-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LbF8LRy+gBFCjIRGqPIMYM7ApsKlTTWrzCzXM5F4dDJh0WnLgGvJfetndrBTQIBD l5V20c2H18j28w+EePR8sA== 0000950170-00-000406.txt : 20000323 0000950170-00-000406.hdr.sgml : 20000323 ACCESSION NUMBER: 0000950170-00-000406 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OMEGA RESEARCH INC CENTRAL INDEX KEY: 0001042814 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 592223464 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22895 FILM NUMBER: 575925 BUSINESS ADDRESS: STREET 1: 8700 WEST FLAGLER ST STE 250 CITY: MIAMI STATE: FL ZIP: 33174 BUSINESS PHONE: 3054857000 MAIL ADDRESS: STREET 1: 8700 WEST FLAGER STREET SUITE 250 CITY: MIAMI STATE: FL ZIP: 33174 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended DECEMBER 31, 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. TABLE OF CONTENTS PAGE NO. -------- PART I - ------ ITEM 1. BUSINESS..............................................................1 Overview and Recent Developments.................................1 Industry Background..............................................3 Products and Services............................................5 Sales and Marketing..............................................8 Strategic Relationships..........................................9 Product Development and Year 2000 Compliance....................11 Customer Support and Training...................................12 Competition.....................................................13 Intellectual Property...........................................14 Government Regulation...........................................15 Employees.......................................................16 ITEM 2. PROPERTIES...........................................................17 ITEM 3. LEGAL PROCEEDINGS....................................................17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................17 PART II - ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................................18 Common Stock Information........................................18 Dividend Policy.................................................18 Recent Sales of Unregistered Securities.........................19 Use of Proceeds.................................................19 ITEM 6. SELECTED FINANCIAL DATA..............................................20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................21 Overview .......................................................21 Results of Operations...........................................24 Years Ended December 31, 1999 and 1998..........................25 Years Ended December 31, 1998 and 1997..........................27 Income Taxes....................................................28 Variability of Results..........................................28 Liquidity and Capital Resources.................................29 Recently Issued Accounting Standards............................30 Year 2000 Compliance............................................31 Forward-Looking Statements; Business Risks......................31 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................................40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......................41 PART III - -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................................42 ITEM 11. EXECUTIVE COMPENSATION...............................................45 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................52 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................53 PART IV - ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................................................55 SIGNATURES....................................................................59 ii PART I ITEM 1. BUSINESS. OVERVIEW AND RECENT DEVELOPMENTS Omega Research, Inc. ("Omega Research" or, together with its subsidiaries, the "Company"), a Florida corporation, was incorporated in 1982 to develop, market and sell investment analysis and trading strategy testing and automation (collectively, "trading strategy") software tools to individual and professional investors and traders (collectively, "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 tools, historical and streaming real-time market data and news, and a high-speed electronic order execution system. The Company's historical business model has consisted of sales of client software products, payment for which is committed to in full by the customer at the time of sale. Under the new business model, the Company will seek to derive recurring revenues from customers by offering monthly subscription services for trading strategy tools integrated with streaming real-time market data and news for which a monthly fee is payable, and by offering, through an affiliate, on-line brokerage services for which commissions are payable. The Company believes that it will be able to leverage its historical success in selling trading strategy tools to build a subscriber base of active traders that will use its affiliated on-line brokerage services or, at a minimum, its trading strategy subscription services. Omega Research has been, and remains, a leading provider of real-time trading strategy client software for the Microsoft Windows operating system. In February 1999, Omega Research released its current generation of premium software products, branded "2000I," which included upgrade versions of its then-existing products and new products. As of February 22, 1999, Omega Research's client software product line has consisted of TRADESTATION 2000I, OPTIONSTATION 2000I, RADARSCREEN 2000I, OMEGA RESEARCH PROSUITE 2000I and SUPERCHARTS 4. TRADESTATION enables traders to historically test the profitability of their own trading strategies, and then computer-automate those strategies to generate real-time buy and sell signals. OPTIONSTATION enables traders who are not options experts or mathematicians to benefit from advanced stock, index and futures options trading strategies. RADARSCREEN enables traders to scan the markets in real time to identify favorable buying and selling opportunities based upon their own trading strategies. OMEGA RESEARCH PROSUITE is an integrated suite of TRADESTATION, OPTIONSTATION and RADARSCREEN. SUPERCHARTS provides traders with state-of-the-art technical analysis capabilities. Approximately five months ago, the Company began to implement the change in its business model. On October 26, 1999, Omega Research acquired Window on WallStreet Inc. ("Window On WallStreet"), a leading provider of Internet-based streaming real-time market data (FINANCIAL DATA CAST NETWORK, or "FDCN") and a developer of client software and on-line trading strategy tools, in a merger transaction in which the Window On WallStreet shareholders received 1,999,995 newly- issued shares of Omega Research common stock. For more information about Omega Research's merger with Window On WallStreet, review the Company's Current Report on Form 8-K/A filed on January 7, 2000 described in "ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - (b) Current Reports on Form 8-K" and See "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - Recent Sales of Unregistered Securities." On November 8, 1999, the Company announced that it would focus on serving active on-line traders through the design, marketing and implementation of a monthly-subscription, Internet-based, trading strategy portal that is to be named TRADESTATION.COM. TRADESTATION.COM, expected to be launched later this year, will include premium trading strategy tools of TRADESTATION seamlessly integrated with the FDCN'S streaming real-time market quotes and news. TRADESTATION.COM is also expected to contain features that support the use of real-time trading strategies, such as subject-focused discussion forums, chat rooms, educational content and on-line technical support. On January 19, 2000, the Company signed a definitive, 100% share-exchange merger agreement with onlinetradinginc.com corp. ("OnlineTrading.com"). OnlineTrading.com provides electronic order execution technology that directly accesses electronic communications networks ("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 prime objective of the pending merger with OnlineTrading.com is to offer to active traders on-line brokerage services that are integrated with TRADESTATION.COM, thereby creating a trading platform that incorporates and seamlessly integrates powerful trading strategy tools, historical and streaming real-time market data and news, and a high-speed electronic order execution system. Pursuant to an Agreement and Plan of Merger and Reorganization, as amended (the "Merger Agreement"), a newly-formed holding company named OnlineTrading.com Group, Inc. ("OnlineTrading.com Group") 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 OnlineTrading.com Group and each of Omega Research and OnlineTrading.com, and the listing of OnlineTrading.com Group shares, OnlineTrading.com Group will be the sole publicly-traded company in the group, with its outstanding shares of common stock listed on The Nasdaq National Market. OnlineTrading.com Group, based upon the exchange ratio set forth in the Merger Agreement, would 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. The initial eight-member Board of Directors of OnlineTrading.com Group would consist of five directors (two of whom would be independent directors) designated by Omega Research, and three directors (one of whom would be an independent director) designated by OnlineTrading.com. Closing of the Merger Agreement is conditioned upon and subject to the filing and effectiveness of a registration statement on Form S-4, the approval of the shareholders of each of Omega Research and OnlineTrading.com, and the satisfaction of other conditions precedent. For more information about the Company's pending merger with OnlineTrading.com, review the Company's Current Report on Form 8-K filed on January 28, 2000 described in "ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - (b) Current Reports on Form 8-K." 2 On January 25, 2000, the Company launched WINDOWONWALLSTREET.COM, its first Internet subscription service. WINDOWONWALLSTREET.COM offers streaming real-time charts, quotes and news powered by some of the Company's award-winning trading tools. The Company believes that the subscriber base being built with WINDOWONWALLSTREET.COM will contain many potential OnlineTrading.com brokerage clients. On February 29, 2000, the Company announced that in light of the apparent successful launch of WINDOWONWALLSTREET.COM, the Company was accelerating its transition to its new business model by focusing its marketing efforts and resources on WINDOWONWALLSTREET.COM (as opposed to its client software). The word "Company," as used in this report specifically with respect to the Company's planned new business model, refers collectively to OnlineTrading.com Group as the anticipated publicly-traded holding company, Omega Research as its wholly-owned subsidiary responsible for the development and operation of the trading strategy tools/real-time market data services business, and OnlineTrading.com as its wholly-owned subsidiary responsible for brokerage services. Each of those subsidiaries are intended to be operated as separate, independent companies. The anticipated brokerage services to be provided through OnlineTrading.com are subject to the closing of the Merger Agreement, of which no assurance can be given. The Company's principal executive offices are located at 8700 West Flagler Street, Miami, Florida 33174, and its telephone number is (305) 485-7000. THIS REPORT (PARTICULARLY "ITEM 1. BUSINESS" AND "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS") CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FORWARD-LOOKING STATEMENTS; BUSINESS RISKS." INDUSTRY BACKGROUND In the last several years there has been dramatic growth in the electronic brokerage industry. In the early 1990s, several broker-dealers gave customers the ability to enter orders with them through private computer networks. In 1995, broker-dealers introduced the first systems that allowed customers to submit orders through the Internet. More than 160 broker-dealers now offer on-line trading. In fewer than five years, on-line brokerage has become an important channel for conducting retail brokerage transactions. U.S. Bancorp Piper Jaffray ("Piper Jaffray") estimated that by the end of the third quarter of 1999 there were over 10.8 million on-line brokerage accounts, up from 3.7 million in 1997 and 7.3 million in 1998. Piper Jaffray estimated that over $900 billion in assets were held in on-line brokerage accounts at year-end 1999. On-line equity trading volume has also grown dramatically over the past several years. Piper Jaffray reported that there was a daily average of approximately 807,000 on-line trades in the fourth quarter of 1999. 3 Not only have on-line equity trading volumes risen, they are accounting for an increasing percentage of overall equity trading. CS First Boston reported that in the first quarter of 1999 almost one in six equity trades (15.91%) took place on-line. On-line trading accounts for an even higher percentage of overall equity and options trades by retail investors. Piper Jaffray estimated that on-line trading activity accounted for 48% of all retail trades in the second half of 1999, up from 37% in the first half of 1999. For all of 1999, Piper Jaffray estimated that on-line firms processed 43% of all retail trades, up from 27% in 1998. Industry analysts foresee continued growth both in the number of on-line brokerage accounts and account assets. Forrester Research predicted that, by 2003, 9.7 million U.S. households will manage more than $3 trillion in 20.4 million on-line accounts. Jupiter Communications estimated that, by 2003, 20.3 million households will trade on-line, and also predicted total on-line account assets at more than $3 trillion. Forrester Research has also recently predicted that, by 2004, Europe will have 14 million on-line brokerage accounts. Concurrently with the growth of on-line trading, there has been, in the last several years, dramatic growth in the financial markets as increasing amounts of capital have been actively invested in an effort to generate superior returns. Traditionally, financial instruments were held to maturity or for long investment horizons, but in today's environment of abundant data flow and low transaction costs, financial instruments are increasingly being actively traded. FleetBoston Robertson Stephens Inc. reported that during 1999 The Nasdaq Stock Market ("Nasdaq") and New York Stock Exchange ("NYSE") composite volumes experienced the largest jump in history. Nasdaq volume reached 271 billion in 1999, a 37% increase over the 1998 volume of 198 billion. NYSE volume also increased in 1999, to 209 billion, a 24% increase over 1998 volume of 169 billion. The broad availability of financial market information on-line has enabled individuals to become more sophisticated and knowledgeable about trading, having experienced greater access to stock quotes, other financial market data, trading advice and other trading information through the Internet or through other on-line services. In addition to increased information flows, the increased popularity and proliferation of on-line brokerage services have resulted in reduced transaction costs to the individual trader, facilitating the increase in trading activity. While both brokerage services and financial market data have been available for some time, historically only large institutional investors with access to mainframe or minicomputer-based systems, and direct or personal access to securities exchanges, have had the capability to manipulate, organize and analyze such data to support their trading decisions, and then execute with efficiency those trading decisions. Historically, such organizational and analytical data activities have been expensive and time consuming, and usually performed in the "back office" of institutional traders through custom programming by information technology professionals. With the proliferation of on-line brokerage services, the increasing and less-expensive accessibility to large quantities of various types of market data, the increasingly-powerful processing capabilities of personal computers, and the rapidly-growing capabilities of the Internet, the Company believes that individual traders are demanding powerful, Internet-based, real-time trading platforms that are seamlessly integrated with the best-available order execution technology. Individual traders desire to improve both their decision-making regarding, and their execution of, trades. The Company believes that a need has arisen for an on-line brokerage to provide to the growing market of active traders an institutional quality, Internet-based platform that includes analytical tools which support the design and testing of custom trading strategies, the automation of those strategies in real time, and the execution of those strategies through state-of-the-art electronic order execution systems. 4 PRODUCTS AND SERVICES As a result of the Company's decision to change its business model, the beginning of this "Products and Services" discussion is set forth in two parts. The first part discusses the Company's client software products (principally the 2000I line released in February 1999), which constituted virtually all products sold by the Company during 1999. The second part discusses the Company's recently-implemented and future-planned Internet-based services. Those consist of trading tools seamlessly integrated with streaming real-time market quotes and news, and, assuming and subject to the consummation of the OnlineTrading.com merger, the Company's planned on-line brokerage services. The first of the Company's Internet-based, monthly-subscription services, WINDOWONWALLSTREET.COM, was first marketed on Window On WallStreet's web site in December 1999, and was launched by Window On WallStreet in late January 2000. In February 2000, the focus of the Company's marketing efforts were shifted from the 2000I product line to WINDOWONWALLSTREET.COM. CLIENT SOFTWARE In the first quarter of 1999, the Company released its current generation of client software products: TRADESTATION 2000I, RADARSCREEN 2000I, OPTIONSTATION 2000I and OMEGA RESEARCH PROSUITE 2000I. The Company's 2000I software products contain numerous new features, functions and improvements when compared to the prior versions, including 32-bit architecture and Microsoft COM technology (most notably, this technology enables users to run multiple software applications within a single workspace). The Company's client software products, each of which operates in a Microsoft Windows environment, are marketed to individual and professional traders. The 2000I software is compatible with the following real-time Internet and broadcast financial market datafeeds: BMI (broadcast); DTN Real Time (broadcast); DTNstant (broadcast); eSignal (Internet); Hyperfeed (Internet and broadcast) and InSite (Internet). An agreement is also in place to add compatibility with FutureSource Information Systems, Inc.'s MDS network and stand-alone datafeeds (broadcast). In addition to being compatible with real-time datafeeds, the Company's 2000I software products are able to access and display end-of-day market data. Omega Research's principal client software products currently are: CURRENT OPERATING LIST PRODUCT VERSION SYSTEM PRICE - ------- ------- ------ ----- OMEGA RESEARCH PROSUITE 2000I Microsoft Windows $4,799 TRADESTATION 2000I Microsoft Windows $2,399 RADARSCREEN 2000I Microsoft Windows $2,399 OPTIONSTATION 2000I Microsoft Windows $2,399 SUPERCHARTS REAL-TIME 4.0 Microsoft Windows $1,199 SUPERCHARTS END-OF-DAY 4.0 Microsoft Windows $ 395 TRADESTATION 2000I. TRADESTATION has been the flagship product of the Company, serving as a platform for numerous third-party software solutions. TRADESTATION has been marketed to equities, futures and foreign currency traders. TRADESTATION empowers the trader to design and 5 develop custom trading strategies based upon the trader's objective rules and criteria, test the profitability of such trading strategies against historical data, and then computer-automate a chosen trading strategy to monitor the applicable market and alert the trader in real-time when the criteria of the trading strategy have been met and an order should, therefore, be placed. The principal features of TRADESTATION which enable the trader to design and develop custom trading strategies are EASYLANGUAGE and the POWEREDITOR. EASYLANGUAGE is a proprietary computer language developed by Omega Research consisting of English-like statements and trading terms which can be input by the trader to describe particular objective rules and criteria. The POWEREDITOR is a compiler of EASYLANGUAGE statements that provides the trader with considerable flexibility to modify and combine different trading rules and criteria which ultimately result in the design of the trader's custom trading strategies. The Company's TRADESTATION product has also been marketed worldwide to institutional traders on a monthly subscription basis by Telerate, Inc., a subsidiary of Bridge Information Systems, Inc. See "Strategic Relationships" below. RADARSCREEN 2000I. RADARSCREEN, a product officially released in February 1999, enables traders to scan up to hundreds or thousands (depending upon the data service and computer hardware used) of stocks or other securities to identify favorable buying and selling opportunities based upon their own trading strategies, which may be designed through the use of EASYLANGUAGE and the POWEREDITOR. The program also updates dynamically and ranks securities in real time based upon user-defined criteria and alerts the trader in real time when the strategies' criteria are met. OPTIONSTATION 2000I. OPTIONSTATION is an options trading analysis product for stock, index and futures options which enables traders, without requiring them to be options experts or mathematicians, to explore complex trading strategies. Specifically, OPTIONSTATION is designed to sort through all of the possible options positions on one or more securities and identify the most favorable risk-reward profile based upon user-defined assumptions. EASYLANGUAGE and the POWEREDITOR can be used with OPTIONSTATION to customize the user's options analyses. OPTIONSTATION is designed to perform two critical tasks of options trading--position search and position analysis. OPTIONSTATION's Position Search helps the trader find the best risk-reward profile based upon the trader's market assumptions. The OPTIONSTATION Position Analysis and OPTIONSTATION Position Chart features enable traders to design and customize options positions and then graphically view and analyze each position's profitability and risk. The program will alert the trader in real time when the trader's specified criteria have been met. OMEGA RESEARCH PROSUITE 2000I. OMEGA RESEARCH PROSUITE is the Company's premium client software product, as it includes, as an integrated suite, TRADESTATION 2000I, RADARSCREEN 2000I and OPTIONSTATION 2000I. Due to the utilization of Microsoft COM technology, all three programs (plus additional third party programs, such as, e.g., Microsoft Excel) may be viewed and utilized simultaneously within a single workspace. OMEGA RESEARCH PROSUITE is best suited to traders who are active in multiple markets and to traders who are seeking a full range of analysis tools. For example, a trader who uses OMEGA RESEARCH PROSUITE may use TRADESTATION to conduct analysis to determine the optimum time to buy or sell stocks or futures based upon his or her own trading strategies, then use RADARSCREEN to scan the markets to identify which stocks or futures he or she wants to buy or sell based upon such trading strategies, and then use OPTIONSTATION to determine whether, based upon his or her market assumptions, an option strategy may be preferable to trading the underlying securities. SUPERCHARTS. SUPERCHARTS is a technical analysis charting product available in both real-time and end-of-day