or failures occur, they are likely to result in material adverse effects to
the Company's business, financial condition, results of operations and
prospects. See "ITEM 1. BUSINESS - Product Development and Year 2000
Compliance."
18
<PAGE>
o Liquidity Concerns. The Company is experiencing a period of net losses
which is expected to continue at least through the first quarter of 2001.
As of March 8, 2000, the Company had less than $4 million in cash, cash
equivalents and marketable securities to address these current and
anticipated losses and other cash requirements of the Company as it
transitions to its new business model. As the Company implements its
transition to its new business model and thereafter, the Company may need
to raise additional funds in order to support more rapid expansion, develop
new or enhanced services and products, respond to competitive pressures,
acquire necessary or complementary businesses or technologies, and take
advantage of unanticipated opportunities. The Company has also recently
substantially increased its rental obligations under real property,
facilities and equipment leases. The Company's future liquidity and capital
requirements will depend upon numerous factors, including the period of
time it takes the Company to execute its transition to its new business
model, and customer acceptance thereof, costs and timing of expansion of
research and development and marketing efforts, the success and timing of
such efforts, the success of the Company's existing and new product and
service offerings, and competing technological and market developments.
Funds may be raised through debt financing and/or the issuance of equity
securities (there being no assurance that any such type of financing on
terms satisfactory to the Company will occur). Any equity financing or debt
financing which requires issuance of equity securities or warrants to the
lender would reduce the percentage ownership of the shareholders of the
Company. The shareholders may, if issuance of equities occurs, experience
additional dilution in net book value per share, or the issued equities may
have rights, preferences or privileges senior to those of the holders of
the Company's common stock. See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources."
o Potential Fluctuations in Quarterly Operating Results. The Company's
quarterly revenues and operating results have fluctuated significantly in
the past, and will likely fluctuate in the future. These fluctuations may
be expected to be even greater during 2000, and thereafter, due to the
unpredictability inherent in the Company's change to its new business
model. Causes of such significant fluctuations may include, but are not
limited to: the timing, completion (if any) and costs of: (i) the Company's
merger with OnlineTrading.com, (ii) the Company's development of
TradeStation.com and other trading strategy platforms, (iii) development of
OnlineTrading.com's first proprietary electronic order routing and
execution technology, (iv) the integration of TradeStation.com as a
platform for OnlineTrading.com's electronic order routing and execution
technology, (v) modifications by the Company to its infrastructure,
including information technology and databases, mechanisms and methods of
delivery of products and services, administrative functions, product
development and sales and marketing, and (vi) the respective launch dates
of the various stages of the Company's transition to its new business
model; cash flow problems that may occur; costs and payment obligations
associated with debt and/or equity financings, if any; the level of
product/service and price competition; continuous changes in the Company's
sales incentive or marketing strategies (which have undergone significant
change recently and are expected to continue to evolve); changes in demand
for the Company's products and services; costs that may occur with respect
to regulatory compliance or other regulatory issues; changes in operating
expenses; the Company's attempt to enter additional related new markets or
expand into additional related businesses and the cost, timing and success
thereof; the incurrence of
19
<PAGE>
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 "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Variability of Results."
o Competition. The markets for (i) on-line brokerage services, (ii) trading
strategy tools and (iii) real-time market data services are intensely
competitive and rapidly evolving, and there appears to be substantial
consolidation of those three products and services occurring in the
industry. The Company's new business model embraces this evolution and
consolidation. However, the Company believes that due to the current and
anticipated rapid growth of the market for integrated trading strategy
tools, real-time market data and on-line brokerage services, 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 services and enhancements developed
by the Company and its competitors, the ability of the Company to complete
its pending merger with OnlineTrading.com and to integrate the respective
businesses in an orderly, efficient and otherwise successful manner,
product and service functionality, data availability, ease of use, pricing,
reliability, customer service and support, and sales and marketing efforts.
See "ITEM 1. BUSINESS - Competition."
o Exposure to Possible Litigation from Brokerage Customers (Assuming the
Company Completes its Transition to its New Business Model). Many aspects
of the securities brokerage business, including on-line trading services,
involve substantial risks of liability. In recent years there has been an
increasing incidence of litigation involving the securities brokerage
industry, including class action and other suits that generally seek
substantial damages, including in some cases punitive damages. Any such
litigation could have a material adverse effect on the Company's business,
financial condition, results of operations and prospects. See "Potential
Liability to Customers" below.
o Potential Liability to Customers. The Company's products and services and
planned products and services are and will be used by traders in the
financial markets, and, as a result, an investor or trader might claim that
investment or trading losses or lost profits resulted from use of a flawed
version of one of the Company's trading tools or inaccurate assumptions
made by the trading tools regarding data, or inaccurate data, which could
result in litigation against the Company. This risk was heightened 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 and trading
decisions using the Company's trading tools. This risk will again be
substantially heightened by the Company's planned offering, if and when it
occurs, of brokerage services, which will likely result in certain
brokerage customers from time to time asserting that the Company's acts or
omissions (or that errors or inaccuracies in the Company's trading tools or
market data) have caused such customers losses or lost profits.
Contributing to these possible occurrences are risks that the electronic
communications and other systems upon which the Company's products and
services rely, and will continue to rely, may operate too slowly or fail.
Major failures of this kind will affect all of the Company's customers who
are on-line simultaneously, possibly resulting in a class action lawsuit
being filed against the Company. In addition, there can be no assurance
that the Company's Year 2000 compliance efforts, or
20
<PAGE>
that compliance modifications, have not and will not adversely affect the
Company's products and services in ways not 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 costs to the Company in terms of the deployment of its
financial and managerial resources. See "Exposure to Possible Litigation
from Brokerage Customers (Assuming the Company Completes its Transition to
its New Business Model)" above, "Systems Failure (Assuming the Company
Completes its Transition to its New Business Model)" below and "ITEM 1.
BUSINESS - Product Development and Year 2000 Compliance."
o Risks Associated with Reliance on the Internet. The Company's change in its
business model means that the future growth of the Company will depend upon
it continuing to adopt the Internet as its primary medium for commerce and
communication, including the delivery of browser-based trading tools,
high-quality streaming real-time market data, on-line electronic trade
routing and execution systems, and comprehensive web sites that include
discussion forums, chat rooms, educational content, marketing materials and
customer support. There can be no assurance that the Company will
successfully develop and implement such Internet capabilities, or
effectively adjust its marketing and customer support approaches. Further,
the Company is and will be relying increasingly on its web sites and
related systems, and the Internet generally, to maximize the use and
cost-efficiency of its products and services, to accept orders and
payments, to track and account for orders and payments and fulfill
reporting obligations under regulatory laws and marketing agreements with
third parties, to register attendees for events, to market its products and
services, and to provide technical information and assistance to its
customers. In addition to the risk that the Company may not adequately
transition its business to the Internet, there is the risk that, over time,
the Internet may not prove to be a viable commercial 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 "ITEM 1. BUSINESS -
Products and Services and - Sales and Marketing."
o Systems Failure (Assuming the Company Completes its Transition to its New
Business Model). As an on-line brokerage, the Company will receive and
process trade orders through Internet-based trading platforms and on-line
order execution systems. Thus, the Company will depend heavily on the
integrity of the electronic systems supporting this type of trading,
including the trading strategy tools containing buy and sell alerts that
initiate trading decisions or order placement. Heavy stress placed on these
systems during peak trading times could cause these systems to operate too
slowly or fail. Additionally, the integrity of these systems is
increasingly being attacked by persons sometimes referred to as "hackers"
who intentionally introduce viruses or other defects to cause damage,
inaccuracies or complete failure. If these systems or any other systems in
the trading process slow down significantly or fail even for a short time,
the Company's brokerage customers would suffer delays in trading,
potentially causing substantial losses and possibly subjecting the Company
to claims for such losses or to litigation claiming fraud or negligence.
During a systems
21
<PAGE>
failure, the Company may be able to take orders by telephone, however, only
associates with appropriate securities broker's licenses can accept
telephone orders, and an adequate number of associates may not be available
to take customer calls in the event of a systems failure. In addition, a
hardware or software failure, power or telecommunications interruption or
natural disaster could cause a systems failure. Any systems failure that
interrupts the Company's operations could have a material adverse effect on
its business, financial condition, results of operations and prospects. See
"Potential Liability to Customers" and "Exposure to Possible Litigation
from Brokerage Customers (Assuming the Company Completes its Transition to
its New Business Model)" above.
o Risks Associated with Fluctuations in the Securities and Financial Markets.
The Company's current and planned products and services are and will be
marketed to customers who invest or trade in the securities and financial
markets. To the extent that interest in investing or trading decreases due
to volatility in the securities or financial markets, tax law changes,
recession, depression, or otherwise, the Company's business, financial
condition, results of operations and prospects could be materially
adversely affected. It is possible, if not likely, that increased losses by
customers that occur as a result of any such recession, depression or other
negative event will increase the quantity and size of legal claims made
against the Company. See "Potential Liability to Customers" and "Exposure
to Possible Litigation from Brokerage Customers (Assuming the Company
Completes its Transition to its New Business Model)" above.
o Operation in a Highly Regulated Industry and Compliance Failures (Assuming
the Company Completes its Transition to its New Business Model). The
securities industry in the U.S., Canada and the other jurisdictions in
which the Company may operate is subject to extensive regulation covering
all aspects of the securities business. Regulatory authorities are
currently focusing intensely on the on-line trading industry, particularly
the segment that seeks the accounts of active traders by offering
well-integrated, sophisticated trading platforms and order execution. The
various government authorities and industry self-regulatory organizations
that will supervise and regulate the Company generally have broad
enforcement powers to censure, fine, issue cease-and-desist orders or
suspend, enjoin or expel the Company or any of its officers or employees
who violate applicable laws or regulations. Additionally, new rules
relating to active traders may be enacted which severely limit the
operations and potential success of the Company's new business model. The
Company's ability to comply with all applicable laws and rules is largely
dependent on the Company's establishment and maintenance of compliance and
reporting systems, as well as its ability to attract and retain qualified
compliance and other personnel. The Company could be subject to
disciplinary or other regulatory or legal actions in the future due to
noncompliance. In addition, it is possible that any past noncompliance of
OnlineTrading.com could subject the Company to future civil lawsuits or
regulatory actions, the outcome of which could have a material adverse
effect on the Company's financial condition and operating results. See
"ITEM 1. BUSINESS - Overview and Recent Developments" and - "Government
Regulation."
o Dependence Upon Outside Data Sources. The Company's business is dependent
upon its ability to enter into contracts with private business information
compilers in order to provide market data and news to its customers. The
Company obtains such information pursuant to
22
<PAGE>
non-exclusive licenses from private information compilers, some of which
are current or potential competitors of the Company. The private sector
contracts typically provide for royalties based on usage or minimums. The
Company has such licenses from certain data suppliers to provide such
information that such suppliers also market in competition with the
Company. The Company must also comply with rules and regulations of the
exchanges that are the sources of market data information. Failure to
comply could result in the Company becoming a prohibited recipient of
market data from exchanges the rules or regulations of which were violated.
While the Company is not aware of any material data supplier contracts that
are in jeopardy of being terminated or not renewed, there can be no
assurance that the Company will be able to renew its current contracts with
data sources, maintain comparable price levels for information, or
negotiate additional contracts with data sources as necessary to maintain
existing products and services or introduce new products and services.
There is no assurance comparable alternative sources of information could
be obtained should existing contracts be terminated or not renewable.
Termination of the Company's relationship with one or more information
suppliers could have a material adverse effect on the Company's operations.
See "ITEM 1. BUSINESS - Products and Services" and "Systems Failures
(Assuming the Company Completes its Transition to its New Business Model)"
and "Potential Liability to Customers" above.
o 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.
The loss of one or more of these key employees, including William R. Cruz
or Ralph L. Cruz, the Company's Co-Chief Executive Officers, or of certain
key technology personnel, could have a material adverse effect on the
Company. See "ITEM 1. BUSINESS - Employees."
o 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 through January 12, 2002, the loss of which would
materially adversely affect the Company's revenues and earnings (or size of
its losses) 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. See "Liquidity Concerns" above and "ITEM 1. BUSINESS - Strategic
Relationships."
o Net Capital Requirements (Assuming the Company Completes its Transition to
its New Business Model). The SEC, the NASD and various other regulatory
agencies have stringent rules with respect to the maintenance of specific
levels of net capital by securities broker-dealers. Net capital is the net
worth of a broker or dealer (assets minus liabilities), less deductions for
certain types of assets as well as other charges. If a firm fails to
maintain the required net capital it may be subject to suspension or
revocation of registration by the SEC and suspension or expulsion by the
NASD, and it could ultimately lead to the firm's liquidation. If such net
capital rules are changed or expanded, or if there is an unusually large
charge against net capital, operations that require the use of capital
would be limited. Such operations may include trading activities and the
financing of customer account balances. Also, the Company's ability to
withdraw capital from its future brokerage subsidiary (OnlineTrading.com)
is restricted under SEC rules, which in turn could materially
23
<PAGE>
impact the Company's available working capital and materially impact or
limit the Company's ability to repay debt as and when due, redeem or
purchase shares of the Company's outstanding stock, if required, and pay
dividends in the future. A large operating loss or charge against net
capital could adversely affect the Company's ability to expand or even
maintain its then present levels of business, which could have a material
adverse effect on the Company's business, financial condition, results of
operations and prospects. See "Liquidity Concerns" above, and "ITEM 1.
BUSINESS - Government Regulation."
o Internet Business Risks Relating to Customer Privacy and Security and
Increasing Regulation. A significant risk for the Company's existing and
planned Internet operations is that customers may refuse to transact
business over the Internet due to privacy or security concerns. The Company
currently incorporates and plans to incorporate security measures into its
privacy policy. However, a major breach of customer privacy or security
could have serious consequences for the Company's Internet-based
operations. Use of the Internet, particularly for commercial transactions,
may not continue to increase as rapidly as it has during the past few years
as a result of privacy or security concerns, or for other reasons. If this
occurs, the growth of the Company's Internet-based operations would be
materially hindered. If Internet activity becomes heavily regulated in
these respects, that could also have significant negative consequences for
the growth of the Company's current and planned Internet-based operations.
See "Risks Associated with Reliance on the Internet" above and "ITEM 1.