versions. SUPERCHARTS has a built-in library of more than 80 popular technical 6 indicators and 15 drawing tools that highlight significant market patterns. SUPERCHARTS provides the trader with sophisticated charting and technical analysis capabilities, including the ability to draw trend lines, identify chart patterns and chart historical fundamental data. SUPERCHARTS can generate an alert on a real-time or end-of-day basis when a simple user-defined criterion occurs with respect to a specific security. SUPERCHARTS also contains certain trading strategy capabilities in order to introduce the less-experienced trader to such functions. EASYLANGUAGE is included to a limited degree in SUPERCHARTS. ADDITIONAL PRODUCTS AND SERVICES. The Company has offered additional products and services to support its client software sales, such as: HISTORYBANK.COM, the Company's historical financial market database and end-of-day financial market data service included free of charge with orders for 2000I products; OMEGAWORLD, the Company's annual trading strategy development conference; the STRATEGY TRADING AND DEVELOPMENT CLUB, a bi-monthly CD-ROM and accompanying booklet that describes and demonstrates sample trading strategies designed using EASYLANGUAGE; OMEGA RESEARCH MAGAZINE, a quarterly magazine about trading strategy development that has been distributed free of charge to the Company's customer base; and seminars, workshops and instructional videotapes (often offered free of charge) that have been used to enhance traders' abilities to use fully and effectively the Company's products. In February 2000, in connection with the Company's transition to its new business model, OMEGA RESEARCH MAGAZINE and the seminars, workshops and instructional videotapes were discontinued. WINDOW ON WALLSTREET LEGACY PRODUCTS. Window On WallStreet has, over the years, developed client software products and Internet-based products and services (including FDCN), all of which are being phased out in an orderly fashion. FDCN and certain features and functions of some of those other products and services have been, and will be, incorporated into WINDOWONWALLSTREET.COM and TRADESTATION.COM. In particular, FDCN is intended to serve as the backbone of the streaming real-time market data and news services that are and will be part of those products and services. NEW BUSINESS MODEL WINDOWONWALLSTREET.COM. On January 25, 2000, the Company launched WINDOWONWALLSTREET.COM. WINDOWONWALLSTREET.COM offers to its subscribers, on a monthly-subscription basis, browser-based streaming real-time charts, quotes and news presented and powered by some of the Company's award-winning trading tools. The features of WINDOWONWALLSTREET.COM include powerful analytical charting, Nasdaq Level II market maker data, time and sales data, quote lists, option chains, market leaders data, streaming news, Internet SmartSearch (a feature that enables the trader to access relevant Internet research services), live ticker, portfolio management, profit/loss tracking, discussion forum, and wireless access. The streaming real-time financial market data currently included are NYSE, Nasdaq, American Stock Exchange ("AMEX") and Options Price Reporting Authority ("OPRA"). The subscription price currently being offered is $79.95 per month. If the subscriber commits to a one-year subscription, and pays in advance, the price currently offered is $839.40 ($69.95 per month). All exchange fees payable to NYSE, Nasdaq, AMEX and OPRA for non-professional subscribers are included in the pricing (those currently total $5.00 per month), other than those payable to receive Nasdaq Level II data (which currently costs $50.00 per month). Exchange fees payable by professional subscribers are also not included in the above-described pricing. 7 TRADESTATION.COM. Later this year, the Company intends to launch TRADESTATION.COM, which is currently under development. The Company has targeted late Spring for the launch, but given the substantial development yet to be completed, the launch date may be later than currently expected. TRADESTATION.COM is planned to be an Internet-based monthly subscription service that will include substantially all of the features and functions of WINDOWONWALLSTREET.COM, including streaming real-time charts, quotes and news, plus the powerful trading strategy tools of TRADESTATION: tools that enable the development of custom trading strategies that may be historically tested and then automated to produce buy and sell signals in real time. TRADESTATION.COM's tools will likely also include the functions of RADARSCREEN. TRADESTATION.COM is also expected to include discussion forums, chat rooms, educational content and detailed technical support information that support the use of its trading strategy tools. Conceptually, TRADESTATION.COM is being designed as a web-based "portal" for the active on-line trader who wishes to develop, test and implement in real time objective trading strategies. The Company has not yet determined the monthly subscription price at which TRADESTATION.COM will be offered. Such decision is expected to be made shortly before its launch. Sometime following the launch of TRADESTATION.COM, the Company plans to launch OPTIONSTATION.COM, either as a separate trading platform for options traders or as premium service within TRADESTATION.COM. ONLINETRADING.COM'S ON-LINE BROKERAGE SERVICES. Assuming that the Merger Agreement is consummated (which, although no assurance can be given, is expected to occur in June of this year), the Company intends to integrate the TRADESTATION.COM platform with OnlineTrading.com's high-speed electronic order execution brokerage services. The planned benefit of such integration is that OnlineTrading.com's on-line brokerage customers will be able to utilize TRADESTATION.COM to develop real-time trading strategies and then electronically initiate execution of their buy and sell orders, including buy and sell orders that result from alerts generated in real time by TRADESTATION.COM. Those buy and sell orders would then be executed through OnlineTrading.com's high-speed electronic order execution system. The Company has not yet made a decision as to whether WINDOWONWALLSTREET.COM shall be usable in such fashion with OnlineTrading.com's order execution technology; however, it is currently intended that OPTIONSTATION.COM, if and when launched, will be so integrated. SALES AND MARKETING The Company has marketed its client software products using a combination of methods, including inbound telesales, the use of distributors, and, most recently, on-line sales through its web site. Marketing efforts in support of sales have included television advertising and print media, direct mail, advertising on the Company's web site, hundreds of sales seminars conducted annually throughout the United States (which were discontinued in February 2000 in connection with the Company's transition to its new business model), and establishment of marketing and other relationships with data vendors, on-line brokerages and software and service solution providers. In connection with the Company's transition to its new business model, its marketing methods, and the mix of such methods, is expected to change significantly. For example, those relationships, as related to the new business model, with data vendors and on-line brokerages (companies that the Company is now or soon will be competing with) will likely no longer be desirable or available, and the mix of television, print, web site, direct mail and in-person marketing methods will be determined and continually modified as the Company tests such methods and mixtures and analyzes and interprets the results. 8 In February 1999, the Company launched a redesigned and expanded web site. In addition to enabling on-line ordering and payment for virtually all 1999 products and services, the new web site included the following features: on-line registration for Company conferences and on-line subscriptions to Company newsletters; expanded free access to downloadable technical files, indicators and studies; on-line search functions that enable users to find Omega Research product distributors and user groups by geographic area; an expanded industry events section; on-line search capabilities for locating Omega Research Solution Providers (as described below in "Strategic Relationships - Omega Research Solution Provider Network"); on-line search capabilities that allow users to find answers to technical issues by having access to the Company's technical assistance knowledge base; and comprehensive information about the Company's products and services. The web site will be substantially redesigned, and new web sites will be created (as, for example, a new web site was created for WINDOWONWALLSTREET.COM) in connection with the Company's planned offering of TRADESTATION.COM and OPTIONSTATION.COM, as well as in connection with the anticipated merger with OnlineTrading.com. The majority of the Company's direct sales for its client software products has been generated by telesales. The telesales process has consisted of the generation of leads through media and direct mail advertising, delivery of product information to prospective purchasers, and follow-up calls to the recipients of the product information to attempt to complete the sale. The size of this sales force was substantially reduced in February 2000 in connection with the Company's transition to its new business model. In the first quarter of 1999, the Company implemented a new system of customer tracking and management at its corporate headquarters to improve its lead management capability, enhance its customer satisfaction through increased responsiveness and to improve its ability to market additional products to existing customers. This system will need to be substantially modified, and/or integrated with additional systems that will need to be obtained or designed and implemented, in connection with the Company's transition to its new business model. The Company has advertised its 2000I products on a regular basis on the CNBC television network, and to a much lesser extent on certain local television and radio stations. The Company has advertised its 2000I products in publications popular with traders such as INVESTORS BUSINESS DAILY and TECHNICAL ANALYSIS OF STOCKS & COMMODITIES. The Company has also undertaken periodic promotional mailings to its customer base, as well as to mailing lists obtained by the Company by license from, or agreement with, third parties. Such promotional mailings have included flyers, brochures, videotapes, books or demo CDs. 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 revenues were derived from customers outside of the United States for the years ended December 31, 1999, 1998 and 1997. International sales are made in U.S. dollars. STRATEGIC RELATIONSHIPS Omega Research has over the years established strategic marketing and other strategic partner relationships with data vendors, software and service solution providers, on-line brokerages and other relevant third parties with respect to its client software products. In light of the Company's transition to its new business model, the number and significance of the Company's strategic 9 relationships, as they relate to the Company's client software products, will substantially decrease. With respect to the Company's new business model, those types of relationships with data vendors and on-line brokerages are expected to be undesirable and unavailable. However, the Company's solution provider network (discussed below) should be able to use TRADESTATION.COM as a platform. BRIDGE TELERATE AGREEMENT. In August 1994, the Company entered into a Software License, Maintenance and Development Agreement (the "Bridge Telerate Agreement") with Dow Jones Markets, Inc. (now known as Telerate, Inc. and a subsidiary of Bridge Information Systems, Inc.), under which Omega Research licenses to Telerate, Inc. ("Bridge Telerate") the right to market and distribute TRADESTATION to its data subscribers worldwide, who are primarily institutional investors. In 1999, the Company and Bridge Telerate completed development of technical compatibility between TRADESTATION 2000I and the Bridgefeed technology on which the Bridge Telerate datafeeds currently run. The Bridge Telerate Agreement expires in January 2002. The Bridge Telerate Agreement requires Bridge Telerate to use commercially reasonable efforts to market TRADESTATION, to market the product under a name including "TRADESTATION," and to pay to Omega Research a per-subscription royalty, subject to minimum annual royalties which escalate each year of the agreement. The Company has no technical support obligation under the agreement to the customers of Bridge Telerate, but is obligated to provide limited technical support to Bridge Telerate managers. During the term of the Bridge Telerate Agreement, Omega Research is not permitted to enter into a similar licensing arrangement regarding TRADESTATION with five enumerated competitors of Bridge Telerate. Bridge Telerate is not prohibited by the agreement from offering to its data service subscribers its own or another company's trading strategy software. MARKET DATA SERVICES. The real-time market data included in WINDOWONWALLSTREET.COM is, and the real-time market data to be included in TRADESTATION.COM will be, licensed from S&P ComStock, Inc. A portion of the technology used to deliver real-time market data services is licensed from a third-party development company. A significant portion of the computer hardware and software used by the Company to provide market data services is located at facilities leased to the Company by Verio Inc. located in Dallas, Texas. CROSS-MARKETING AGREEMENTS. The Company currently has written agreements with other data vendors, each of which contains provisions for the maintenance of technical compatibility between one or more of the Company's client software products and the data vendors' data services. OMEGA RESEARCH SOLUTION PROVIDER NETWORK. The Company developed its principal client software products as "platform applications," unique and valuable software applications that also serve as platforms for third-party solutions which add value to the products (collectively, the "Omega Research Platform"). The Omega Research Platform was designed to be open and extendible, encouraging the development of as many complementary third-party solutions as possible. To date, more than 150 independent software developers ("Omega Research Solution Providers") have developed specific trading strategies or other trading applications for the Omega Research Platform. This is attributable chiefly to EASYLANGUAGE, the Company's proprietary computer language comprised of English-like statements and trading terms that can be used by traders and third-party developers to describe their own trading rules and criteria. The Company expects that TRADESTATION.COM shall also serve as a platform for solution providers. 10 PRODUCT DEVELOPMENT AND YEAR 2000 COMPLIANCE The Company believes that its future success depends in large part on its ability to transfer and implement, on a high-quality, efficient and user-friendly basis, the functions and features of its 2000I line of products to Internet, browser-based platforms, and to integrate those platforms with the FDCN'S steaming real-time market data and news and with state-of-the-art on-line order execution technology, and to develop and implement well-designed and user-friendly web sites. To date, the Company has relied primarily on internal development of its products and services, but is currently relying or will or may rely to some extent on licenses from third parties with respect to market data services technology and order execution technology (assuming the merger with OnlineTrading.com closes). The Company performs all quality assurance and develops documentation and other training materials internally. In 1999, 1998 and 1997, product development expenses were approximately $5.1 million, $4.0 million and $2.4 million, respectively. The Company may, in the near future, explore acquisitions of, or strategic or other relationships with, quality software development companies as a means of expanding its product development resources. The Company and OnlineTrading.com are currently working together (with the assistance of a third-party development company) on the development of proprietary order routing and execution technology that the Company intends to use in its new business model. The Company also intends to continue to improve the speed and efficiency of its 2000I line of products. As of December 31, 1999, the Company's product development team was comprised of 72 persons, as compared to 54 as of December 31, 1998, a 33% increase. That number of persons was 82 as of March 8, 2000, a 14% increase from December 31, 1999. The Company views its product development cycle (with respect to both client software and its new business model) as a four-step process to achieve technical feasibility. The first step is to conceptualize in detail the defining features and functions that the targeted trader group requires from the product or service, and to undertake a cost-benefit analysis to determine the proper scope and integration of such features and functions. Once the functional requirements of the product or service have been determined, the second step is to technically design the product or service. The third step is the detailed implementation, or engineering, of this technical design. The fourth step is rigorous quality assurance testing to ensure that the final product or service generally meets the functional requirements determined in the first step. Several refinements are typically added in the quality assurance phase of development. Once this process is completed, technological feasibility has been achieved and the working model is available for final testing. The market for trading strategy tools, streaming real-time data and news services, and on-line order execution services is characterized by rapidly changing technology, evolving industry standards in computer hardware, programming tools and languages, operating systems, database technology and information delivery systems, changes in customer requirements and frequent new product and service introductions and enhancements. The Company's future success will depend upon its ability to develop and maintain competitive technologies and to develop and introduce its new products and services in a timely and cost-effective manner that meets changing conditions such as evolving customer needs, existing and new competitive product and service offerings, emerging industry standards and changing technology. There can be no assurance that the Company will be able to develop and market, on a timely basis, if at all, new products and services that fulfill the objectives of the Company's new business model, respond to changing market conditions or that will be accepted by customers. Any failure by the Company to anticipate or to respond quickly to changing market conditions, or any significant delays in the development and implementation of the Company's new business model and/or introduction of new products and services and/or 11 enhancements, could cause customers to delay or decide against purchases of the Company's products and services and would have a material adverse effect on the Company's business, financial condition and results of operations. Omega Research's most recent versions of its client software products, TRADESTATION 2000I, RADARSCREEN 2000I, OPTIONSTATION 2000I and OMEGA RESEARCH PROSUITE 2000I are Year 2000 compliant in all material respects. WINDOWONWALLSTREET.COM is also Year 2000 compliant in all material respects, as are Window On WallStreet's 6.5, 7.0 and 7.5 versions of Internet Trader, Internet Trader Deluxe, Internet Trader Pro, Day Trader and Professional Investor. With respect to the shipping versions of Omega Research's client software products immediately prior to the 2000I line, TRADESTATION 4, OPTIONSTATION 1.2, TRADESTATION PROSUITE 4 and SUPERCHARTS 4, Omega Research offered, in June 1999, to all registered customers in good-payment standing of those versions, as a courtesy, an appropriate solution to those products' Year 2000 compliance issues. No versions prior to version 6.0 of any Window On WallStreet product, all of which are discontinued products, are Year 2000 compliant. With respect to the 5.0 shipping versions of those discontinued client software products, Window On WallStreet offered, in December 1999, to all registered customers of version 5.0 products in good-payment standing, as a courtesy, a free upgrade to a Year 2000 compliant Window On WallStreet product. The Company did not incur any material expenditures specifically to provide Year 2000 solutions for its products. During 1999, the Company utilized internal resources having an approximate aggregate value of under $200,000 to provide all requisite Year 2000 solutions. There have not been, and will not be, any Year 2000 modifications or solutions for any versions of the Company's products introduced prior to those versions specifically mentioned above, or for any other products not specifically named above, or any other discontinued products. CUSTOMER SUPPORT AND TRAINING The Company provides customer support and product-use training in the following ways: CUSTOMER SUPPORT. The Company provides technical support to its customers by telephone, electronic mail and fax. The majority of these services are provided during the first sixty days of ownership of a Company client software product and the related costs associated with such support are accrued at the date of sale. With respect to monthly subscription services, technical support is provided as a courtesy to subscribers during the subscription period. The Company also provides a substantial amount of technical support information on its web sites. PRODUCT-USE TRAINING. The Company considers product-use and service-use training important to try to ensure that its customers develop the ability to use its products and services as fully and effectively as is possible. The majority of the Company's training materials consist of extensive on-line documentation and technical assistance information on its web sites. 