BUSINESS - Government Regulation."
o 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 or will be 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 or services. The risk of
infringement claims against the Company is heightened with respect to its
new business model technology in development, as such will not have stood
any "test of time" as has the Company's client software technology. See
"ITEM 1. BUSINESS - Intellectual Property."
o Intellectual Property. The Company's success is and will be heavily
dependent on its proprietary technology, including its existing trading
tools, as well as trading tool, Internet, web site and order execution
technology currently in development. The Company views its technology as
proprietary, and relies, and will be relying, 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 and
services is difficult, however, and the Company is unable to determine the
extent to which piracy of its products and services 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 and services. See "ITEM
1. BUSINESS - Intellectual Property."
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and notes thereto and the report of
the independent certified public accountants thereon set forth on pages F-1
through F-25 herein are filed as part of this report and incorporated herein by
reference.
The Consolidated Financial Statement Schedule and the report of the
independent certified public accountants thereon set forth on pages S-1 through
S-3 herein are filed as part of this report and incorporated herein by
reference.
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 Consolidated Financial Statements and
notes thereto and the report of the independent certified public
accountants thereon set forth on pages F-1 through F-25 herein
are filed as part of this report and incorporated herein by
reference.
2. Financial Statement Schedules. The Consolidated Financial
Statement Schedule and the report of the independent certified
public accountants 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.
Exhibit
Number Description
------ -----------
2.1 - Agreement and Plan of Merger and
Reorganization dated as of January 19, 2000
by and among Omega Research, Inc.,
onlinetradinginc.com corp.,
OnlineTrading.com Group, Inc. (formerly
known as Online Trading Group, Inc.), Omega
Acquisition Corporation and Onlinetrading
Acquisition Corporation, together with the
following exhibits thereto: (i) Form of
Omega Affiliate Agreement; (ii) Form of
Online Affiliate Agreement; (iii) Form of
Employment Agreement; (iv) Form of
Non-Competition and Non-Disclosure Agreement
(incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K
reporting event on January 19, 2000 and
filed on January 28, 2000)
2.2 - Form of Omega Shareholder Agreement dated
January 19, 2000 among OnlineTrading.com
Group, Inc. (formerly known as Online
Trading Group, Inc.), onlinetradinginc.com
corp and each applicable Omega Research
shareholder (incorporated by reference to
Exhibit 2.2 to the Company's Current Report
on Form 8-K reporting event on January 19,
2000 and filed on January 28, 2000)
2.3 - Form of Online Shareholder Agreement dated
January 19, 2000 among OnlineTrading.com
Group, Inc.
25
<PAGE>
(formerly known as Online Trading Group,
Inc.), Omega Research, Inc. and each
applicable OnlineTrading.com shareholder
(incorporated by reference to Exhibit 2.3 to
the Company's Current Report on Form 8-K
reporting event on January 19, 2000 and
filed on January 28, 2000)
2.4 - Omega Stock Option Agreement dated January
19, 2000 between Omega Research, Inc. and
onlinetradinginc.com corp. (incorporated by
reference to Exhibit 2.4 to the Company's
Current Report on Form 8-K reporting event
on January 19, 2000 and filed on January 28,
2000)
2.5 - Online Stock Option Agreement dated January
19, 2000 between Omega Research, Inc. and
onlinetradinginc.com corp. (incorporated by
reference to Exhibit 2.5 to the Company's
Current Report on Form 8-K reporting event
on January 19, 2000 and filed on January 28,
2000)
2.6 - First Amendment to Agreement and Plan of
Merger and Reorganization effective March 7,
2000 among Omega Research, Inc.,
onlinetradinginc.com corp.,
OnlineTrading.com Group, Inc. (formerly
known as Online Trading Group, Inc.), Omega
Acquisition Corporation and OnlineTrading
Acquisition Corporation +++
2.7 - Agreement and Plan of Merger, dated as of
October 25, 1999, by and among Omega
Research, Inc., WOW Acquisition Corporation
and Window on WallStreet Inc., together with
the following exhibits thereto: (i) Articles
of Merger; (ii) Form of Company Affiliate
Agreement; (iii) Form of Agreement Regarding
Employment; (iv) Form of Shareholder
Non-Competition and Non-Disclosure
Agreement; (v) Form of Stock Option
Agreement (All Employees); (vi) Form of
Stock Option Agreement (Jennings and Black);
(vii) Form of Investment Acknowledgment
Agreement; (viii) Registration Rights
Agreement; and (ix) Opinion Letter Matters
(incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K
reporting event on October 26, 1999 and
filed on November 8, 1999)
3.1 - Second Amended and Restated Articles of
Incorporation of Omega Research, Inc.+
3.2 - Second Amended and Restated Bylaws of Omega
Research, Inc.+
26
<PAGE>
10.1 - Omega Research, Inc. Amended and Restated
1996 Incentive Stock Plan, as amended
through August 13, 1999 (incorporated by
reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1999)*
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. /Degree/
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 (incorporated by reference to
Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1998)
10.12 - Second Modification of Lease Agreement,
dated January 31, 2000, between Nationwide
Theaters West Flagler, L.L.C. and Omega
Research, Inc. +++
10.13 - Office/Showroom/Warehouse Lease Agreement
dated June 12, 1996 between Springcreek
Place Ltd. and Window on WallStreet Inc.
(then named MarketArts, Inc.), as amended by
Addendum to Lease dated
27
<PAGE>
October 12, 1998, and as further amended by
Addendum to Lease dated May 28, 1999 +++
10.14 - Lease Agreement, dated November 16, 1999,
between Fairfax Boca 92, L.P. and Omega
Research, Inc. +++
23.1 - Consent of Arthur Andersen LLP (filed
herewith)
27.1 - Financial Data Schedule (filed herewith)
--------------------------
+ Previously filed as part of Registration
Statement No. 333-3207 on Form S-1 filed
with the Commission on July 25, 1997.
/Degree/ 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.
+++ Previously filed as part of Annual Report on
Form 10-K for the fiscal year ended December
31, 1999 filed on March 22, 2000.
28
<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 Form 10-K/A 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 (Co-Principal
Executive Officer)
By: /s/ Ralph L. Cruz
---------------------------------------------
Ralph L. Cruz
Co-Chairman of the Board of Directors and
Co-Chief Executive Officer (Co-Principal
Executive Officer)
By: /s/ Gregg F. Stewart
---------------------------------------------
Gregg F. Stewart
Chief Financial Officer, Vice President of
Finance and Treasurer (Principal Financial
and Accounting Officer)
Dated: November 13, 2000
29
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants............................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997..... F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998
and 1997....................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997..... F-6
Notes to Consolidated Financial Statements..................................................... F-8
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Omega Research, Inc.:
We have audited the accompanying consolidated balance sheets of Omega
Research, Inc. (a Florida corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999 (as restated - see Note 2). 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 auditing standards generally
accepted in the United States. 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. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
November 2, 2000.
F-2
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Restated)
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 2,175,852 $ 7,436,980
Marketable securities 1,695,304 5,736,958
Accounts receivable, net 1,976,000 9,246,474
Inventory 67,371 131,659
Income tax receivable 589,106 -
Other current assets 1,033,277 692,273
Deferred income taxes 13,221,000 4,541,000
------------------ ------------------
Total current assets 20,757,910 27,785,344
PROPERTY AND EQUIPMENT, net 2,611,454 1,670,925
GOODWILL, net 1,564,958 --
OTHER INTANGIBLE ASSETS, net 14,151,389 --
OTHER ASSETS 473,344 185,854
------------------ ------------------
Total assets $ 39,559,055 $ 29,642,123
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 2,786,739 $ 1,082,521
Accrued expenses 1,861,321 962,464
Deferred revenue 414,824 105,035
------------------ ------------------
Total current liabilities 5,062,884 2,150,020
------------------ ------------------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 25,000,000
shares authorized, none issued and outstanding -- --
Common stock, $.01 par value; 100,000,000
shares authorized, 24,475,104 and 22,269,964
issued and outstanding at December 31, 1999
and 1998, respectively 244,751 222,700
Additional paid-in capital 34,618,412 23,913,877
Accumulated (deficit) earnings (366,992) 3,355,526
------------------ ------------------
Total shareholders' equity 34,496,171 27,492,103
------------------ ------------------
Total liabilities and shareholders' equity $ 39,559,055 $ 29,642,123
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Restated)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
NET REVENUES:
Licensing fees $ 16,217,922 $ 22,005,324 $ 24,364,990
Other revenues 7,518,613 6,211,181 4,861,284
--------------- --------------- ----------------
Total net revenues 23,736,535 28,216,505 29,226,274
--------------- --------------- ----------------
OPERATING EXPENSES:
Cost of licensing fees 1,931,731 1,798,078 1,848,993
Product development 4,698,319 3,318,310 1,890,392
Sales and marketing 18,161,741 14,381,923 11,272,290
General and administrative 4,534,084 6,134,608 5,420,760
Amortization of goodwill 68,042 -- --
Amortization of other intangible assets 823,611 -- --
--------------- --------------- ----------------
Total operating expenses 30,217,528 25,632,919 20,432,435
--------------- --------------- ----------------
(Loss) income from operations (6,480,993) 2,583,586 8,793,839
OTHER INCOME, net 422,475 423,961 146,474
--------------- --------------- ----------------
(Loss) income before income taxes (6,058,518) 3,007,547 8,940,313
INCOME TAX (BENEFIT) PROVISION (2,336,000) 1,052,000 (934,000)
--------------- --------------- ----------------
Historical net (loss) income $ (3,722,518) $ 1,955,547 9,874,313
=============== ===============
PRO FORMA INCOME TAX
ADJUSTMENTS (Notes 1 and 9):
Pro forma income taxes for period
ending prior to September 30, 1997 3,255,731
Non-recurring tax credit 1,167,000
----------------
Pro forma net income $ 5,451,582
================
HISTORICAL (LOSS) EARNINGS PER
SHARE (Note 11):
Basic $ (0.16) $ 0.09 $ 0.49
=============== =============== ================
Diluted $ (0.16) $ 0.09 $ 0.47
=============== =============== ================
PRO FORMA EARNINGS PER
SHARE (Note 11):
Basic $ 0.27
================
Diluted $ 0.26
================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
-------------------------- Paid-In Earnings
Shares Amount Capital (Deficit) Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 19,480,000 $ 194,800 $ 2,517 $ 4,638,160 $ 4,835,477
Issuance 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 (Restated) -- -- -- 9,874,313 9,874,313
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 22,246,108 222,461 23,745,251 1,264,957 25,232,669
Issuance of common stock 23,856 239 54,749 -- 54,988
Repayment of distributions -- -- -- 135,022 135,022
Compensation expense on
stock option grants -- -- 113,877 -- 113,877
Net income (Restated) -- -- -- 1,955,547 1,955,547
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1998 22,269,964 222,700 23,913,877 3,355,526 27,492,103
Issuance of common stock 205,145 2,051 463,671 -- 465,722
Issuance of common stock
in connection with
acquisition 1,999,995 20,000 8,605,009 -- 8,625,009
Issuance of stock options
in connection with
acquisition -- -- 1,495,059 -- 1,495,059
Compensation expense on
stock option grants -- -- 140,796 -- 140,796
Net loss (Restated) -- -- -- (3,722,518) (3,722,518)
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1999 24,475,104 $ 244,751 $ 34,618,412 $ (366,992) $ 34,496,171
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Restated)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Historical net (loss) income $ (3,722,518) $ 1,955,547 $ 9,874,313
Adjustments to reconcile historical net (loss) income
to net cash (used in) provided by operating activities:
Depreciation and amortization 1,844,050 466,628 606,820
Provision for doubtful accounts 25,000 2,222,834 2,450,736
Compensation expense on stock option grants 140,796 113,877 122,041
Deferred income tax benefit (8,478,000) (1,578,000) (2,963,000)
(Increase) decrease in:
Accounts receivable 7,497,044 (2,031,091) (7,531,906)
Inventory 74,185 15,162 (54,633)
Other current assets (340,601) (171,736) (514,847)
Other assets (217,293) 128,672 (1,315)
Income tax receivable (791,106) -- --
Increase (decrease) in:
Accounts payable 1,078,777 (36,681) 636,540
Accrued expenses 17,833 (108,088) 585,363
Deferred revenue 36,439 57,640 47,395
------------ ------------ ------------
Net cash (used in) provided by operating activities (2,835,394) 1,034,764 3,257,507
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,594,178) (1,166,041) (899,296)
Capitalized software development costs -- -- (29,358)
Purchases of marketable securities -- (5,722,368) (1,014,590)
Proceeds from maturity of marketable securities 4,041,654 1,000,000 --
Acquisition of data rights and customer lists (120,000) (222,900) (40,000)
Cash paid in acquisition, net of cash acquired (1,134,441) -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,193,035 (6,111,309) (1,983,244)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 465,722 54,988 27,440,445
Repayments from (distributions to) shareholders, net -- 135,022 (16,532,826)
Proceeds from borrowings of debt -- -- 15,000,000
Repayment of borrowings of debt (4,084,491) -- (15,000,000)
------------ ------------ ------------
Net cash (used in) provided by financing activities (3,618,769) 190,010 10,907,619
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (5,261,128) (4,886,535) 12,181,882
CASH AND CASH EQUIVALENTS, beginning of period 7,436,980 12,323,515 141,633
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,175,852 $ 7,436,980 $ 12,323,515
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ -- $ -- $ 17,979
============ ============ ============
Cash paid for income taxes $ 6,933,366 $ 3,138,740 $ 1,520,000
============ ============ ============
</TABLE>
(continued)
F-6
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Effective October 26, 1999, Omega Research, Inc. acquired Window On
WallStreet Inc. See Note 3 of Notes to Consolidated Financial Statements.
Information with respect to the acquisition is summarized below:
Consideration paid:
Fair market value of common stock issued $ 8,625,009
Fair market value of options issued 1,495,059
Acquisition costs 1,200,000
--------------
Total consideration paid 11,320,068
Fair value of net identifiable assets acquired 9,687,068
--------------
Goodwill $ 1,633,000
==============
Effective June 30, 1997, the Company declared a dividend distributing land and a
building with a carrying value of $506,781 to its shareholders.