12 COMPETITION The markets for (i) on-line brokerage services, (ii) client software and Internet-based trading 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 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. The Company faces and will face direct competition from several publicly-traded and privately-held companies with respect to its new business model, principally (i) on-line brokerages and (ii) data vendors with Internet-based subscription services. The Company's on-line brokerage competitors include the approximately 160 on-line brokerages currently active in the United States, including, but not limited to, A.B. Watley, Inc., Ameritrade, Inc., Charles Schwab & Co., Inc. (including CyberCorp., an on-line broker with an active trader customer base which is in the process of being acquired by Charles Schwab & Co., Inc.), Datek Online Holdings Corporation, Discover Brokerage Direct, Inc., DLJdirect, E*Trade Group, Inc., Fidelity Brokerage Services, Inc., National Discount Brokers, Quick & Reilly, Inc., SURETRADE, Inc., TRADESCAPE.com Inc. and Waterhouse Securities, Inc. Those brokers currently serve, in the aggregate, more than 92% of existing on-line accounts, and many are focusing on attracting more active traders to use their services. The Company's principal data vendor competitors include, but are not limited to, Bridge Information Systems, Inc. (Bridge Channel, Telerate Channel), Data Broadcasting Corporation (eSignal), Data Transmission Network Corporation (DTN.IQ and InterQuote), Hyperfeed Technologies, Inc. (Hyperfeed), Quote.com, Inc. (Quote.com), S&P ComStock, Inc. (ComStock on the Net and MyComStock.com), Telescan, Inc. (Wall Street City) and Track Data Corporation (MyTrack). The Company's competitors in the trading tools industry include, but are not limited to, Equis International, Inc. (a subsidiary of Reuters Group PLC) and each of the data vendors and on-line brokers listed above (all of whom develop, are in the process of developing or seek to develop or otherwise obtain, trading tools as value-added front ends for their data services and/or value-added tools for their brokerage services). The Company also will compete with trading tools and data services on the Internet that are available for free, and believes that trading tools and data services that are available on the Internet either for free or at modest prices will increase in sophistication over time. There can be no assurance that the Company will be able to compete effectively with its competitors, adequately educate potential customers as to the benefits that the Company's products and services provide, or continue to offer such products and services. Many of the Company's existing and potential competitors, which include (i) large, established software or Internet companies that do not currently focus on trading tools/market data services, (ii) large discount and traditional national brokerages that are focusing more closely on on-line services, trading tools and real-time market data for active traders, and (iii) data vendors that are adding on-line brokerages (such as Track Data Corporation) and/or increasing the sophistication of their trading tools, have longer operating histories, significantly greater financial, technical and 13 marketing resources, greater name recognition and a larger installed customer base than has the Company. The Company can, against such forces, be considered to have virtually no prior operating experience given its recent decision to shift to its new business model, especially given that the Company has not completed its pending merger with OnlineTrading.com and no assurance can be given that such completion will occur. One or more of these competitors may be able to respond more quickly to new or emerging technologies or changes in customer requirements or to devote greater resources to the development, promotion and sale of their products and services than may the Company. There can be no assurance that the Company's existing or potential competitors will not develop products and services comparable or superior to those developed by the Company or adapt more quickly than the Company to new technologies, evolving industry trends or changing customer requirements, or that the Company will be able to timely and adequately complete the implementation of its new business model (in particular, consummation of its pending merger with OnlineTrading.com), and integrate, implement and offer products and services competitive with those of its competitors. Increased competition could result in price reductions, reduced margins, failure to obtain any significant market share, or loss of market share, any of which could materially adversely affect the Company's business, results of operations and financial condition. There can be no assurance that the Company will be able to compete successfully against current or future competitors, or that competitive pressures faced by the Company will not have a material adverse effect on its business, financial condition and results of operations. INTELLECTUAL PROPERTY The Company's success is and will be heavily dependent on its proprietary technology, including Internet, web site and order execution technology currently in development. The Company views its software 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 establish and protect its proprietary rights. The Company has no material patents or patents pending, and has not to date registered any of its copyrights. The Company has obtained registrations in the United States and Canada for the trademarks TRADESTATION and OPTIONSTATION, and registrations in the United States for the trademarks SUPERCHARTS, PROSUITE, EASYLANGUAGE and POWEREDITOR, and for the service mark OMEGAWORLD. The Company uses a "click-wrap" license on its web site (for on-line orders of client software products), and in its client software products (for other types of sales), and uses and plans to continue to use a subscription agreement for its Internet-based subscription services, each directed to users of those products and services, in order to protect its copyrights and trade secrets and to prevent such users from commercially exploiting such copyrights and trade secrets for their own gain. Since these licenses are not physically signed by the licensees, many authorities believe that they may not be enforceable under many state laws and the laws of many foreign jurisdictions. The laws of Florida, which such licenses purport to make the governing law, are unclear on this subject. Despite the Company's efforts to protect its proprietary rights, unauthorized parties copy or otherwise obtain, use or exploit the Company's products or technology independently. Policing unauthorized use of the Company's products is difficult, and the Company is unable to determine the extent to which piracy of its software products exists. Piracy can be expected to be a persistent problem, particularly in international markets and as a result of the growing use of the Internet (including the Company's substantially increasing use of the Internet in connection with its transition to its new business model). In addition, effective protection of intellectual property rights may be unavailable or limited in certain countries, including some in which the Company may attempt to expand its sales efforts. There can be no assurance that the steps taken by the Company to protect 14 its proprietary rights will be adequate or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies or products. There has been substantial litigation in the software industry involving intellectual property rights. The Company does not believe that it is infringing, or that the technology in development will infringe, the intellectual property rights of others. The risk of infringement by 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. There can be no assurance that infringement claims would not have a material adverse effect on the Company's business, financial condition and results of operations. In addition, to the extent that the Company acquires or licenses a portion of the software or data included in its products or services from third parties (all data is licensed from third parties), or markets products licensed from others generally, its exposure to infringement actions may increase because the Company must rely upon such third parties for information as to the origin and ownership of such acquired or licensed software or data. In the future, litigation may be necessary to establish, enforce and protect trade secrets, copyrights, trademarks and other intellectual property rights of the Company. The Company may also be subject to litigation to defend against claimed infringement of the rights of others or to determine the scope and validity of the intellectual property rights of others. Any such litigation could be costly and divert management's attention, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in such litigation could result in the loss of proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties, which could be expensive, or prevent the Company from selling its products or services or using its trademarks, any one of which could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION If and when the Company completes its pending merger with OnlineTrading.com, OnlineTrading.com, which will then be a wholly-owned subsidiary of OnlineTrading.com Group, shall be (as it currently is) subject to extensive securities industry regulation under both federal and state laws. Broker-dealers are subject to regulations covering all aspects of the securities business, including: sales methods; trade practices among broker-dealers; use and safe-keeping of customers' funds and securities; arrangements with clearing houses; capital structure; record keeping; conduct of directors, officers and employees; and supervision. To the extent OnlineTrading.com solicits orders from customers or makes investment recommendations, it is subject to additional rules and regulations governing, among other things, sales practices and the suitability of recommendations to its customers. Neither OnlineTrading.com Group, nor Omega Research, is expected to be a broker or dealer. OnlineTrading.com's mode of operation and profitability may be directly affected by: additional legislation; changes in rules promulgated by the Securities and Exchange Commission ("SEC"), the National Association of Securities Dealers ("NASD"), the Board of Governors of the Federal Reserve System, the various stock exchanges and other self-regulatory organizations; and changes in the interpretation or enforcement of existing rules and laws. The SEC, the NASD or other self-regulatory organizations and state securities commissions can censure, fine, issue cease-and-desist orders, enjoin or suspend or expel a broker-dealer or any of its officers or employees. 15 Marketing campaigns by OnlineTrading.com to bring brand name recognition to it and to promote the benefit of its services, such as the anticipated TradeStation.com trading platform and its high-speed electronic order execution, are regulated by the NASD, and all marketing materials must be reviewed by an appropriately-licensed OnlineTrading.com principal prior to release, and must conform to standards articulated by the SEC and NASD. The NASD may request that revisions be made to marketing materials, and can impose certain penalties for violations of its advertising regulations, including censures or fines, suspension of all advertising, the issuance of cease-and-desist orders, and the suspension or expulsion of a broker-dealer or any of its officers or employees. 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. It is possible that other federal or state agencies will attempt to regulate OnlineTrading.com's current and planned on-line and other electronic activities with rules that may include compliance requirements relating to record keeping, data processing, other operation methods, privacy, and pricing, content and quality of goods and services as the market for on-line commerce evolves. Because of the growth in the electronic commerce market, Congress had held hearings on whether to regulate providers of services and transactions in the electronic commerce market. As a result, federal or state authorities could enact laws, rules or regulations, not only with respect to on-line brokerage services, but other on-line services the Company provides and plans to provide. Such laws, rules and regulations, if and when enacted, could have a material adverse effect on the Company's business, financial condition, results of operations and prospects. EMPLOYEES As of December 31, 1999, the Company had 282 full-time equivalent employees consisting of 72 in product development (including software engineering, product management, documentation and quality assurance), 173 in sales and marketing (including sales, marketing, customer support and order fulfillment), and 37 in general administration (including executive management, finance, information technology services and administration). The Company's employees are not represented by any collective bargaining organization, and the Company has never experienced a work stoppage and considers its relations with its employees to be good. The Company's future success depends, in significant part, upon the continued service of its key senior management, technical and sales and marketing personnel. The loss of the services of one or more of these key employees, including William R. Cruz or Ralph L. Cruz, the Company's Co-Chief Executive Officers, or of certain key technology personnel, could have a material adverse effect on the Company. There can be no assurance that the Company will be able to retain its key personnel. Departures and additions of personnel, to the extent disruptive, could have a material adverse effect on the Company's business, financial condition and results of operations. 16 ITEM 2. PROPERTIES. The Company's corporate headquarters are located in Miami, Florida, in a leased facility originally consisting of approximately 17,300 square feet of office space under a lease which commenced in February 1997 and which expires in August 2002. The Company has entered into a sublease and two lease amendments with respect to its corporate headquarters which, taken together, had the effect of significantly expanding these facilities to approximately 60,500 square feet of office space. The Company recently opened a leased facility in Boca Raton, Florida, consisting of approximately 6,000 square feet of space to be used for additional product development and data services operations. That lease expires January 1, 2005, and has a five-year renewal option. The Company acquired an approximate 13,500 square foot leased facility in Richardson, Texas in connection with the Window On WallStreet acquisition, at which most Window On WallStreet employees are based and at which certain data services development and technical operations are based. That lease expires July 31, 2002, and has a three-year renewal option. The Company also leases warehouse space south of Miami, Florida consisting of approximately 4,800 square feet, which is used for fulfillment of orders. The warehouse lease is on a month to month term. The Company's corporate headquarters contain all of the Company's facilities except for data services, a portion of product development, and fulfillment. The Company believes that its existing facilities are adequate to support its existing operations and that, if needed, it will be able to obtain suitable additional facilities on commercially reasonable terms. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 1999. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. COMMON STOCK INFORMATION The Company's Common Stock, par value $.01 per share ("Common Stock"), is quoted under the symbol "OMGA" on The Nasdaq Stock Market (Nasdaq National Market). The Company completed an initial public offering pursuant to a Registration Statement that was declared effective on September 30, 1997. Prior to the initial public offering, the Company's Common Stock was not listed or traded on any organized market system. The high and low closing sales prices based on actual transactions for the Company's Common Stock on The Nasdaq Stock Market during each of the quarters presented are as follows: High Low ------------- ------------ Closing Sales Price ------------------------------- 1998: First Quarter...................... $ 5 3/8 $ 2 3/4 Second Quarter..................... 6 3 5/8 Third Quarter...................... 4 5/8 2 1/8 Fourth Quarter..................... 3 1 3/16 1999: First Quarter...................... 14 5/16 2 15/16 Second Quarter..................... 12 7/8 8 Third Quarter...................... 12 7/16 3 7/8 Fourth Quarter..................... 10 3 13/16 As of March 8, 2000, there were 52 holders of record of the Common Stock, and, based upon information previously provided to the Company by depositories and brokers, the Company believes it has in excess of 3,900 beneficial owners. DIVIDEND POLICY The Company currently expects operating losses for at least the next several quarters and intends to retain any future earnings to finance its growth and development and therefore does not anticipate paying any cash dividends in the foreseeable future. Payment of any future dividends will depend upon the future earnings and capital requirements of the Company and other factors which the Board of Directors considers appropriate. The Company did not distribute any dividends during the year ended December 31, 1999 or 1998. During 1997, the Company distributed cash dividends in the aggregate amount of $16.5 million (including the Dividend described in the following paragraph which was paid immediately prior to the consummation of the Company's initial public offering) to the then current shareholders of the Company. Additionally, during the second quarter of 1997, the Company declared a dividend to the then current shareholders of the Company, William 18 R. Cruz and Ralph L. Cruz, of the Company's former office facilities. The carrying value of the facility on the Company's books was approximately $507,000. The Company's Board of Directors declared and paid a dividend of $15.4 million to the Company's then existing shareholders (the "Dividend") immediately prior to the consummation of the Company's initial public offering. The Dividend was equal to the Company's estimate at that time of its cumulative taxable income prior to its conversion to a C corporation to the extent such taxable income had not been previously distributed. Subsequent to the payment of the Dividend, the Company preliminarily determined that the actual cumulative taxable income would be less than was originally estimated. Accordingly, in the fourth quarter of 1997, the recipients of the Dividend repaid $800,000, plus interest, to the Company. During the third quarter of 1998, upon finalization of the Company's 1997 tax returns and final determination of S corporation earnings at the date of the conversion to a C corporation, the recipients of the Dividend repaid an additional $135,000, plus interest, to the Company, reducing the Dividend to $14.5 million. See Note 7 of Notes to Consolidated Financial Statements. RECENT SALES OF UNREGISTERED SECURITIES In connection with the October 26, 1999 merger with Window On WallStreet, the Company issued 1,999,995 unregistered shares (the "WOW Shares") of the Company's Common Stock to the nine former shareholders of Window On WallStreet in exchange for the cancellation of all of the outstanding shares of capital stock of Window On WallStreet. The WOW Shares, post merger, represented approximately 8.2% of the then outstanding Common Stock of Omega Research. In addition, the Company assumed all outstanding stock options to purchase Window On WallStreet common stock which, based on an exchange ratio of 0.210974 shares of Omega Research Common Stock for each share of Window On WallStreet common stock, were exercisable at the time of assumption for an aggregate of 182,529 shares of Omega Research Common Stock (82,783 shares at an exercise price of $.48 per share, and 99,746 shares at an exercise price of $8.06 per share). The Window On WallStreet options generally vest ratably over four years and have a term of ten years. See "ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - (b) Current Reports on Form 8-K." During the fourth quarter of 1999, the Company granted options to purchase an aggregate of 412,125 shares of Common Stock pursuant to the Company's Amended and Restated 1996 Incentive Stock Plan (the "Incentive Plan"). Nearly all such options vest ratably over a five-year period and are exercisable at prices ranging from $4.22 to $8.44 per share, which was the fair market value of the Company's Common Stock on the respective dates on which the options were granted. The options expire, if they remain unexercised, on the tenth anniversary of the date on which they were granted. All the foregoing shares of the Company's Common Stock and options were issued or granted (as the case may be) by the Company in reliance upon the exemption from registration available under Section 4(2) of the Securities Act. Other than as described above, the Company did not issue or sell any unregistered securities during the fourth quarter of 1999. USE OF PROCEEDS The Company's initial public offering was effected pursuant to a Registration Statement on Form S-1 (File No. 333-32077) which was declared effective by the Securities and Exchange Commission on September 30, 1997. 19 For a description of the Company's use of proceeds from such offering through September 30, 1999, see Item 2(d) of Part II of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997. During the fourth quarter of 1999, the Company used a portion of such proceeds to repay outstanding debt of Window On WallStreet of approximately $4.1 million, fund operations with approximately $3.0 million, including $1.0 million paid for acquisition costs with respect to the Window On WallStreet acquisition, and used $530,000 for capital expenditures. The balance of the net offering proceeds (the portion that has not been used) of approximately $3.9 million continues to be temporarily invested in short-term, interest bearing instruments pending the use by the Company for working capital and other general corporate purposes. 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-23 of this report, which have been audited by Arthur Andersen LLP. The Consolidated Balance Sheet Data as of December 31, 1997 have 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 12 of Notes to Consolidated Financial Statements for quarterly financial information for fiscal years 1999 and 1998.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (In thousands, except per share data) (1) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues: Licensing fees.................................... $ 33,768 $ 25,057 $ 27,729 $ 15,994 $ 9,404 Other revenues.................................... 9,102 6,654 5,221 4,118 1,595 --------- --------- --------- --------- --------- Total net revenues........................... 42,870 31,711 32,950 20,112 10,999 Total operating expenses............................. 40,745 30,616 24,727 13,616 7,731 --------- --------- --------- --------- --------- Income from operations....................... 2,125 1,095 8,223 6,496 3,268 --------- --------- --------- --------- --------- Pro forma net (loss) income (2)...................... $ (967) $ (429) $ 4,665 $ 3,690 $ 1,980 ========= ========= ========= ========= ========= Pro forma (loss) earnings per share: (2)............. Basic............................................. $ (0.04) $ (0.02) $ 0.21 $ 0.18 $ 0.09 Diluted........................................... $ (0.04) $ (0.02) $ 0.21 $ 0.17 $ 0.09 Weighted average shares outstanding: Basic............................................. 24,294 23,914 21,829 20,886 20,934 Diluted........................................... 24,294 23,914 22,620 22,033 22,018
20
DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (In thousands) (1) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents..............................$ 2,176 $ 7,650 $ 12,827 $ 1,097 $ 364 Marketable securities.................................. 1,695 5,737 1,015 - - Working capital........................................ 22,390 24,928 24,983 5,051 2,154 Total assets........................................... 31,380 30,774 29,153 7,571 3,747 Long term debt......................................... - 2,641 2,365 2,167 - Shareholders' equity .................................. 25,475 24,495 24,017 4,304 3,200 - ------------------ (1) Amounts have been restated to reflect the acquisition of Window On WallStreet, which was accounted for under the pooling-of-interests method. See Note 2 of Notes to Consolidated Financial Statements. (2) 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 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 through the year 2000. These anticipated losses could reduce 21 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. 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 revenue from the Company's FINANCIAL DATA CAST NETWORK ("FDCN") subscription service. Licensing fees are recognized upon product shipment in accordance with Statement of Position ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION. See Note 1 of Notes to Consolidated Financial Statements. While the Company has no obligation to perform future services subsequent to shipment of client software, the Company voluntarily provides telephone, electronic mail and fax customer support to purchasers of its products. The Company currently does not charge a fee for the use of customer support. The costs associated with these services are insignificant in relation to product value. On February 22, 1999, the Company 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." 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 Company's Consolidated Financial Statements have been restated to reflect the acquisition of Window On WallStreet, which was accounted for as a pooling-of-interests. 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 later this year. On January 19, 2000, the Company signed a definitive, 100% share-exchange merger agreement with OnlineTrading.com, a direct access on-line broker. That merger is also 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." 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. 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 12 months. The Company has offered a 16-month payment term for OMEGA RESEARCH PROSUITE 2000I sales. That payment plan results in deferred revenues with respect to the amounts 22 not due within twelve months from the date of sale. The concentration of the Company's revenue, prior to the consummation of the merger with OnlineTrading.com, is expected to 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 and it is difficult to predict when, if at all, or to what extent, the Company's Internet subscription services will offset such reductions. The 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, the Company's Internet subscription service revenues 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. The Company provides client software customers with a 30-day right of return and, as a result, records a provision for estimated returns at the time of sale. Depending on the circumstances, the Company has often allowed customers to return client software after the 30-day period. The reserve for returns and the provision for bad debts, in accordance with generally accepted accounting principles, are estimated based on historical experience and other relevant factors and there is no certainty that future returns or bad debts will not exceed established estimates. Due to expanded marketing and sales efforts including television advertising and free audiotape or book offers, and an increased awareness of trading, the Company has reached a broader audience that includes more individuals who may not necessarily be suited to use the Company's products. Consequently, the Company's rate of returns and provision for bad debts have increased over the last three years, particularly in the last of those years. There can be no assurance that this trend will not continue, particularly in light of the Company's recent decision to transition its business from a client software company to an on-line brokerage firm and provider of subscription-based services. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, ACCOUNTING FOR THE COST OF CAPITALIZED SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, the Company examines its software development costs after technological feasibility has been established to determine the amount of capitalization that is required. Based on the Company's product development process, technological feasibility is established upon completion of a working model. The costs that are capitalized are amortized on the straight-line basis over a one-year period, the period of benefit of the related products. There were no capitalized software development costs as of December 31, 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. 23 In 1988, the Company elected to be taxed under Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"), and, as a result, the Company's earnings prior to September 30, 1997 (the effective date of the Company's initial public offering) were taxed at the federal level directly to the Company's shareholders (the State of Florida does not have a personal income tax). Effective September 30, 1997, the Company terminated its S corporation election and became subject to corporate-level federal and state income taxes. As a result of terminating this election, the Company was required to record a non-recurring credit (the "SFAS No. 109 Credit"). The SFAS No. 109 Credit represents the recognition of net deferred tax assets arising from the book and tax basis differences that arise primarily as a result of accounts receivable reserves. The SFAS No. 109 Credit, net of a $1.8 million provision for income taxes payable, was approximately $1.2 million as of September 30, 1997, the date the S corporation election was terminated. See "Income Taxes" below. The pro forma income tax adjustments for the 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 following table presents, for the periods indicated, certain items in the Company's statement of operations reflected as a percentage of total net revenues: YEAR ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ----- ----- ----- Net Revenues: Licensing fees .................... 78.8% 79.0% 84.2% Other net revenues ................ 21.2 21.0 15.8 ----- ----- ----- Total net revenues .......... 100.0 100.0 100.0 ----- ----- ----- Operating expenses: Cost of licensing fees and services 6.9% 7.9% 8.2% Product development ............... 12.0 12.6 7.1 Sales and marketing ............... 44.3 49.1 37.1 General and administrative ........ 29.0 26.9 22.7 Acquisition costs ................. 2.8 -- -- ----- ----- ----- Total operating expenses .... 95.0 96.5 75.1 Income from operations ................. 5.0% 3.5% 24.9% ===== ===== ===== 24 YEARS ENDED DECEMBER 31, 1999 AND 1998 NET REVENUES TOTAL NET REVENUES. The Company's total net revenues increased 35% from $31.7 million in 1998 to $42.9 million in 1999. LICENSING FEES. Licensing fees increased 35% from $25.1 million in 1998 to $33.8 in 1999, primarily due to an increase in net revenues resulting from the release, on February 22, 1999, of the Company's 2000I line of client software products. As a result of the Company's recent announcement regarding the acceleration of its Internet subscription services, it is expected that in the short term the level of licensing fees will decrease as the Company focuses on building a subscriber base from its Internet subscription services. The Company has provided what it believes are appropriate provisions for returns, in light of its 30-day right of return policy, but no assurance can be given that the rate of returns will not increase beyond the reserved levels, particularly due to the Company's announcements regarding its new business model. OTHER REVENUES. Other revenues increased 37% from $6.7 million in 1998 to $9.1 million in 1999, primarily due to increases in data service revenues associated with FDCN, the Company's real-time market data subscription service, and, to a lesser extent, an increase in minimum royalties under the Company's license agreement with Bridge Telerate, as well as revenues generated from OMEGAWORLD, the Company's annual conference for users of Omega Research products. OPERATING EXPENSES COST OF LICENSING FEES AND SERVICES. Cost of licensing fees and services consisted primarily of costs related to data redistribution, product media, packaging and storage and inventory costs. Cost of licensing fees and services was approximately $3.0 million in 1999 as compared to $2.5 million in 1998. Cost of licensing fees and services as a percentage of total net revenues decreased from 8% in 1998 to 7% in 1999, primarily due to a shift in product mix to higher-priced products during 1999 as well as 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, offset by decreased margins for the FDCN subscription services. 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 $4.0 million in 1998 to $5.1 million in 1999 primarily due to an increase in the number of individuals employed in product development. Product development expenses as a percentage of total net revenues decreased from 13% in 1998 to 12% in 1999, primarily due to a higher rate of growth in net revenues compared to the increase in personnel and related expenses. 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. SALES AND MARKETING. Sales and marketing expenses have consisted primarily of marketing programs, including advertising, brochures, direct mail programs and seminars to promote the 25 Company's client software products to investors, sales commissions, salaries for the customer support center and marketing personnel, other personnel costs, web site design and administration costs, and shipping expenses. Sales and marketing expenses were $19.0 million in 1999 compared to $15.6 million in 1998, primarily due to increased marketing and sales personnel, increased commissions resulting from higher net revenues, increased travel expenses and increased costs related to OMEGAWORLD. Sales and marketing expenses as a percentage of total net revenues decreased from 49% in 1998 to 44% in 1999 primarily due to a higher rate of growth in net revenues compared to the increase in personnel and related expenses. The Company expects sales and marketing expenses to increase significantly in the near term, as the Company redirects its resources towards marketing Internet subscription services and the other components of its new business model. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of provision for bad debt, employee-related costs for administrative personnel such as executive, human resources, finance and information technology employees, as well as professional fees, rent and other facilities expense. General and administrative expenses were $12.4 million in 1999 compared to $8.5 million in 1998 primarily as a result of an increase in bad debt expense, and, to a lesser extent, an increase in personnel and related costs as well as facility expenses, partially offset by decreased consulting and professional expenses as a result of the favorable settlement of the class action law suit brought against the Company in 1998. General and administrative expenses as a percentage of total net revenues increased from 27% in 1998 to 29% in 1999, primarily as a result of the increase in the provision for bad debt. The Company believes that the absolute dollar amount of its general and administrative expenses in the future will depend, to a large extent, on the level of provision required for bad debt, the level of hiring of additional personnel to support the expected growth of the Company and the Company's change in its business model. ACQUISITION COSTS. Acquisition expenses of $1.2 million were recognized in the fourth quarter of fiscal year 1999 for transaction costs associated with the Window On WallStreet acquisition. Significant additional costs in conjunction with the Company's pending merger with OnlineTrading.com are expected to be incurred during fiscal year 2000. OTHER INCOME (EXPENSE), NET INTEREST EXPENSE. Interest expense increased from approximately $907,000 in 1998 to approximately $1.7 million in 1999 due to the issuance of common stock of the pooled company (Window On WallStreet) associated with nonpayment and consolidation of its debt with related parties. Interest expense during 1999 included $1.3 million of noncash charges related to the issuance of common stock of Window On WallStreet, as compared to $600,000 during 1998. Window On WallStreet outstanding debt of approximately $4.1 million was repaid, in accordance with its terms, by the Company upon consummation of the merger. OTHER INCOME, NET. Other income, net consists primarily of investment income from cash and cash equivalents. The Company generally invests in overnight investments, tax exempt commercial paper and investment grade short-term municipal bonds. The amount of interest income fluctuates based on the amount of funds available for investment and the prevailing interest rates. Other income, net was approximately $445,000 in 1999 and $435,000 in 1998. 26 YEARS ENDED DECEMBER 31, 1998 AND 1997 NET REVENUES TOTAL NET REVENUES. The Company's total net revenues were $31.7 million in 1998 compared to $33.0 million in 1997. LICENSING FEES. Licensing fees were $25.1 million in 1998 as compared to $27.7 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 line of client software products, which were released on February 22, 1999. OTHER REVENUES. Other revenues increased 27% from $5.2 million in 1997 to $6.7 million in 1998, primarily due to increases 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 AND SERVICES. Cost of licensing fees and services was $2.5 million in 1998 compared to $2.7 million in 1997. Cost of licensing fees and services as a percentage of total net revenues remained relatively unchanged at 8%. PRODUCT DEVELOPMENT. Product development expenses increased from $2.4 million in 1997 to $4.0 million in 1998, primarily due to an increase in the number of individuals employed in product development. Product development expenses as a percentage of total net revenues increased from 7% in 1997 to 13% in 1998, primarily due to increased personnel and related expenses as well as decreased revenues. SALES AND MARKETING. Sales and marketing expenses were $15.6 million in 1998 compared to $12.2 million in 1997, primarily due to increased marketing and sales personnel, increased advertising (including print advertising, the use of sales seminars, television advertising and direct mailers), and increased shipping costs and costs related to OMEGAWORLD, offset by decreased telecommunications expenses. Sales and marketing expenses as a percentage of total net revenues increased from 37% in 1997 to 49% in 1998 as a result of the increased marketing expenses and decreased revenues. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $8.5 million in 1998 compared to $7.5 million in 1997, primarily as a result of increased professional fees related to the defense of the class action lawsuit brought against the Company in 1998, costs of being a public company, expenses related to the implementation and lease of a new telephone system, and increased personnel costs. General and administrative expenses as a percentage of total net revenues increased from 23% in 1997 to 27% in 1998, primarily as a result of the increase in those expenses and decrease in revenues. 27 OTHER INCOME (EXPENSE), NET INTEREST EXPENSE. Interest expense increased from approximately $265,000 in 1997 to approximately $907,000 in 1998, primarily due to noncash interest associated with the conversion of Window On WallStreet's detachable warrants into its common stock upon nonpayment of certain debt with related parties. OTHER INCOME, NET. Other income, net increased from approximately $196,000 in 1997 to approximately $435,000 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 rates for 1999 and 1998 were 210% and 169%, respectively. The increase as compared with the 38.6% statutory rate is primarily due to an increase in the valuation allowance established at Window On WallStreet to offset net operating loss carryforwards. The effective tax rates of Omega Research as a stand-alone company were approximately 37% and 35% during 1999 and 1998, 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 28 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 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 12 of Notes to Consolidated Financial Statements for quarterly financial information. LIQUIDITY AND CAPITAL RESOURCES The Company currently anticipates that its available cash resources and cash flows from operations will be sufficient to meet its presently anticipated working capital and capital expenditure requirements for at least the next 12 months. However, the Company is experiencing a period of net losses which is expected to continue at least through the year 2000. Further, as the Company transitions to its new business model, it may need to raise additional funds in order to execute that transition, support more rapid expansion, develop new or enhanced services and products, respond to competitive pressures, 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 $22.4 million. Marketable securities consist of investment grade municipal bonds maturing, on average, within a year. 29 Cash used in operating activities in 1999 totaled approximately $5.0 million, compared to cash provided by operating activities of approximately $33,000 and $2.8 million in 1998 and 1997, respectively. The decrease in net cash provided by operations in 1999 was primarily due to an increase in net loss by the Company and an increase over 1998 in cash paid for income taxes of $3.8 million by Omega Research prior to the Window On WallStreet acquisition. 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 by Omega Research. 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 $2.3 million during 1999 and used cash of $6.3 million and $2.2 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. 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 $2.8 million as compared to cash provided of $1.0 million and $11.1 million in 1998 and 1997, respectively. Net cash used in financing activities during 1999 was related to the payment of existing debt of Window On WallStreet (net of current year borrowings) of $3.3 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 borrowings of debt from related parties by Window On WallStreet in addition 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 - Divided 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 $11.1 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, and to a lesser extent, related party borrowings of approximately $240,000 by Window On WallStreet. A portion of the distributions were financed with a $15 million short-term bank loan which was repaid with the proceeds of the initial public offering. 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. 30 137 defers for one year the effective date of SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 will now apply to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet as either assets or liabilities measured at fair value. Derivatives that are not hedges must be adjusted to fair value through income. The Company will adopt SFAS No. 133 effective for the year ended December 31, 2001. The Company believes that the adoption of SFAS No. 133 will not have a material impact on its consolidated financial statements, as it has entered into no derivative contracts and has no current plans to do so in the future. YEAR 2000 COMPLIANCE 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. 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: /bullet/ 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 31 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, 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, 32 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 no later than mid-June (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 eight months. 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. /bullet/ 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 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 33 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." /bullet/ LIQUIDITY CONCERNS. The Company is experiencing a period of net losses which is expected to continue at least through the year 2000. 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 34 ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources." /bullet/ POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's quarterly revenues and operating results have fluctuated significantly in the past, including the fourth quarter of 1999 (when compared to the other quarters of that year), during 1998 (when compared to 1997), and during the fourth quarter of 1997 (when compared to the other quarters of that year), 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; the transition in the Company's business model from deriving revenues on expensive client software sales at the time of the sale to deriving revenues on lower-priced subscription services on a monthly basis; the Company's actual returns and bad debt exceeding or being smaller than its reserves (which are estimates) of returns and bad debt; 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 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." /bullet/ 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 35 availability, ease of use, pricing, reliability, customer service and support, and sales and marketing efforts. See "ITEM 1. BUSINESS - Competition." /bullet/ 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. /bullet/ 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 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." /bullet/ RETURNS AND BAD DEBT. Historically, the Company's net revenues from licensing fees for sales of client software have been determined by estimating reserves for returns and bad debt on a quarterly basis based upon historical experience and other relevant factors. There can be no assurance, in particular given the possible effects of the Company's announcements of its change in business model and shift of focus to WindowOnWallStreet.com, that actual returns and bad debt will not exceed estimated returns and bad debt. See "POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING 36 RESULTS" above and "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Overview." /bullet/ 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." /bullet/ 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 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. 37 /bullet/ 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. /bullet/ 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." /bullet/ 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 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 38 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. /bullet/ DEPENDENCE ON KEY EMPLOYEES. The Company's success depends to a very significant extent on the continued availability and performance of a number of senior management, engineering and sales and marketing personnel. 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." /bullet/ DEPENDENCE ON RELATIONSHIP WITH BRIDGE TELERATE. The Company is party to a Software License, Maintenance and Development Agreement with Bridge Telerate relating to TRADESTATION. The agreement provides a substantial minimum royalty stream 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." /bullet/ 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 brokerage subsidiary (OnlineTrading.com) is restricted under SEC rules, which in turn could materially 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." /bullet/ 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 39 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." /bullet/ RISK OF INTELLECTUAL PROPERTY LITIGATION. There has been substantial litigation in the software industry involving intellectual property rights. Although the Company does not believe that it is 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." /bullet/ 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." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Financial Statements and notes thereto and the report of the independent auditors thereon set forth on pages F-1 through F-23 herein are filed as part of this report and incorporated herein by reference. The Financial Statement Schedule and the report of the independent auditors thereon set forth on pages S-1 through S-3 herein are filed as part of this report and incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 41 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers and directors of the Company and their ages and positions with the Company as of March 8, 2000 are as follows:
NAME AGE POSITION WITH THE COMPANY - ---- --- ------------------------- William R. Cruz 38 Co-Chairman of the Board and Co-Chief Executive Officer Ralph L. Cruz 36 Co-Chairman of the Board and Co-Chief Executive Officer Salomon Sredni(1) 32 President and Chief Operating Officer and Director Peter A. Parandjuk 37 Chief Technology Officer, Vice President of Research and Technology and Director Marc J. Stone 39 Vice President of Corporate Development, General Counsel, Secretary and Director Gregg F. Stewart 38 Chief Financial Officer, Vice President of Finance and Treasurer Janette Perez 42 Executive Vice President of Marketing and Sales Stephen C. Richards(1)(2) 46 Director Brian D. Smith(1)(2) 55 Director - -------------------- (1) Member of the Audit Committee of the Company's Board of Directors. (2) Member of the Compensation Committee of the Company's Board of Directors.