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Omega Research, Inc. ("Omega Research" or, together with its subsidiaries,
the "Company"), a Florida corporation, was incorporated in 1982 to develop,
market and sell trading strategy tools to individual and professional investors
and traders. The Company's products and services provide investors and traders
with the ability to develop, historically test and computer automate trading
strategies and to access streaming real-time charts, quotes and news via the
Internet.
The following is a summary of significant accounting policies followed in
the preparation of these financial statements:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its direct and indirect wholly owned subsidiaries, Window on WallStreet Inc.
("Window On WallStreet") and Direct XChange Securities, Inc., since the
acquisition of such subsidiaries on October 26, 1999. All significant
intercompany transactions have been eliminated in consolidation.
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 consist 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
As of December 31, 1999, accounts receivable are primarily comprised of
receivables earned under royalty agreements with entities that market and sell
financial market data subscriptions (see Other Revenues below and Note 12). The
Company performs periodic credit evaluations and maintains allowances for
potential credit losses of approximately $716,000 and $3.7 million at December
31, 1999 and 1998, respectively, and allowances for potential returns of
approximately $83,000 and $7.4 million at December 31, 1999 and 1998,
respectively.
F-8
<PAGE>
The Company provides all client software customers with a 30-day right of
return and, prior to 1999, recorded a provision for anticipated returns at the
time of sale in accordance with Statement of Financial Accounting Standards
("SFAS") No. 48, Revenue Recognition When Right of Return Exists. To maintain a
positive, customer-friendly environment, the Company has historically accepted
returns in excess of 30 days. Approximately, 90% of all returns accepted under
the 30-day right of return policy are initiated within 60 days following the
date of sale. The reserve for returns and the provision for bad debts are
estimated based on historical experience and other relevant information.
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, 1999 and 1998.
Inventory
Inventory, which consists 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 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, 1999 or 1998.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are stated at cost less accumulated
amortization and are amortized using the straight-line method. Goodwill is being
amortized over four years. Other intangible assets are being amortized over
three to four years.
F-9
<PAGE>
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.
Revenue Recognition
Licensing fees
Prior to 1999, sales of client software products, net of provisions for
anticipated returns, were recognized at the time the product was shipped, in
accordance with the provisions of the American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2, Software Revenue Recognition and
an estimate for returns was provided in accordance with SFAS No. 48.
Beginning in 1999 with the launch of the Company's 2000i product line,
changes in the Company's client software product sales, including introduction
of a new, higher-priced product and longer financing terms, were deemed to alter
the predictability of return reserves and the future collectibility of
receivables. Accordingly, all 2000i product sales are recognized as they become
due (generally over a period of up to 12 months and, for Omega Research ProSuite
2000i sales, over the course of up to 16 months).
While the Company has no obligation to perform future services subsequent to
shipment of client software, for a limited time, the Company voluntarily
provides support on its web site, periodic "bug" fixes and 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 insignificant in relation to
product sales value and are accrued at the date the software is delivered in
accordance with SOP 97-2.
Certain products have been sold with bundled services (see discussion of
Other Revenues below). The portion of software sales related to such bundled
services are deferred and recognized as revenue on a monthly basis as the
service is provided.
Other Revenues
The Company has, with respect to its client software products, entered into
certain agreements with entities that market and sell financial market data
subscriptions. Except for the agreement described in Note 12 (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 client software
customers of financial market data feed subscriptions which are accessed through
one of the Company's client software products. The Company records these
revenues as they are earned in accordance with the terms of the applicable
contracts.
In addition, the Company provides streaming real-time market information via
the Internet through the Financial Data Cast Network ("FDCN") acquired in the
Window On WallStreet acquisition. Revenue is recognized on a monthly basis as
the service is provided. Payments
F-10
<PAGE>
received in advance of service are deferred and recognized on a monthly basis as
the services are provided.
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
operations. Advertising costs for the years ended December 31, 1999, 1998 and
1997 were $5.6 million, $5.8 million and $5.4 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
compensation expense in the statement of operations 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. See Note 8.
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. See Note 9.
Pro Forma Income Tax Adjustments
The pro forma income tax adjustments included in the accompanying statement
of operations for the year ended December 31, 1997 are for informational
purposes only. Pro forma income taxes have been provided at an estimated
effective rate of 39.5% for Omega Research 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 9.
(Loss) Earnings Per Share
(Loss) earnings per share is calculated in accordance with SFAS No. 128,
Earnings per Share. SFAS No.128 requires presentation of basic and diluted
(loss) earnings per share on the face of the statement of operations. Basic
(loss) earnings per share is computed by dividing the net (loss) income
available to common shareholders by the weighted average shares of outstanding
common stock. The calculation of diluted (loss) earnings per share is similar to
basic (loss) earnings per share except that the denominator includes dilutive
common stock equivalents such as stock options and warrants. See Note 11.
F-11
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 uncollectible accounts receivable.
Computer Software Developed or Obtained for Internal Use
Computer software developed or obtained for internal use is accounted for
in accordance with 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. The
Company adopted SOP 98-1 prospectively effective January 1, 1999. Such adoption
did not have a material effect on the Company's financial position or results of
operations.
Comprehensive Income
Comprehensive income is defined as the change in a business enterprise's
equity during a period arising from transactions, events or circumstances
relating to non-owner sources, such as foreign currency translation adjustments
and unrealized gains or losses on available-for-sale securities. It includes all
changes in equity during a period except those resulting from investments by or
distributions to owners. Comprehensive (loss) income is equal to net (loss)
income for all periods presented.
Segment Information
Segment information is required to be presented in accordance with SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 is based on a management approach, which requires segmentation based
upon the Company's internal organization and disclosure of revenue and operating
income based upon internal accounting methods. During the three years ended
December 31, 1999, management evaluated and operated the business of the Company
as a single segment. See Note 13.
New Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities-Deferral of FASB
Statement No. 133. SFAS No. 137 defers for one year the effective date of SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 will now apply to all fiscal quarters of all fiscal years beginning after
June 15, 2000. SFAS No. 133, as amended by SFAS No. 138, will require the
Company to recognize all derivatives on the balance sheet as either assets or
liabilities measured at fair value. Derivatives that do not qualify for hedge
accounting must be adjusted to fair value through income. The Company will adopt
SFAS No. 133 effective for the
F-12
<PAGE>
year ended December 31, 2001. The Company believes that the adoption of SFAS No.
133 will not have a material impact on its consolidated financial statements, as
it has entered into no derivative contracts and has no current plans to do so in
the future.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), Revenue Recognition in Financial Statements, to provide guidance on the
recognition, presentation and disclosure of revenue in financial statements. The
Company will be required to adopt SAB 101 by the fourth quarter of 2000. The
adoption of SAB 101 is not expected to have a material impact on the financial
statements of the Company.
In March 2000, the Emerging Issues Task Force reached a consensus on Issue
No. 00-2, Accounting for Web Site Development Costs, which applies to all web
site development costs incurred for the quarters beginning after June 30, 2000.
The consensus states that the accounting for specific web site development costs
should be based on a model consistent with AICPA Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. Accordingly, certain web site development costs that are currently expensed
as incurred may be capitalized and amortized. The adoption of Issue No. 00-2 is
not expected to have a material impact on the financial statements of the
Company.
(2) RESTATEMENT
Subsequent to the filing of the Company's Consolidated Financial Statements
for each of the three years ended December 31, 1999 on Form 10-K and in
connection with its review of a registration statement on Form S-4 related to
the proposed merger with onlinetradinginc.com corp. ("OnlineTrading.com") (see
Note 15), the Staff of the Securities and Exchange Commission ("SEC") expressed
concern about the method of accounting for revenue recognition of licensing fees
used by the Company and its method of accounting for the acquisition of Window
On WallStreet. As a result of consultation with the Staff of the SEC, the
Company restated certain of its annual and quarterly financial statements as
discussed below.
Beginning in 1999, with the launch of the Company's 2000i product line,
changes in the Company's client software product sales, including introduction
of a new, higher-priced product and longer financing terms, were deemed to alter
the predictability of return reserves and the future collectibility of
receivables. Accordingly, all 2000i product sales are recognized as they become
due (generally over a period of up to 12 to 16 months). Prior to 1999, sales of
client software products were recognized, net of anticipated returns, at the
time the product was shipped. In addition, the Company's acquisition of Window
On WallStreet has been restated to be accounted for under the purchase method of
accounting. A summary of the effects of the restatement for the three-year
period ended December 31, 1999 is as follows:
F-13
<PAGE>
<TABLE>
<CAPTION>
Purchase Revenue
Previously Accounting Recognition As
Reported Adjustments Adjustments Restated
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
1999:
Net revenues $ 42,869,969 $ (2,679,375) $ (16,454,059) $ 23,736,535
Income (loss) before income taxes 879,391 3,939,150 (10,877,059) (6,058,518)
Net loss (966,609) 3,939,150 (6,695,059) (3,722,518)
Loss per share:
Basic and diluted (0.04) 0.17 (0.29) (0.16)
1998:
Net revenues 31,710,753 (3,494,248) -- 28,216,505
Income before income taxes 623,453 2,384,094 -- 3,007,547
Net (loss) income (428,547) 2,384,094 -- 1,955,547
(Loss) earnings per share:
Basic and diluted (0.02) 0.11 0.00 0.09
1997:
Net revenues 32,950,448 (3,724,174) -- 29,226,274
Income before income taxes 8,153,922 786,391 -- 8,940,313
Pro forma net income 4,665,191 786,391 -- 5,451,582
Pro forma earnings per share:
Basic 0.21 0.06 0.00 0.27
Diluted 0.21 0.05 0.00 0.26
</TABLE>
The revenue recognition timing changes do not impact revenue recognition for
the Company's Internet subscription services or other revenues, or any of the
Company's planned service offerings, which are expected to generate the majority
of the Company's revenues in the future. The amounts reported for 1997 and 1998
are the same as the Company had previously reported prior to the Window On
WallStreet acquisition in its Annual Report on Form 10-K for the year ended
December 31, 1998 filed with the SEC on March 30, 1999.
(3) ACQUISITION
Effective October 26, 1999, the Company acquired Window On WallStreet, a
leading provider of Internet-based streaming real-time market data and a
developer of client software and on-line trading strategy tools. Under the terms
of the merger agreement, Window On WallStreet shareholders received 1,999,995
newly issued shares of the Company's common stock for all of the issued and
outstanding shares of Window On WallStreet's common stock. In addition, the
Company (i) repaid in accordance with its terms approximately $4.1 million of
debt, (ii) assumed all outstanding stock options to purchase Window On
WallStreet common stock which, based on an exchange ratio of 0.210974, were
exercisable for an aggregate of 182,529 shares of the Company's common stock and
issued to employees 335,000 stock options to purchase the Company's common
stock, and (iii) paid fees and costs relating to the acquisition of $1.2
F-14
<PAGE>
million. The consolidated financial statements contained herein reflect this
acquisition under the purchase method of accounting.
At the acquisition date, the shares of the Company's common stock issued
were valued at $8.6 million and the options were valued at $1.5 million. The
resulting goodwill of $1.6 million and identifiable intangible assets of $15.0
million are being amortized over a period of three to four years. See Note 5.
Under purchase accounting, the results of operations of the acquired company
are included from the acquisition date forward. Accordingly, the consolidated
financial statements include the results of operations of Window on WallStreet
from October 26, 1999 through December 31, 1999. The following pro forma
financial information assumes the acquisition of Window On WallStreet occurred
on January 1, 1998:
1999 1998
--------------- ---------------
Pro forma net revenues $ 26,415,910 $ 31,710,753
Pro forma net loss (11,811,588) (5,778,467)
Pro forma loss per share (0.49) (0.24)
There were no material relationships or intercompany transactions between
the Company and Window On WallStreet prior to the acquisition.
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
Useful Life
In Years 1999 1998
-------- ---- ----
<S> <C> <C> <C>
Computers and software 3-5 $ 4,682,353 $ 2,648,974
Furniture and equipment 3-7 495,877 413,075
Leasehold improvements 3-5 178,811 122,449
Autos 5 -- 110,205
----------- ------------
5,357,041 3,294,703
Accumulated depreciation and amortization (2,745,587) (1,623,778)
----------- ------------
$ 2,611,454 $ 1,670,925
============ ============
</TABLE>
F-15
<PAGE>
(5) GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill and other intangible assets consist of the following as of December
31, 1999:
Amortization
Period
In Years 1999
------------- --------------
Goodwill 4 $ 1,633,000
Accumulated amortization (68,042)
--------------
Goodwill, net $ 1,564,958
==============
Purchased technology and workforce 3 $ 11,600,000
Trade names and patents 3 1,500,000
Customer lists 3 1,275,000
Non-compete agreements 4 600,000
--------------
Total other intangible assets 14,975,000
Accumulated amortization (823,611)
--------------
Other intangible assets, net $ 14,151,389
==============
(6) ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31, 1999 and 1998:
1999 1998
---- ----
Payroll and related accruals $ 579,153 $ 542,218
Accrued data distribution and exchange fees 550,977 --
Accrued technical support costs 161,000 173,500
Other 570,191 246,746
---------- ----------
$1,861,321 $ 962,464
========== ==========
(7) DEFERRED REVENUE
Deferred revenue is comprised of deferrals for (i) licensing fees for which
amounts are paid for obligations which have not yet been fulfilled (such as
committed upgrades), (ii) payments received in advance of service or bundled
with client software purchases and (iii) registration fees and sponsorship and
exhibitor deposits for OmegaWorld, the Company's annual conference, designed to
highlight the benefits of trading strategy development, held during the second
quarter of each year. Deferred revenue consists of the following as of December
31, 1999 and 1998:
1999 1998
---- ----
Licensing fees $ -- $ 48,450
Subscription services 290,300 --
OmegaWorld 124,524 56,585
---------- ----------
$ 414,824 $ 105,035
========== ==========
F-16
<PAGE>
(8) 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 its initial public offering of 2.6
million shares of common stock of the Company at $11.00 per share (the "Initial
Public Offering"). On November 5, 1997, the Company closed 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 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 has reserved 4,500,000 shares of its common stock for issuance
under its Amended and Restated 1996 Incentive Stock Plan, as amended (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
F-17
<PAGE>
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 Option Plan generally vest ratably over a five-year period. In January 2000,
the Board of Directors, as part of its authorization of the Merger Agreement
(see Note 15) with OnlineTrading.com authorized an increase, subject to approval
by the Company's shareholders of the Merger Agreement and the merger with
OnlineTrading.com, in the number of shares of common stock reserved for issuance
under the Option Plan from 4,500,000 to 7,500,000, subject to future
anti-dilution adjustments.