The Company's directors hold office until the next annual meeting of shareholders. The Company's executive officers serve at the discretion of the Board of Directors. WILLIAM R. CRUZ co-founded the Company in 1982 and has been a director since that time. Mr. Cruz was appointed Co-Chief Executive Officer of the Company in 1996 and was the Company's President since its founding through August 1999. Mr. Cruz studied classical violin at the University of Miami, which he attended on a full scholarship, and Julliard School of Music. He left Julliard School of Music prior to graduation to co-found the Company. He has won numerous classical violin competitions. Mr. Cruz has been primarily responsible for overseeing the conception and management of the Company's products and product strategies. RALPH L. CRUZ co-founded the Company in 1982 and has been a director since that time. Mr. Cruz was Vice President of the Company from 1982 until 1996, at which time he was appointed Co-Chief Executive Officer. Mr. Cruz studied classical violin at the University of Miami, which he attended on a full scholarship, and Indiana University. He left Indiana University prior to graduation to devote full time to the Company. He has won numerous classical violin competitions. Mr. Cruz has been primarily responsible for overseeing the Company's marketing strategies. SALOMON SREDNI joined the Company in December 1996 as its Vice President of Operations and Chief Financial Officer and was named Treasurer in May 1997, a director of the Company in July 1997 and a member of the Audit Committee of the Board of Directors in January 1998. In August 1999, Mr. Sredni was named President and Chief Operating Officer, and maintained Chief Financial Officer functions until September 1999. From August 1994 to 42 November 1996, Mr. Sredni was Vice President of Accounting and Corporate Controller at IVAX Corporation, a publicly-held pharmaceutical company. Prior to that time, from January 1988 to August 1994, Mr. Sredni was with Arthur Andersen LLP, an international accounting firm. Mr. Sredni is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants. Mr. Sredni has a bachelor's degree in Accounting from The Pennsylvania State University. PETER A. PARANDJUK joined the Company in 1988 as a software engineer, became the Company's senior software engineer in 1991, was appointed Vice President of Product Development in January 1995 and was named a director of the Company in July 1997. In October 1998, Mr. Parandjuk was appointed Chief Technology Officer and Vice President of Research and Technology. Mr. Parandjuk has a bachelor's degree in Applied Mathematics from the State University of New York at Buffalo. MARC J. STONE joined the Company in May 1997 as its Vice President of Corporate Development, General Counsel and Secretary and was named a director of the Company in July 1997. From January 1993 to May 1997, Mr. Stone was a partner at a predecessor law firm of Bilzin Sumberg Dunn Price & Axelrod LLP ("Bilzin Sumberg"), which currently serves as the Company's regular outside counsel. Prior to that time, from 1985 to 1992, Mr. Stone was an associate with that predecessor law firm. Mr. Stone is of counsel to Bilzin Sumberg. Mr. Stone has bachelor's degrees in English and American Literature and Theatre Arts and Dramatic Literature from Brown University, and received his law degree from University of California (Boalt Hall) School of Law at Berkeley. Mr. Stone is a member of the Bar of the State of New York, The Florida Bar, the American Bar Association and the New York State Bar Association. GREGG F. STEWART joined the Company in September 1999 as its Chief Financial Officer, Vice President of Finance and Treasurer. Before joining Omega Research, he served as Vice President - Finance & Treasurer of Interim HealthCare, Inc. from October 1998 until September 1999. Prior to that, from 1990 to 1998, he held several positions with Alamo Rent-A-Car, Inc., including Executive Director, Replacement Division (1996 to 1998), Controller, Consolidated Group (1995 to 1996) and Assistant Treasurer (1990 to 1995). Prior to that, from 1986 to 1990, he served in several financial positions with USAir, Inc. Mr. Stewart is a Certified Public Accountant and holds a Bachelor of Science in Accounting from Marquette University, Milwaukee, Wisconsin. JANETTE PEREZ joined the Company in January of 1996 as its Public Relations Manager and was appointed Corporate Relations Director in November 1997. In July 1998, she was appointed Vice President of Marketing and in September 1999, she was appointed Executive Vice President of Marketing and Sales. During 1994 and 1995, Ms. Perez traveled abroad. Prior to that, from 1979 to January 1994, Ms. Perez was Office Manager and Controller for Simon Bolivar International, a specialty advertising firm. STEPHEN C. RICHARDS is currently Chief Online Trading Officer of E*Trade Group, Inc. ("E*Trade"), a position he has held since March 1999. From 1998 to February 1999, Mr. Richards served as Senior Vice President, Corporate Development and New Ventures at E*Trade following two years as E*Trade's Senior Vice President of Finance, Chief Financial Officer and Treasurer. Prior to joining E*Trade in April 1996, Mr. Richards was Managing Director and Chief Financial Officer of Correspondent Clearing at Bear Stearns & Companies, Inc., where he was employed for 43 more than 11 years. He is also a former Vice President/Deputy Controller of Becker Paribas, and former First Vice President/Controller of Jefferies and Company, Inc. Mr. Richards also serves as a director of Versus Technologies, Inc. which is listed on the Montreal and Toronto Stock Exchanges. He received a Bachelor of Arts in Statistics and Economics from the University of California at Davis and an MBA in Finance from the University of California at Los Angeles. Mr. Richards is a Certified Public Accountant. Mr. Richards became a director in August 1999, at which time he was also elected to the Compensation Committee and the Audit Committee of the Board of Directors. BRIAN D. SMITH, who is currently a private investor, served as President of Data Broadcasting Corporation ("DBC"), a provider of market data services, from 1990 until 1996. Prior to becoming President, Mr. Smith, since 1983, held several key positions with DBC and its predecessor companies. Prior to that, Mr. Smith worked for 13 years for General Electric Company in engineering, sales and management positions, and for Texas Instruments in engineering. Mr. Smith also served as Chief Executive Officer of Mobile Broadcasting Corp., a wireless communications company, from December 1996 to December 1997. Mr. Smith became a director in December 1997, and was elected to the Compensation Committee and the Audit Committee of the Board of Directors in January 1998. INDEPENDENT DIRECTORS; COMMITTEES OF THE BOARD OF DIRECTORS During 1999, two nonemployee, independent members, Brian D. Smith and Stephen C. Richards (or Christos M. Cotsakos, who was an independent member prior to August 1999 until replaced by Mr. Richards), served on the Company's Board of Directors (the "Independent Directors"). In January 1998, the Company's Board of Directors appointed the Independent Directors and Salomon Sredni as the members of the first Audit Committee of the Board of Directors, and they were reappointed in July 1998. In August of 1999, Mr. Smith and Sredni were reappointed, and Mr. Richards (who replaced Mr. Cotsakos) was appointed, and all of them currently serve, as members of the Audit Committee. The Audit Committee recommends the annual engagement of the Company's auditors, with whom the Audit Committee reviews the scope of audit and non-audit assignments, related fees, the accounting principles used by the Company in financial reporting, internal financial auditing procedures and the adequacy of the Company's internal control procedures. In January 1998, the Board of Directors established a Compensation Committee consisting solely of the Independent Directors, who were reappointed in July 1998 and August 1999 (Mr. Richards replacing Mr. Cotsakos in August 1999), and both of them currently serve, on the Compensation Committee. The Compensation Committee determines executive officers' salaries and bonuses and administers the Omega Research, Inc. Amended and Restated 1996 Incentive Stock Plan, as amended (the "Incentive Stock Plan"), and the Omega Research, Inc. 1997 Employee Stock Purchase Plan, as amended (the "Purchase Plan"). The Board of Directors does not currently have a nominating committee or a committee that performs similar functions. 44 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers (as defined under the Exchange Act) and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to the Company and written representations that no Forms 5 were required when applicable, the Company believes that during the fiscal year ended December 31, 1999 all Section 16(a) filing requirements applicable to such officers, directors and greater than ten percent beneficial owners were complied with. ITEM 11. EXECUTIVE COMPENSATION. EXECUTIVE COMPENSATION TABLES. The following tables provide information about executive compensation. SUMMARY COMPENSATION TABLE The following table sets forth information with respect to all compensation paid or earned for services rendered to the Company in the three years ended December 31, 1999 by the Co-Chief Executive Officers of the Company and the four other most highly compensated executive officers of the Company whose aggregate annual compensation exceeded $100,000 (together, the "Named Executive Officers"). The Company did not have a pension plan or a long-term incentive plan, had not issued any restricted stock awards and had not granted any stock appreciation rights as of December 31, 1999. The value of all perquisites and other personal benefits received by each Named Executive Officer did not exceed 10% of the Named Executive Officer's total annual compensation.
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS --------------------------------- ------------ SECURITIES FISCAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) OPTIONS(2) COMPENSATION(3) - --------------------------- ------ ------ --------- ------------ --------------- William R. Cruz....................... 1999 $150,000 -- -- $5,400 Co-Chief Executive Officer 1998 150,000 -- -- -- 1997 150,000 -- -- 3,800 Ralph L. Cruz......................... 1999 150,000 -- -- 5,400 Co-Chief Executive Officer 1998 150,000 -- -- -- 1997 150,000 -- -- 3,800 Salomon Sredni........................ 1999 193,636 $ 25,000 100,000 6,000 President and Chief Operating Officer 1998 165,000 10,000 150,000 -- 1997 130,000 34,125(4) -- --
45
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS --------------------------------- ------------ SECURITIES FISCAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) OPTIONS(2) COMPENSATION(3) - --------------------------- ------ ------ --------- ------------ --------------- Peter A. Parandjuk.................... 1999 186,323 5,761 -- 6,000 Chief Technology Officer and Vice 1998 165,000 15,077 205,000 -- President of Research and Technology 1997 130,000 34,125(4) -- 3,800 Marc J. Stone......................... 1999 186,323 -- -- -- Vice President of Corporate 1998 165,000 10,000 130,000 -- Development, General Counsel 1997 76,483(5) 107,875(4)(6) 140,000(7) -- and Secretary Janette Perez......................... 1999 176,763 -- 50,000 6,000 Executive Vice President of 1998 97,083 30,255(9) 100,000 -- Marketing and Sales (8) 1997 36,875 9,858 12,000 573 (1) See "Other Compensation Arrangements - Executive Officer Bonus Plan" for a discussion of the Company's bonus plan for executive offers for fiscal years 1998 and 1999. (2) Represents shares of Common Stock issuable upon the exercise of options granted under the Company's Incentive Stock Plan. (3) Represents 401(k) Plan Company contributions on behalf of the Named Executive Officer during the current year, but paid out during the subsequent year. (4) $4,875 of this amount was earned in 1997, but paid in 1998. (5) Mr. Stone joined the Company on May 30, 1997. His annual base salary for 1997 was $130,000. (6) Includes a one-time bonus of $90,000 paid to Mr. Stone at the time he became an employee of the Company. (7) The record and beneficial ownership of unexercised options for an aggregate of 70,000 shares of the Company's Common Stock, constituting one-half of those 140,000 options, were transferred in 1999 to the former spouse of the Named Executive Officer pursuant to a marital settlement agreement. Accordingly, the Named Executive Officer disclaims any pecuniary ownership of such transferred options. (8) Ms. Perez became an executive officer in July 1998. (9) $9,000 of this amount was earned in 1998, but paid in 1999.
OPTION GRANTS IN 1999 FISCAL YEAR The following table summarizes the options which were granted during the fiscal year ended December 31, 1999 to the Named Executive Officers.