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.
As discussed in Note 3, the Company assumed all outstanding stock options to
purchase Window On WallStreet common stock ("WOW Options"). The WOW Options
generally vest ratably over a four-year period and their terms are ten years.
A summary of stock option activity including stock options granted under the
Option Plan and the Director Plan 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
Canceled (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
Canceled (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
Granted 1,050,625 1.66 10.25 5.80
Assumed WOW Options 182,529 .48 8.06 4.62
Canceled (131,278) .48 11.00 3.91
Exercised (181,560) 1.25 11.00 2.14
-------------
Outstanding, December 31, 1999 3,813,652 .48 11.00 3.49
=============
</TABLE>
F-18
<PAGE>
Additional information regarding options outstanding at December 31, 1999
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 12/31/99 Life Price 12/31/99 Price
------------ -------- ---------------- --------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.48 $0.48 82,572 5.8 $0.48 81,728 $0.48
1.25 1.66 1,503,252 8.3 1.52 467,647 1.42
2.00 3.00 780,647 8.0 2.81 142,475 2.80
3.03 4.53 605,440 8.0 4.05 112,133 3.20
4.59 6.35 297,200 8.6 5.48 46,500 5.16
6.94 10.25 489,961 8.9 8.39 54,472 7.72
11.00 11.00 54,580 7.6 11.00 25,405 11.00
--------- -------
$0.48 $11.0 3,813,652 8.2 $3.49 930,360 $ 2.58
========= =======
</TABLE>
All options issued during 1996 were issued to key employees at an exercise
price that was subsequently determined to be approximately $291,000 in the
aggregate 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, 1999, 1998 and 1997, the Company recorded compensation expense of
approximately $141,000, $114,000 and $122,000, respectively.
Included in compensation expense in 1999, 1998 and 1997 was approximately
$5,000, $7,000 and $23,000, respectively, related to options issued to
consultants of the Company, accounted for under the provisions of SFAS No. 123.
Such options were issued in connection with the procurement of training services
and product content. The exercise prices of the consultant option grants in
1999, 1998 and 1997 were $5.97, $1.66 and $11.00, respectively, and the option
grants vest over a period of 3-years, 5-years and 6-months, respectively. The
fair values of these grants at the date of issue were $102,000, $2,000 and
$31,000, respectively. In determining the fair value of these grants, the
assumptions set forth below for employee option grants were used in the
application of the Black-Scholes model for these grants except for the weighted
average life of three years used for the 1997 grant. The provisions of Emerging
Issues Task Force ("EITF") 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in conjunction with Selling,
Goods or Services were applied in determining the amount of expense recorded in
each of the periods noted above.
Options to purchase 930,360, 323,450 and 110,900 shares were exercisable at
December 31, 1999, 1998 and 1997, respectively.
The Company, as permitted by SFAS No. 123, applies APB Opinion No. 25 for
options granted to employees. Accordingly, no compensation is recognized for
such grants to the extent that 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
F-19
<PAGE>
grant dates consistent with the methodologies of SFAS No. 123, the Company's pro
forma net loss (and pro forma loss per share) would have been approximately $4.6
million ($0.20 per share) for the year ended December 31, 1999 and pro forma net
income (and pro forma earnings per share on a diluted basis) would have been and
$1.4 million ($0.06 per share) and $5.2 million ($0.25 per share) for the years
ended December 31, 1998 and 1997, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes model with the
following assumptions:
1/1/97 - 10/1/97 -
9/30/97 12/31/97 1998 1999
------- -------- ---- ----
Risk free interest rate 6 % 5 % 5 % 5 %
Dividend yield - - - -
Volatility factors 70% 81% 81% 75%
Weighted average life (years) 7 7 5 5
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 options 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 years ended December 31, 1999 and 1998, 23,585 and 12,506
shares of common stock were issued under the plan at an average price of $3.27
and $3.06, respectively.
(9) INCOME TAXES
The components of income tax (benefit) provision for the years ended
December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Current tax provision:
Federal $ 5,263,000 $ 2,254,000 $ 1,739,894
State 879,000 376,000 289,106
-------------- --------------- --------------
Total current tax provision 6,142,000 2,630,000 2,029,000
-------------- --------------- --------------
Deferred tax benefit:
Federal $ (7,268,000) $ (1,353,000) $ (2,540,811)
State (1,210,000) (225,000) (422,189)
--------------- --------------- --------------
Total deferred tax benefit (8,478,000) (1,578,000) (2,963,000)
--------------- --------------- --------------
Total income tax (benefit) provision $ (2,336,000) $ 1,052,000 $ (934,000)
============== =============== ==============
</TABLE>
F-20
<PAGE>
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>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Deferred income taxes, short term:
Reserves and allowances $ 387,000 $ 4,351,000
Difference in revenue recognition 12,260,000 --
Deferred revenue and accrued liabilities 425,000 190,000
Other 385,000 220,000
----------------- -----------------
Total deferred income taxes, short term 13,457,000 4,761,000
Valuation allowance (236,000) (220,000)
----------------- -----------------
Deferred income taxes, short term, net $ 13,221,000 $ 4,541,000
================= =================
Deferred income taxes, long term:
Net operating loss carryforwards $ 2,533,000 $ --
Valuation allowance (2,533,000) --
----------------- -----------------
Deferred income taxes, long term, net $ -- $ --
================= =================
</TABLE>
At December 31, 1999, the Company had an income tax receivable of
approximately $589,000 which will be realized upon filing 1999 tax returns. The
realizability of the deferred tax assets is based primarily upon the Company's
ability to carryback its expected tax loss during 2000 to recoup approximately
$8.6 million of federal income taxes paid during 1998 and 1999. The remaining
deferred tax assets are expected to be realized through future taxable income.
The Company has available net operating loss carryforwards totaling
approximately $6.7 million (through its acquisition of Window On WallStreet),
which will begin to expire in 2012. The Company also has tax credit
carryforwards totaling approximately $100,000, which will begin to expire in
2012. The utilization of these net operating losses and tax credits will be
subject to limitations of approximately $518,000 per year which are cumulative
to the extent not utilized by the Company. The deferred tax asset related to
these carryforwards has been reduced to zero by a valuation allowance.
A reconciliation of the difference between the expected (benefit) provision
for income taxes using the statutory Federal tax rate and the Company's actual
(benefit) provision is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Income tax (benefit) provision using statutory
Federal tax rate $ (2,120,481) $ 1,052,641 $ 3,129,110
Pro forma taxes for periods prior to
September 30, 1997 -- -- (3,255,731)
Tax credits -- -- (1,167,000)
Other (215,519) (641) 359,621
--------------- --------------- --------------
Total income tax (benefit) provision $ (2,336,000) $ 1,052,000 $ (934,000)
============== =============== ==============
</TABLE>
The effective tax rates for 1999 and 1998 were 39% and 35%, respectively.
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
F-21
<PAGE>
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.
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.
(10) 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.
Matching contributions accrued under the 401(k) Plan amounted to approximately
$242,000, $0 and $63,000 in 1999, 1998 and 1997, respectively.