INDIVIDUAL GRANTS ----------------------------------------------------------------- PERCENT OF POTENTIAL REALIZABLE NUMBER TOTAL VALUE AT ASSUMED OF OPTIONS MARKET ANNUAL RATE OF SECURITIES GRANTED TO EXERCISE PRICE VALUE AT STOCK PRICE UNDERLYING EMPLOYEES OR BASE ON GRANT GRANT-DATE APPRECIATION FOR OPTIONS IN FISCAL PRICE DATE EXPIRATION MARKET PRICE OPTION TERM (1) ------------ ------------------ NAME GRANTED(#)(2) YEAR (3) ($)(SH) ($)(SH) DATE 0%($)(4) 5%($) 10%($) - ---- ------------- -------- ------- ------- ---- -------- ----- ------ William R. Cruz -- -- -- -- -- -- -- -- Ralph L. Cruz -- -- -- -- -- -- -- -- Salomon Sredni 100,000 9.8% $8.57 $8.00 5/4/09 -- $446,116 $1,217,994 Peter A. Parandjuk -- -- -- -- -- -- -- -- Marc J. Stone -- -- -- -- -- -- -- -- Janette Perez 50,000 4.9% 8.57 8.00 5/4/09 -- 223,058 608,997
46 (1) Potential realizable value is based on the assumption that the Common Stock price appreciates at the annual rate shown (compounded annually) from the date of grant until the end of the option term. The amounts have been calculated based on the requirements promulgated by the SEC. The actual value, if any, a Named Executive Officer may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised (if the executive officer were to sell the shares on the date of exercise), so there is no assurance that the value realized will be at or near the potential realizable value as calculated in this table. (2) These options vest over five years and have a term of ten years from the date of grant, subject to acceleration under certain circumstances. (3) Does not include the outstanding stock options of Window On WallStreet assumed by Omega Research in connection with Omega Research's acquisition of that company. See "Other Compensation Arrangements - Window On WallStreet Assumed Options" below. (4) For purposes of and as provided under the Company's Incentive Stock Plan, "fair market value" on the date of grant of any option is the average of the high and low sales prices of a share of Common Stock on The Nasdaq National Market on the trading day immediately preceding such date of grant. The Compensation Committee of the Company believes this calculation more accurately reflects "fair market value" of the Company's Common Stock on any given day as compared to simply using the closing market price on the date of grant. As a result, the closing market price on the date of grant at times may be different than the exercise price per share. AGGREGATE OPTION EXERCISES IN 1999 FISCAL YEAR AND 1999 FISCAL YEAR-END OPTION VALUES The following table provides information regarding the value of all options exercised during 1999 by the Named Executive Officers, and of all unexercised options held at December 31, 1999 by the Named Executive Officers measured in terms of the closing market price of the Company's Common Stock on December 31, 1999. 47
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1999(#) DECEMBER 31, 1999($)(1) -------------------------------------- ----------------------------- SHARES ACQUIRED ON VALUE NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ------------ ----------- ----------- ------------- ----------- ------------- William R. Cruz -- -- -- -- -- -- Ralph L. Cruz -- -- -- -- -- -- Salomon Sredni 20,000 $148,750 94,000 276,000 $411,080 $ 694,320 Peter A. Parandjuk -- -- 191,000 264,000 874,480 1,122,920 Marc J. Stone (2) -- -- 54,000 146,000 179,200 506,800 Janette Perez 1,000 7,688 23,800 137,200 78,590 303,360 (1) Based on a per share price of $6.00 on December 31, 1999, which was the closing market price of the Company's Common Stock on the last day of the Company's 1999 fiscal year. (2) See footnote (7) to "SUMMARY COMPENSATION TABLE" above.
OTHER COMPENSATION ARRANGEMENTS. EXECUTIVE OFFICER BONUS PLAN. In February 1998, the Compensation Committee of the Board of Directors approved a cash bonus plan for the 1998 fiscal year for the then executive officers of the Company, other than William R. Cruz and Ralph L. Cruz who have no bonus plan, that provided for cash bonuses of up to 40% of the executive officer's base salary determined by the extent, if any, to which the Company's 1998 net income exceeded its 1997 net income. The Co-Chief Executive Officers were also authorized to grant up to a $10,000 bonus to each such executive officer regardless of whether application of the bonus formula would result in a bonus payout. As 1998 net income of the Company was lower than 1997 net income, no bonus was paid other than the $10,000 per executive officer bonus. In February 1999, the Compensation Committee of the Board of Directors approved a cash bonus plan for the 1999 fiscal year for the executive officers of the Company, other than William R. Cruz and Ralph L. Cruz who have no bonus plan, that provides for cash bonuses of up to 50% of the executive officer's base salary depending upon the extent, if any, to which the Company achieves its net income goals for 1999. As 1999 net income goals of the Company were not met, no bonus was paid other than a $25,000 special bonus paid to Salomon Sredni in connection with his promotion to President and Chief Operating Officer. 1996 INCENTIVE STOCK PLAN. The Incentive Stock Plan, pursuant to which officers, employees and nonemployee consultants may be granted stock options, stock appreciation rights, stock awards, performance shares and performance units, was adopted by the Board of Directors and approved by the shareholders in June 1996. It was amended and restated in August 1997 and further amended by the Board of Directors in February 1998. In December 1998 the Board of Directors increased, subject to shareholder approval, the authorized number of shares of Common Stock for issuance under the Incentive Stock Plan from 3,000,000 to 4,500,000, subject to future antidilution adjustments, which was approved at the Company's annual meeting of shareholders held on August 13, 1999. In January 2000, the Board of Directors, as part of its authorization of the Merger Agreement with OnlineTrading.com, authorized an increase, subject to the approval by the Company's shareholders of the Merger Agreement and merger with OnlineTrading.com, in the number of shares of Common Stock reserved for issuance under the Incentive Stock Plan from 4,500,000 to 7,500,000, subject to future antidilution adjustments. 48 Prior to January 1998, the Incentive Stock Plan had been administered by the Board of Directors of the Company, but, since the establishment of the Compensation Committee of the Board of Directors in January 1998, the Incentive Stock Plan has been administered by the Compensation Committee, whose members must qualify as "nonemployee directors" (as such term is defined in Rule 16b-3 under the Exchange Act). The Compensation Committee is authorized to determine, among other things, the employees to whom, and the times at which, options and other benefits are to be granted, the number of shares subject to each option, the applicable vesting schedule and the exercise price (provided that, for incentive stock options, the exercise price shall not be less than 100% of the fair market value of the Common Stock on the date of grant). The Compensation Committee also determines the treatment to be afforded to a participant in the Incentive Stock Plan in the event of termination of employment for any reason, including death, disability or retirement, or change in control. Under the Incentive Stock Plan, the maximum term of an incentive stock option is ten years and the maximum term of a nonqualified stock option is fifteen years. In February 1998, the Board of Directors amended the Incentive Stock Plan to permit the Compensation Committee to delegate to the Company's Co-Chief Executive Officers the authority to grant options to employees of the Company identified by the Co-Chief Executive Officers. At present, the Compensation Committee has delegated to the Co-Chief Executive Officers the authority to grant options covering up to 250,000 shares of Common Stock per annum, but retains the ability to revoke the delegation at any time. The Board of Directors has the power to amend the Incentive Stock Plan from time to time. Shareholder approval of an amendment is only required to the extent that it is necessary to maintain the Incentive Stock Plan's status as a protected plan under applicable securities laws or as a qualified plan under applicable tax laws. As of December 31, 1999, options to purchase 3,478,869 shares were outstanding under the Incentive Stock Plan, of which options to purchase 1,326,000 shares had been granted to executive officers of the Company. During 1999, options granted to executive officers totaled options to purchase 220,000 shares of Common Stock which were granted at exercise prices ranging from $5.54 to $8.57 per share. In general, options granted under the Incentive Stock Plan vest at the rate of 20% per year and have a total term of ten years. The options which have been granted under the Incentive Stock Plan to the executive officers of the Company immediately vest and become exercisable upon termination of employment due to death or permanent disability, or upon a sale or a change in control of the Company, and, in the case of Mr. Parandjuk, upon termination of employment by the Company without cause. The options to purchase the shares granted under the Incentive Stock Plan, the Window On WallStreet options assumed by Omega Research (discussed below) and the Nonemployee Director Stock Plan (defined and discussed below) that were outstanding as of December 31, 1999 have a weighted average exercise price of $3.49 per share. See Note 7 of Notes to Consolidated Financial Statements. WINDOW ON WALLSTREET ASSUMED OPTIONS. In October 1999, the Company assumed all outstanding stock options to purchase Window On WallStreet common stock ("WOW Options"), which, based on an exchange ratio of .210974 shares of Common Stock for each share of Window On WallStreet common stock, were exercisable at the time of assumption for an aggregate of 182,529 shares of Common Stock (82,783 shares of Common Stock at an exercise price of $.48 per share, and 99,746 shares of Common Stock at an exercise price of $8.06 per share). The WOW 49 Options generally vest ratably over a four-year period and their terms are ten years. As of December 31, 1999, there were 176,783 WOW Options outstanding. 1997 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN. The 1997 Nonemployee Director Stock Option Plan, as amended (the "Nonemployee Director Stock Plan"), pursuant to which annual grants of a nonqualified stock option are made to each nonemployee director of the Company, was adopted by the Board of Directors and approved by the shareholders in July 1997. It was amended by the Board of Directors in January 1998 to increase the number of shares that may be covered by an option granted to nonemployee directors upon their initial election to the Board. Upon initial election to the Board of Directors, each nonemployee director may be granted an option to purchase up to 75,000 shares of Common Stock as determined by the Company's Board of Directors at such time. Upon each re-election to the Board of Directors at the annual meeting of shareholders, each nonemployee director will be granted an additional option to purchase 3,000 shares of Common Stock. Each option will be granted at an exercise price equal to the fair market value of the Common Stock on the date of grant. The Company has reserved 175,000 shares of Common Stock for issuance under the Nonemployee Director Stock Plan, subject to antidilution adjustments. In August 1999, Mr. Smith was awarded an additional option to purchase 3,000 shares at an exercise price of $5.60 per share upon re-election to the Board of Directors and Stephen C. Richards was issued an option to purchase 25,000 shares at an exercise price of $5.60 per share upon his initial election to the Board of Directors. These options have a term of five years and vest in equal installments over three years. In August 1999, the vesting of Mr. Cotsakos's options to purchase 75,000 shares of Common Stock were accelerated upon his retirement from the Board due to his significant contribution to the Company, which permitted him to exercise any or all such options for 180 days following his retirement from the Board. As of December 31, 1999, options to purchase 128,000 shares were outstanding under the Nonemployee Director Stock Plan. The Board of Directors has the power to amend the Nonemployee Director Stock Plan from time to time. Shareholder approval of an amendment is only required to the extent that it is necessary to maintain the Nonemployee Director Stock Plan's status as a protected plan under applicable securities laws. 1997 EMPLOYEE STOCK PURCHASE PLAN. The Purchase Plan was adopted by the Board of Directors and approved by the Company's shareholders in July 1997. The Purchase Plan provides for the issuance of a maximum of 500,000 shares of Common Stock pursuant to the exercise of nontransferable options granted to participating employees. The Purchase Plan is administered by the Compensation Committee of the Board of Directors. All employees of the Company whose customary employment is more than 20 hours per week and more than five months in any calendar year and who have completed at least three months of employment are eligible to participate in the Purchase Plan. Employees who would immediately after the grant own 5% or more of the total combined voting power or value of the Company's stock and the nonemployee directors of the Company may not participate in the Purchase Plan. To participate in the Purchase Plan, an employee must authorize the Company to deduct an amount (not less than one percent nor more than ten percent of a participant's total cash compensation) from his or her pay during six-month periods (each a "Plan Period"). The maximum number of shares of Common Stock an employee may purchase in any Plan Period is 500 shares. The exercise price for the option for each Plan Period is 85% of the lesser of the market price of the Common Stock on the 50 first or last business day of the Plan Period. If an employee is not a participant on the last day of the Plan Period, such employee is not entitled to exercise his or her option, and the amount of his or her accumulated payroll deductions will be refunded. An employee's rights under the Purchase Plan terminate upon his or her voluntary withdrawal from the Purchase Plan at any time or upon termination of employment. No options were granted under the Purchase Plan during 1997. The first Plan Period began January 1, 1998. During the years ended December 31, 1999 and 1998, 23,585 and 12,506 shares, respectively, of Common Stock were issued under the plan at an average price of $3.27 and $3.06, respectively. The Board of Directors has the power to amend or terminate the Purchase Plan. Shareholder approval of an amendment is only required to the extent that it is necessary to maintain the Purchase Plan's status as a protected plan under applicable securities laws or as a qualified plan under applicable tax laws. 401(K) PLAN. The Company has a defined contribution retirement plan which complies with Section 401(k) of the Code. All employees with at least three months of continuous service are eligible to participate and may contribute up to 15% of their compensation. Company contributions are vested 20% for each year of service. Matching contributions accrued under the 401(k) Plan amounted to approximately $242,000, $0 and $63,000 in 1999, 1998 and 1997, respectively. NON-COMPETITION AGREEMENTS. Virtually all employees of the Company, including the Named Executive Officers, have entered into agreements with the Company which generally contain certain non-competition, non-disclosure and non-solicitation restrictions and covenants, including a provision prohibiting such employees from competing with the Company during their employment with the Company and for a period of two years thereafter. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The Company formed the Compensation Committee of the Board of Directors in January 1998, at which time the two Independent Directors were appointed as members. The compensation (including salaries, bonuses and stock options) of the Company's executive officers for 1999 was determined by the Compensation Committee. In 1999, neither member of the Compensation Committee had any relationship with the Company requiring disclosure under Item 404 of the Regulation S-K. DIRECTOR COMPENSATION. The Company's Independent Directors receive $750 for attendance at each meeting of the Board of Directors and each committee thereof, with an additional $150 paid for each committee meeting which is chaired by an Independent Director. Pursuant to the Nonemployee Director Stock Plan, each Independent Director also receives an option to purchase up to 75,000 shares of Common Stock upon initial election as a director of the Company as determined by the Company's Board of Directors at such time, and an option to purchase 3,000 shares of Common Stock upon each re-election as an Independent Director at the Company's annual meeting of shareholders. See "Other Compensation Arrangements--1997 Nonemployee Director Stock Option Plan." All directors may 51 also be reimbursed for certain expenses in connection with attendance at Board of Directors and committee meetings. Other than with respect to reimbursement of expenses, directors who are employees or officers of the Company do not receive additional compensation for service as a director. During 1999, Mr. Richards received a one-time retainer of $10,000 in connection with his initial appointment to the Board of Directors. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of March 8, 2000 by (i) each person who is known to the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director of the Company, (iii) each Named Executive Officer, and (iv) all directors and executive officers of the Company as a group. Except as otherwise described in the footnotes below, the Company believes that the beneficial owners of the Common Stock listed below, based on information provided by such owners, have sole investment and voting power with respect to such shares. The address of each person who beneficially owns more than 5% of the Common Stock is the Company's principal executive office. SHARES BENEFICIALLY OWNED(1) ---------------------------- NAME OF BENEFICIAL OWNER (1) NUMBER PERCENT ---------------------------- ------ ------- William R. Cruz(2)...................... 9,156,654 37.3% Ralph L. Cruz(3)........................ 9,156,554 37.3 Peter A. Parandjuk...................... 199,550 * Salomon Sredni.......................... 126,750 * Marc J. Stone........................... 62,000 * Janette Perez........................... 36,000 * Brian D. Smith.......................... 16,666 * Stephen C. Richards..................... 4,000 * All executive officers and directors as a group (9 persons)(4)..... 