(11) (LOSS) EARNINGS PER SHARE
Weighted average shares outstanding for the years ended December 31, 1999,
1998 and 1997 are calculated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average shares outstanding (basic) 22,758,654 22,255,627 20,171,527
Impact of dilutive options after applying
the treasury stock method -- 502,286 713,148
------------ ------------ ------------
Weighted average shares outstanding (diluted) 22,758,654 22,757,913 20,884,675
------------ ------------ ------------
Options outstanding which are not included in
the calculation of diluted (loss) earnings per
share because their impact is antidilutive 3,813,652 415,250 78,075
============ ============ ============
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has seven non-cancelable operating leases for facilities. The
only significant facility 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 1998, February 1999 and January 2000, the Company
entered into a sub-lease and two lease amendments for additional space at the
facilities with lease terms ending on the same day as the original lease. In
addition to the leases for facilities, the Company leases its telephone system
and certain computer equipment.
F-22
<PAGE>
Future minimum lease payments as of December 31, 1999 under all operating leases
are as follows:
2000 $2,783,700
2001 2,689,514
2002 1,076,065
2003 131,556
2004 131,556
Thereafter 10,963
----------
$6,823,354
==========
Total rent expense for 1999, 1998 and 1997 was approximately $584,000,
$329,000 and $256,000, 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 a license to promote, market, sublicense and distribute
the Bridge Telerate version for six years. During 1999, 1998 and 1997, the
Company earned approximately $4.0, $3.0 and $2.2 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. On July 1, 1999, pursuant to the stipulation of the parties, the Court
of Appeals for the Eleventh Circuit issued a final order which dismissed with
prejudice all claims against the Company and all other defendants.
In addition to the above, from time to time the Company may become engaged
in routine litigation incidental to its business. The Company does not believe
that such routine litigation would have a material adverse effect on its
financial position or results of operations.
(13) SEGMENT AND RELATED INFORMATION
During the three years ended December 31, 1999, management evaluated and
operated the business of the Company as a single segment. The internal financial
reporting systems present data in formats directed to enable management to run
the business as a single operating segment.
Net revenues from the licensing of the Company's client software products
represented 68%, 78% and 83% of total consolidated net revenues in 1999, 1998
and 1997, respectively. Royalties under the Agreement with Bridge Telerate
represented 17%, 11% and 7% of total consolidated net revenues in 1999, 1998 and
1997, respectively.
F-23
<PAGE>
The mix of net revenue from the Company's client software products are
broken down as follows for the three years ended December 31, 1999:
Product 1999 1998 1997
------- ---- ----- -----
Omega Research ProSuite 67 % - % - %
TradeStation 18 59 65
OptionStation 4 28 23
SuperCharts 2 4 7
Other 9 9 5
---- ---- ----
100 % 100 % 100 %
==== ==== ====
The Company engages in sales to customers outside of the United States
through the use of independent distributors and responses to direct telephonic
or electronic mail inquiries from foreign persons. Less than 10% of the
Company's total consolidated net revenues were derived from customers outside of
the United States for the years ended December 31, 1999, 1998 and 1997.
(14) UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following tables summarize selected quarterly financial data of the
Company for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
--------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 5,618,410 $ 6,207,859 $ 6,096,047 $ 5,814,219 $ 23,736,535
Gross profit* $ 5,135,619 $ 5,752,470 $ 5,636,409 $ 5,280,306 $ 21,804,804
Net loss $ (457,762) $ (546,935) $ (260,173) $ (2,457,648) $ (3,722,518)
Loss per share:
Basic and diluted $ (.02) $ (.02) $ (.01) $ (.10) $ (.16)
<CAPTION>
1998
--------------------------------------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
--------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 7,030,794 $ 7,651,597 $ 6,469,473 $ 7,064,641 $ 28,216,505
Gross profit* $ 6,579,542 $ 7,132,764 $ 6,156,909 $ 6,549,212 $ 26,418,427
Net income $ 801,954 $ 817,018 $ 216,103 $ 120,472 $ 1,955,547
Earnings per share:
Basic and diluted $ .04 $ .04 $ .01 $ .01 $ .09
</TABLE>
*Gross profit is defined as total net revenues less cost of licensing fees.
F-24
<PAGE>
(15) RECENT DEVELOPMENTS
On January 19, 2000, the Company signed a definitive, 100% share-exchange
merger agreement with OnlineTrading.com, a direct access on-line broker.
OnlineTrading.com provides order execution technology that directly accesses
electronic communications networks ("ECN's"), and electronically-centered
exchanges and market makers, in order to provide OnlineTrading.com's customers
with prompt and efficient order execution that avoids traditional market maker
participation and brokerage order-flow arrangements.
Pursuant to an Agreement and Plan of Merger and Reorganization, as amended
(the "Merger Agreement"), a newly-formed holding company will own 100% of the
issued and outstanding capital stock of Omega Research and OnlineTrading.com.
Upon completion of the merger, as a result of share exchanges between the
holding company and each of Omega Research and OnlineTrading.com, and the
listing of the holding company's shares, the holding company will be the sole
publicly-traded company in the group with its outstanding shares of common stock
listed on The Nasdaq National Market. The holding company will initially be
owned between 62% and approximately 57% (on a fully diluted basis) by Omega
Research's shareholders and between 38% and approximately 43% (on a fully
diluted basis) by OnlineTrading.com's shareholders. The precise percentages will
be determined by the formulae set forth in the Merger Agreement. Closing of the
Merger Agreement is conditioned upon and subject to the filing and effectiveness
of a registration statement on Form S-4, as amended, the approval of the
shareholders of each of Omega Research and OnlineTrading.com, and the
satisfaction of the other conditions precedent to consummating the Merger
Agreement.
The Company is currently in the process of changing its business model. The
Company has taken certain steps to transform itself from a trading strategy
client software company to an on-line broker that intends to provide to active
traders a best-of-breed, Internet-based trading platform: One that incorporates
and seamlessly integrates powerful trading strategy development tools,
historical and streaming real-time market data and news, and a direct access
electronic order execution system.
On February 29, 2000, the Company announced that in light of the launch of
WindowOnWallStreet.com, the Company was accelerating its transition to its new
business model by focusing its marketing efforts on WindowOnWallStreet.com (as
opposed to its client software).
F-25
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
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, 1999,
1998 and 1997 .................................................................................... S-3
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To Omega Research, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements included in this Form
10-K and have issued our report thereon dated November 2, 2000. 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,
November 2, 2000.
S-2
<PAGE>
OMEGA RESEARCH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Deductions Period
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
(Restated):
Allowance for doubtful accounts $ 3,723,000 $ 25,000 $ (3,032,000) $ 716,000
Allowance for returns 7,350,000 83,000 (7,350,000) 83,000
--------------- --------------- --------------- ----------------
$ 11,073,000 $ 108,000 $ (10,382,000) $ 799,000
=============== =============== =============== ================
Year ended December 31, 1998:
(Restated):
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
--------------- --------------- --------------- ----------------
$ 7,379,166 $ 27,559,588 $ (23,865,754) $ 11,073,000
=============== =============== =============== ================
Year ended December 31, 1997:
(Restated):
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
--------------- --------------- --------------- ----------------
$ 2,627,430 $ 18,187,799 $ (13,436,063) $ 7,379,166
=============== =============== =============== ================
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