18,758,174 75.1% - -------------------- * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the SEC that deem shares to be beneficially owned by any person who has or shares voting or investment power with respect to such shares. Includes options held by executive officers and/or directors which are exercisable within 60 days of March 8, 2000. Does not include any shares of Common Stock that may be deemed beneficially owned by OnlineTrading.com as a result of that certain Omega Shareholder Agreement dated January 19, 2000 among OnlineTrading.com Group, OnlineTrading.com and certain of the Company's shareholders or that certain Omega Stock Option Agreement dated January 19, 2000 between Omega Research and OnlineTrading.com, both of which were executed in connection with the Merger Agreement. See "ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - (b) Current Reports on Form 8-K." (2) Includes 1,950,000 shares held by a Texas limited partnership as to which William R. Cruz possesses sole voting and dispositive powers through his direct and indirect 100% ownership of a Texas 52 limited liability company that is the 1% sole general partner of such limited partnership and William R. Cruz and the William R. Cruz 1999 Grantor Retained Annuity Trust #1 are the limited partners. The William R. Cruz 1999 Grantor Retained Annuity Trust #1 provides for annual distributions of principal and income to William R. Cruz for five years commencing with respect to calendar year 1999, and thereafter any remainder interest is payable to the William R. Cruz 1997 Family Trust for the benefit of certain family members and/or charitable organizations. Also includes 7,206,554 shares held by another Texas limited partnership as to which William R. Cruz possesses sole voting and dispositive powers through his 100% ownership of the sole general partner of such limited partnership and William R. Cruz is the sole limited partner. Does not include 900 shares owned by the spouse of William R. Cruz with respect to which Mr. Cruz disclaims beneficial ownership. (3) The shares are held by two Texas limited partnerships as to which Ralph L. Cruz possesses sole voting and dispositive powers through his direct and/or indirect 100% ownership of the sole general partner of each of such limited partnerships and in one limited partnership Ralph L. Cruz is the sole limited partner and in the other Ralph L. Cruz and his spouse are the limited partners. (4) See other footnotes above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. For information concerning cash dividends paid by the Company to its shareholders in 1997 (including the Dividend which was paid by the Company to its then-existing shareholders immediately prior to the consummation of the Company's initial public offering) and the dividend of the Company's former office facilities to William R. Cruz and Ralph L. Cruz declared in the second quarter of 1997, see "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - Dividend Policy." The Company and William R. Cruz, Ralph L. Cruz and certain of their respective affiliates (collectively, the "Cruz Shareholders") have entered into an S Corporation Tax Allocation and Indemnification Agreement (the "Tax Agreement") relating to the Dividend and their respective income tax liabilities. The Tax Agreement provides that to the extent the Company's earnings during the period in which it was an S corporation ("S Corporation Earnings"), as subsequently established by the filing of the Company's tax return for the Company's short S corporation tax year, are less than the Dividend paid prior to the consummation of the Company's initial public offering, the Cruz Shareholders will make a payment equal to such difference to the Company and if the S Corporation Earnings are greater than the Dividend, the Company will make an additional distribution equal to such difference to William R. Cruz and Ralph L. Cruz, in either case, with interest thereon. Subject to certain limitations, the Tax Agreement also provides for the cross-indemnification of the Cruz Shareholders and the Company for any federal and state income taxes, including interest and penalties, if any, as a result of a final determination of a taxing authority that increases or decreases the taxable income of the Company for an S corporation taxable year (resulting in a change in the income taxes due by the Cruz Shareholders for such year) and causes a corresponding increase or decrease in the taxable income of the Company for a C corporation taxable year. Each party's obligation under the Tax Agreement is limited to the amount of any reduction in such party's tax liability as a result of any such determination. To the extent a payment is made pursuant to the Tax Agreement by the Company to the Cruz Shareholders after the one year anniversary of the date on which the Company's S corporation status terminated, except to the extent it relates to the change of the Company's method of accounting from the cash method to the accrual method effective on 53 July 1, 1997 (the "Change in Accounting Method"), the Company will be required to make an additional payment to the Cruz Shareholders equal to any income taxes payable by such persons on such payments. The Company will not receive a tax deduction for any payments made pursuant to the Tax Agreement. The Cruz Shareholders have not provided security for their obligations under the Tax Agreement; accordingly, the Company's ability to collect any such payments will be dependent upon the financial condition of such persons at the time such payments are to be made. The Company is not aware of any tax adjustments which might require payments under the Tax Agreement other than related to the Change in Accounting Method. See "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - Dividend Policy" and Note 7 of Notes to Consolidated Financial Statements. Marc J. Stone, the Company's Vice President of Corporate Development, General Counsel and Secretary and a director, was a partner in a predecessor law firm to Bilzin Sumberg until immediately prior to joining the Company in May 1997. Thereafter, Mr. Stone was of counsel to the predecessor firm and is currently of counsel to Bilzin Sumberg. Bilzin Sumberg and its predecessor firms have acted as the Company's regular outside legal counsel since 1994. The total fees and costs paid by the Company to the predecessor firm of Bilzin Sumberg (Rubin Baum Levin Constant Friedman & Bilzin) in 1999, 1998 and 1997 were approximately $84,000, $10,000, and $349,000, respectively, and to Bilzin Sumberg in 1999 and 1998 were approximately $87,000 and $69,000, respectively. The Company believes that the fees paid are no less favorable to the Company than could be obtained from comparable law firms in the Miami area. 54 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (A) DOCUMENTS FILED AS PART OF THIS REPORT. 1. Financial Statements. The Financial Statements and notes thereto and the report of the independent auditors thereon set forth on pages F-1 through F-23 herein are filed as part of this report and incorporated herein by reference. 2. Financial Statement Schedules. The Financial Statement Schedule and the report of the independent auditors thereon set forth on pages S-1 through S-3 herein are filed as part of this report and incorporated herein by reference. 3. Exhibits. 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. (formerly known as Online Trading Group, Inc.), Omega Research, Inc. and each applicable OnlineTrading.com shareholder (incorporated by 55 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 (filed herewith) 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.+ 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 56 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. (filed herewith) 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 October 12, 1998, and as further amended by Addendum to Lease dated May 28, 1999 (filed herewith) 57 10.14 - Lease Agreement, dated November 16, 1999, between Fairfax Boca 92, L.P. and Omega Research, Inc. (filed herewith) 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. (b) REPORTS ON FORM 8-K. (i) On November 8, 1999, the Company filed a Current Report on Form 8-K dated November 8, 1999 reporting in Item 2 thereof the consummation on October 26, 1999 of the merger with Window On WallStreet and in Item 7 thereof the filing of a copy of the Agreement and Plan of Merger, dated as of October 25, 1999, among the Company, Window On WallStreet and WOW Acquisition Corporation. (ii) On November 10, 1999, the Company filed a Current Report on Form 8-K, dated November 10, 1999, reporting in Item 5 thereof the announcement on November 8, 1999 of its Internet strategy. (iii) On January 7, 2000, the Company filed a Current Report on Form 8-K/A, dated January 7, 2000, which amended the Current Report on Form 8-K dated and previously filed on November 8, 1999 (as noted above) to include and incorporate therein Item 7(a) (Financial Statements of Business Acquired) and Item 7(b) (Pro Forma Financial Information). (iv) On January 28, 2000, the Company filed a Current Report on Form 8-K, dated January 28, 2000, reporting in Item 5 thereof that the Company entered into an Agreement and Plan of Merger and Reorganization on January 19, 2000 with OnlineTrading.com, under which Omega Research and OnlineTrading.com are proposed to be merged in a 100% stock transaction, and in Item 7 thereof the filing, among other documents, of a copy of the Merger Agreement. 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OMEGA RESEARCH, INC. By: /S/ WILLIAM R. CRUZ ---------------------- William R. Cruz Co-Chairman of the Board of Directors and Co-Chief Executive Officer By: /S/ RALPH L. CRUZ ------------------- Ralph L. Cruz Co-Chairman of the Board of Directors and Co-Chief Executive Officer Dated: March 22, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /S/ WILLIAM R. CRUZ Co-Chairman of the Board and March 22, 2000 - ----------------------------------- William R. Cruz Co-Chief Executive Officer (Co-Principal Executive Officer) /S/ RALPH L. CRUZ Co-Chairman of the Board and March 22, 2000 - ----------------------------------- Ralph L. Cruz Co-Chief Executive Officer (Co-Principal Executive Officer) /S/ SALOMON SREDNI Chief Operating Officer, President March 22, 2000 - ----------------------------------- Salomon Sredni and Director (Principal Operating Officer) /S/ GREGG F. STEWART Chief Financial Officer, Vice President of March 22, 2000 - ----------------------------------- Gregg F. Stewart Finance and Treasurer (Principal Financial and Accounting Officer) /S/ PETER A. PARANDJUK Director March 22, 2000 - ----------------------------------- Peter A. Parandjuk /S/ MARC J. STONE Director March 22, 2000 - ----------------------------------- Marc J. Stone /S/ STEPHEN C. RICHARDS Director March 22, 2000 - ----------------------------------- Stephen C. Richards /S/ BRIAN D. SMITH Director March 22, 2000 - ----------------------------------- Brian D. Smith
59 OMEGA RESEARCH, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- 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-7 F-1 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. 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, February 18, 2000. F-2 OMEGA RESEARCH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------ 1999 1998 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,175,852 $ 7,649,771 Marketable securities 1,695,304 5,736,958 Accounts receivable, net 13,695,059 9,659,700 Inventory 67,371 283,065 Other current assets 1,469,383 696,440 Deferred income taxes 9,192,000 4,541,000 ------------ ------------ Total current assets 28,294,969 28,566,934 PROPERTY AND EQUIPMENT, net 2,611,454 2,020,832 OTHER ASSETS 473,344 186,676 ------------ ------------ Total assets $ 31,379,767 $ 30,774,442 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,786,739 $ 1,487,128 Notes payable -- 600,000 Accrued expenses 1,861,321 1,171,452 Deferred revenue 1,256,824 380,133 ------------ ------------ Total current liabilities 5,904,884 3,638,713 LONG TERM DEBT -- 2,640,925 ------------ ------------ Total liabilities 5,904,884 6,279,638 COMMITMENTS & CONTINGENCIES (Note 11) 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 24,269,959 issued and outstanding at December 31, 1999 and 1998, respectively 244,751 242,700 Additional paid-in capital 26,560,893 24,616,256 Accumulated deficit (1,330,761) (364,152) ------------ ------------ Total shareholders' equity 25,474,883 24,494,804 ------------ ------------ Total liabilities and shareholders' equity $ 31,379,767 $ 30,774,442 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 OMEGA RESEARCH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ NET REVENUES: Licensing fees $ 33,767,832 $ 25,057,098 $ 27,729,549 Other revenues 9,102,137 6,653,655 5,220,899 ------------ ------------ ------------ Total net revenues 42,869,969 31,710,753 32,950,448 ------------ ------------ ------------ OPERATING EXPENSES: Cost of licensing fees and services 2,985,409 2,494,445 2,688,277 Product development 5,144,658 4,001,981 2,355,716 Sales and marketing 18,979,103 15,573,786 12,217,117 General and administrative 12,435,758 8,545,073 7,465,942 Acquisition costs 1,200,000 -- -- ------------ ------------ ------------ Total operating expenses 40,744,928 30,615,285 24,727,052 ------------ ------------ ------------ Income from operations 2,125,041 1,095,468 8,223,396 ------------ ------------ ------------ OTHER INCOME (EXPENSE), net: Interest expense (1,691,185) (907,196) (265,469) Other income, net 445,535 435,181 195,995 ------------ ------------ ------------ Total other expense, net (1,245,650) (472,015) (69,474) ------------ ------------ ------------ Income before income taxes 879,391 623,453 8,153,922 INCOME TAX PROVISION (BENEFIT) 1,846,000 1,052,000 (934,000) ------------ ------------ ------------ (Loss) income before pro forma income tax adjustments (966,609) (428,547) 9,087,922 PRO FORMA INCOME TAX ADJUSTMENTS (Note 1): Pro forma income taxes for periods prior to September 30, 1997 -- -- 3,255,731 Non-recurring tax credit -- -- 1,167,000 ------------ ------------ ------------ Pro forma net (loss) income $ (966,609) $ (428,547) $ 4,665,191 ============ ============ ============ (LOSS) EARNINGS PER SHARE (Note 10): Basic and Diluted $ (0.04) $ (0.02) $ 0.21 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-4 OMEGA RESEARCH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COMMON STOCK ADDITIONAL RETAINED ----------------------------- PAID-IN EARNINGS SHARES AMOUNT CAPITAL (DEFICIT) TOTAL ------------ ------------ ------------ ------------ ------------ BALANCE, December 31, 1996 21,479,995 $ 214,800 $ -- $ 4,088,967 $ 4,303,767 Issuances of common stock 2,766,108 27,661 27,412,784 -- 27,440,445 Cash distributions to shareholders, net -- -- -- (16,532,826) (16,532,826) Non-cash distributions to shareholders -- -- -- (506,781) (506,781) Conversion from S corporation to C corporation -- -- (3,792,091) 3,792,091 -- Compensation expense on stock option grants -- -- 122,041 -- 122,041 Issuance of detachable warrants by pooled company in conjunction with issuance of notes -- -- 102,896 -- 102,896 Net income -- -- -- 9,087,922 9,087,922 ------------ ------------ ------------ ------------ ------------ BALANCE, December 31, 1997 24,246,103 242,461 23,845,630 (70,627) 24,017,464 Issuances of common stock 23,856 239 54,749 -- 54,988 Compensation expense on stock option grants -- -- 113,877 -- 113,877 Issuance of detachable warrants by pooled company in conjunction with issuance of notes -- -- 126,000 -- 126,000 Conversion of detachable warrants into common stock by pooled company upon nonpayment of notes -- -- 476,000 -- 476,000 Repayment of distributions -- -- -- 135,022 135,022 Net loss -- -- -- (428,547) (428,547) ------------ ------------ ------------ ------------ ------------ BALANCE, December 31, 1998 24,269,959 $ 242,700 $ 24,616,256 $ (364,152) $ 24,494,804 Issuances of common stock 205,145 2,051 463,671 -- 465,722 Compensation expense on stock option grants -- -- 140,796 -- 140,796 Issuance of common stock by pooled company upon nonpayment of notes -- -- 1,340,170 -- 1,340,170 Net loss -- -- -- (966,609) (966,609) ------------ ------------ ------------ ------------ ------------ BALANCE, December 31, 1999 24,475,104 $ 244,751 $ 26,560,893 $ (1,330,761) $ 25,474,883 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 OMEGA RESEARCH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: (Loss) income before pro forma income tax adjustments $ (966,609) $ (428,547) $ 9,087,922 Adjustments to reconcile (loss) income before pro forma income tax adjustments to net cash (used in) provided by operating activities: Depreciation and amortization 1,097,104 742,966 717,083 Provision for doubtful accounts 5,721,857 2,222,834 2,450,736 Compensation expense on stock option grants 140,796 113,877 122,041 Noncash interest associated with the conversion of detachable warrants into common stock by pooled company upon nonpayment of notes 1,340,170 476,000 -- Deferred income tax benefit (4,651,000) (1,578,000) (2,963,000) (Increase) decrease in: Accounts receivable (9,757,216) (1,877,540) (7,543,001) Inventory 215,694 132,803 (276,061) Other current assets (773,118) (168,380) (515,476) Other assets (217,293) 128,672 (1,315) Increase (decrease) in: Accounts payable 1,299,611 (25,042) 942,453 Accrued expenses 689,869 558,239 235,784 Income taxes payable -- (509,000) 509,000 Deferred revenue 876,691 243,863 -- ------------ ------------ ------------ Net cash (used in) provided by operating activities (4,983,444) 32,745 2,766,166 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,608,782) (1,310,391) (1,081,398) Capitalized software development costs -- -- (48,694) 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) ------------ ------------ ------------ Net cash provided by (used in) investing activities 2,312,872 (6,255,659) (2,184,682) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net 465,722 54,988 27,440,445 Proceeds from issuance of warrants by pooled company -- -- 3,222 Repayments from (distributions to) shareholders, net -- 135,022 (16,532,826) Proceeds from borrowings of debt 815,422 855,750 15,238,712 Repayment of borrowings of debt (4,084,491) -- (15,001,594) ------------ ------------ ------------ Net cash (used in) provided by financing activities (2,803,347) 1,045,760 11,147,959 ------------ ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,473,919) (5,177,154) 11,729,443 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,649,771 12,826,925 1,097,482 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,175,852 $ 7,649,771 $ 12,826,925 ============ ============ ============ 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 ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTION: Effective June 30, 1997, the Company declared a dividend distributing land and a building with a carrying value of $506,781, to its shareholders. The accompanying notes are an integral part of these consolidated financial statements. F-6 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. 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 Accounts receivable are principally from individuals and distributors of the Company's products. The Company performs periodic credit evaluations and maintains allowances for potential credit losses of approximately $6.3 million and $3.7 million at December 31, 1999 and 1998, respectively, and allowances for potential returns of approximately $23.2 million and $7.5 million at December 31, 1999 and 1998, respectively. The Company provides all client software customers with a 30-day right of return, and, as a result, records a provision for returns at the time of sale. The Company, depending on the circumstances, permits customers to return client software products after the 30-day period in order to maintain as high a level of customer satisfaction as possible. The reserve for returns and the provision for bad debt, in accordance with generally accepted accounting principles, are F-7 estimated based on historical experience and other relevant information. There is no certainty that future returns or bad debt will not exceed established estimates. In addition, the Company is subject to rapid changes in technology and shifts in consumer demand which could result in product returns, in the near term, that are materially different than the Company's reserves that have been provided. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, notes payable and long term debt 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 Statement of Financial Accounting Standards ("SFAS") No. 86, ACCOUNTING FOR THE COST OF CAPITALIZED SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, the Company examines its software development costs after technological feasibility has been established to determine the amount of capitalization that is required. Based on the Company's product development process, technological feasibility is established upon completion of a working model. The costs that are capitalized are amortized on the straight-line basis over a one-year period, the period of benefit, of the related products. For certain periods, the technological feasibility of the Company's products and the general release of such software substantially coincide, and, as a result, software development costs qualifying for capitalization are immaterial. There were no capitalized software development costs as of December 31, 1999 or 1998. LONG-LIVED ASSETS The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. F-8 REVENUE RECOGNITION LICENSING FEES Sales of client software products, net of provisions for estimated returns, are recognized at the time the product is shipped, in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION. SOP 97-2 requires companies to defer revenue and profit recognition if four required criteria of a sale are not met. In addition, SOP 97-2 requires revenue recognized from software arrangements to be allocated to each element of an arrangement based on the relative fair values of the elements, such as software products, upgrades, enhancements, post contract customer support, installation, or training. SOP 97-2 was adopted by the Company effective January 1, 1998 and did not have a material impact on the Company's financial position or results of operations. While the Company has no obligation to perform future services subsequent to shipment of client software, the Company provides telephone and electronic mail customer support as an accommodation to purchasers of its products as a means of fostering customer satisfaction. The majority of such services are provided during the first 60 days of ownership of the Company's products. Costs associated with this effort are generally insignificant in relation to product sales value. 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 11 (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 merger. Revenue is recognized on a monthly basis as the service is provided. Payments 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 $6.2 million, $7.0 million and $6.4 million, respectively. F-9 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. 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). EARNINGS PER SHARE Earnings per share is calculated in accordance with SFAS No. 128, EARNINGS PER SHARE. SFAS No.128 requires presentation of basic and diluted earnings per share on the face of the statement of operations. Basic earnings per share is computed by dividing the net income (loss) available to common shareholders by the weighted average shares of outstanding common stock. The calculation of diluted earnings per share is similar to basic earnings per share except that the denominator includes dilutive common stock equivalents such as stock options and warrants (see Note 10). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates include established reserves for returns and reserves for potentially uncollectable accounts receivable. F-10 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 income is equal to net income (loss) for all periods presented. SEGMENT INFORMATION During the three years ended December 31, 1999, management evaluated and operated the business of the Company as a single segment. 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 will require the Company to recognize all derivatives on the balance sheet as either assets or liabilities measured at fair value. Derivatives that are not hedges must be adjusted to fair value through income. The Company will adopt SFAS No. 133 effective for the year ended December 31, 2001. The Company believes that the adoption of SFAS No. 133 will not have a material impact on its consolidated financial statements, as it has entered into no derivative contracts and has no current plans to do so in the future. (2) ACQUISITIONS 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 and (ii) assumed all outstanding stock options to purchase Window On WallStreet common stock which, F-11 based on an exchange ratio of 0.210974, were exercisable for an aggregate of 182,529 shares of the Company's common stock. The acquisition of Window On WallStreet was accounted for as a pooling-of-interests. Accordingly, the financial statements herein have been restated to give retroactive effect to this acquisition. Below is a reconciliation of Net revenues and Pro forma net (loss) income amounts previously reported with amounts included herein: 1998 1997 ------------ ------------ Net revenues: The Company, as previously reported $ 28,216,505 $ 29,226,274 Window On WallStreet 3,494,248 3,724,174 ------------ ------------ The Company, as restated $ 31,710,753 $ 32,950,448 ============ ============ Pro forma net (loss) income: The Company, as previously reported $ 1,955,547 $ 5,451,582 Window On WallStreet (2,384,094) (786,391) ------------ ------------ The Company, as restated $ (428,547) $ 4,665,191 ============ ============ There were no material relationships or intercompany transactions between the Company and Window On WallStreet prior to the Merger. (3) PROPERTY AND EQUIPMENT, NET Property and equipment, net consists of the following as of December 31, 1999 and 1998:
USEFUL LIFE IN YEARS 1999 1998 ----------- ----------- ----------- Computers and software 3-5 $ 4,682,353 $ 3,195,754 Furniture and equipment 3-7 495,877 448,048 Leasehold improvements 3-5 178,811 144,015 Autos 5 -- 110,205 ----------- ----------- 5,357,041 3,898,022 Accumulated depreciation and amortization (2,745,587) (1,877,190) ----------- ----------- $ 2,611,454 $ 2,020,832 =========== ===========
(4) ACCRUED EXPENSES Accrued expenses consist of the following as of December 31, 1999 and 1998: 1999 1998 ---------- ---------- Payroll and related accruals $ 579,153 $ 654,883 Accrued data distribution and exchange fees 550,977 -- Accrued technical support costs 161,000 173,500 Other 570,191 343,069 ---------- ---------- $1,861,321 $1,171,452 ========== ========== F-12 (5) DEFERRED REVENUE Deferred revenue is comprised of deferrals for (i) licensing fees revenue for which amounts are not due within the next twelve months and 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 revenue $ 842,000 $ 58,095 Subscription service revenues 290,300 265,453 OmegaWorld 124,524 56,585 ---------- ---------- $1,256,824 $ 380,133 ========== ========== (6) RELATED PARTY DEBT SHORT TERM DEBT Short term debt consists of the following as of December 31, 1999 and 1998:
1999 1998 ------- --------- Note payable to Red Oak Capital dated June 11, 1998, bearing interest at 10%, due December 31, 1998. $ -- $ 495,000 Note payable to individual dated June 11, 1998, bearing interest at 10%, due December 31, 1998. -- 5,000 Note payable to Red Oak Capital dated December 23, 1998, bearing interest at 10%, due February 28, 1999. -- 100,000 ------- --------- $ -- $ 600,000 ======= =========
The above notes dated June 11, 1998 were issued by Window On WallStreet together with detachable warrants which entitled the holders, related parties to Window On WallStreet, to purchase 425,000 shares of Window On WallStreet's common stock, no par value, at $2.48 per share. Such warrants resulted in a charge to interest expense of $126,000 during 1998. Furthermore, the debt agreement provided for the conversion of all warrants into shares of Window On WallStreet's common stock to the holder if the notes were not paid as of December 31, 1998. As the notes were not paid as of December 31, 1998, under the terms of the note, the holders converted the warrants into 425,000 shares of Window On WallStreet's common stock at zero cost. Accordingly, an additional charge reflected in interest expense was recorded by the Company at December 31, 1998 in the amount of $476,000. Furthermore, as the above notes dated June 11, 1998 were not paid as of the end of March 1999, Window On WallStreet issued an additional 75,000 shares of its common stock, no par F-13 value, to the note holders in accordance with the agreement. In addition, in accordance with the terms of the above note dated December 23, 1998, Window On WallStreet issued 120,000 shares of its common stock, no par value, to the holders of the notes. Accordingly, a charge reflected in interest expense was recorded by the Company during the year ended December 31, 1999 in the aggregate amount of approximately $218,000. These notes were later consolidated and paid by the Company. LONG TERM DEBT Long term debt consists of the following as of December 31, 1999 and 1998:
1999 1998 ------- ---------- Notes payable to Red Oak Capital dated August 14, 1996, bearing interest at 10%, payable at various dates beginning September 2000, net of unamortized discount at December 31, 1998 of $52,035. Amount includes accrued interest recharacterized as notes payable $ -- $2,631,167 Notes payable to individual dated August 14, 1996, bearing interest at 10%, payable at various dates beginning September 2000, net of unamortized discount at December 31, 1998 of $242. Amount includes accrued interest recharacterized as notes payable -- 9,758 ------- ---------- $ -- $2,640,925 ======= ==========
On April 13, 1999, Window On WallStreet signed an agreement with the related parties holding the notes, consolidating all of the existing debt, short term and long term, into two notes in the aggregate principal amount of approximately $3.9 million (the "New Notes"). The New Notes accrued interest at 10% per annum in cash plus one fully paid and non-assessable share of Window On WallStreet common stock, no par value, for each $45.26 of principal amount outstanding (rounded up to the nearest share) at the end of each month. Interest not paid was capitalized as part of the principal amount of the New Notes on a monthly basis. As part of this refinancing of debt, Window On WallStreet issued an additional 400,000 shares of its common stock as a financing fee. Excluding the financing fee of 400,000 issued shares, during 1999 Window On WallStreet issued 601,580 shares of its common stock to the holders of the New Notes related to the common stock component of interest expense. Accordingly, the Company recorded additional charges reflected in interest expense of $448,000 for the financing fee and $674,000 for the common stock component of interest expense. Charges to interest expense totaled approximately $1.3 million including the $218,000 discussed above. At the time of the acquisition of Window On WallStreet, the Company repaid all existing debt in accordance with the terms of the agreement. F-14 (7) 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. ISSUANCE OF STOCK BY POOLED COMPANY During 1998, Window On WallStreet issued detachable warrants in association with the issuance of certain notes to related parties, which entitled the holders to purchase 425,000 shares of Window On WallStreet's common stock, no par value, at $2.48 per share. At that time, a charge was made to Additional Paid-in Capital of $126,000. The related debt agreement F-15 provided for the conversion of all warrants into shares of Window On WallStreet's common stock at zero cost to the holder if the notes were not paid as of December 31, 1998. As the notes were not paid as of December 31, 1998, under the terms of the note, the holder converted the warrants into 425,000 shares of Window On WallStreet's common stock at zero cost, resulting in a charge to Additional Paid-in Capital of $476,000. During 1999, Window On WallStreet issued 1,196,580 shares of its common stock, no par value, due to nonpayment, consolidation and interest on debt to related parties. The resulting charge to Additional Paid-in Capital was approximately $1.3 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 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 13) with onlinetradinginc.com corp. ("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 2, 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, Director Plan and the WOW Options is as follows: F-16
OPTION PRICE PER SHARE NUMBER ---------------------------------- OF SHARES LOW HIGH WEIGHTED ---------- ----- ----- -------- Outstanding, December 31, 1996 689,328 $ .48 $ 8.06 $1.40 Granted 584,692 1.25 11.00 5.04 Canceled (38,004) 2.00 11.00 5.02 Exercised (8,000) 1.25 1.25 1.25 --------- Outstanding, December 31, 1997 1,228,016 .48 11.00 3.02 Granted 1,902,214 1.59 8.06 2.41 Canceled (68,635) 2.00 11.00 5.15 Exercised (11,350) 1.25 2.00 1.47 --------- Outstanding, December 31, 1998 3,050,245 .48 11.00 2.60 Granted 1,076,245 1.66 10.25 5.86 Canceled (131,278) 1.66 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 =========
Additional information regarding options outstanding at December 31, 1999 is as follows:
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 - ------------ -------- ---------------- --------------- -------------- ---------------- --------------- $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 ===== ====== ========= === ===== ======= =====
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. Options to purchase 930,360, 421,979 and 176,238 shares were exercisable at December 31, 1999, 1998 and 1997, respectively. F-17 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 their exercise price is equal to the fair market value of the underlying stock at the date of grant. Had compensation cost for the Company's stock options been based on fair value at the grant dates consistent with the methodologies of SFAS No. 123, the Company's pro forma net loss (and pro forma loss per share) would have been approximately $1.8 million ($0.07 per share) and $1.0 million ($0.04 per share) for the years ended December 31, 1999 and 1998, and pro forma net income (and pro forma earnings per share on a diluted basis) would have been $4.5 million ($0.20 per share) for the year ended December 31, 1997. 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 option for each six-month Purchase Plan period is 85% of the lesser of the fair market value of the Company's common stock on the first or last business day of the Purchase Plan period. The Purchase Plan provides for the first options to be granted for the Purchase Plan period which commenced January 1, 1998. During the 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. (8) 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. F-18 (9) INCOME TAXES The components of income tax provision (benefit) for the years ended December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ----------- ----------- ----------- Current taxes: Federal $ 5,568,000 $ 2,254,000 $ 1,739,894 State 929,000 376,000 289,106 ----------- ----------- ----------- Total current taxes 6,497,000 2,630,000 2,029,000 ----------- ----------- ----------- Deferred tax benefit: Federal (3,988,000) (1,353,000) (2,540,811) State (663,000) (225,000) (422,189) ----------- ----------- ----------- Total deferred tax benefit (4,651,000) (1,578,000) (2,963,000) ----------- ----------- ----------- Total income tax provision (benefit) $ 1,846,000 $ 1,052,000 $ (934,000) =========== =========== ===========
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: Deferred tax assets: 1999 1998 ------------ ------------ Reserves and allowances $ 8,371,425 $ 4,355,665 Net operating loss carryforwards 2,390,220 961,213 Deferred revenue and accrued liabilities 749,708 176,615 Other 403,647 324,118 ------------ ------------ Total deferred tax assets 11,915,000 5,817,611 Valuation allowance (2,723,000) (1,276,611) ------------ ------------ Deferred income taxes, net $ 9,192,000 $ 4,541,000 ============ ============ The valuation allowance is primarily due to losses incurred by the pooled company which historically had unprofitable operations. A reconciliation of the difference between the expected provision (benefit) for income taxes using the statutory Federal tax rate and the Company's actual provision (benefit) is as follows:
1999 1998 1997 ----------- ----------- ----------- Provision (benefit) using statutory Federal tax rate $ 307,787 $ 218,209 $ 2,853,873 Pro forma taxes for periods prior to September 30, 1997 -- -- (3,255,731) Tax credits -- (26,463) (1,229,911) Change in valuation allowance 1,446,389 578,143 306,692 Other 91,824 282,111 391,077 ----------- ----------- ----------- Total income tax provision (benefit) $ 1,846,000 $ 1,052,000 $ (934,000) =========== =========== ===========
The effective tax rates for 1999 and 1998 were 210% and 169%, respectively. The increase as compared with the 35% Federal statutory rate is primarily due to an increase in the valuation F-19 allowance established at Window On WallStreet to offset net operating loss carryforwards. The effective tax rates of Omega Research as a stand-alone company were approximately 37% and 35% during 1999 and 1998, 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 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. Window On WallStreet has available net operating loss carryforwards totaling approximately $6.3 million, which will begin to expire in 2012. Window On WallStreet 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. (10) (LOSS) EARNINGS PER SHARE Weighted average shares outstanding for the years ended December 31, 1999, 1998 and 1997 are calculated as follows:
1999 1998 1997 ---------- ---------- ---------- Weighted average shares outstanding (basic) 24,294,179 23,913,762 21,829,417 Impact of dilutive options after applying the treasury stock method -- -- 790,647 ---------- ---------- ---------- Weighted average shares outstanding (diluted) 24,294,179 23,913,762 22,620,064 ---------- ---------- ---------- Options outstanding which are not included in the calculation of diluted earnings per share because their impact is antidilutive 3,793,652 3,050,245 115,483 ========== ========== ==========
(11) 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 F-20 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 computer equipment server farm. 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 $689,000, $439,000 and $343,000, 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. (12) QUARTERLY FINANCIAL INFORMATION The following tables summarize selected quarterly financial data of the Company for the years ended December 31, 1999 and 1998 as restated for the acquisition of Window On WallStreet, which was accounted for as a pooling-of-interests. F-21
1999 ---------------------------------------------------------------- FIRST SECOND THIRD FOURTH FULL QUARTER QUARTER QUARTER QUARTER YEAR ----------- ----------- ----------- ----------- ----------- NET REVENUES: Previously reported $ 9,440,788 $10,977,164 $10,792,560 Window On WallStreet 994,596 646,872 690,064 ----------- ----------- ----------- Restated $10,435,384 $11,624,036 $11,482,624 $ 9,327,925 $42,869,969 =========== =========== =========== =========== =========== GROSS PROFIT: * Previously reported $ 8,957,997 $10,521,775 $10,332,922 Window On WallStreet 634,599 264,494 346,523 ----------- ----------- ----------- Restated $ 9,592,596 $10,786,269 $10,679,445 $ 8,826,250 $39,884,560 =========== =========== =========== =========== =========== NET INCOME (LOSS): Previously reported $ 1,210,616 $ 1,644,370 $ 1,639,340 Window On WallStreet (560,511) (1,826,075) (1,272,563) ----------- ----------- ----------- Restated $ 650,105 $ (181,705) $ 366,777 $(1,801,786) $ (966,609) =========== ============ =========== ============ =========== EARNINGS (LOSS) PER SHARE: Previously reported- Basic and Diluted $ .05 $ .07 $ .07 Restated- Basic $ .03 $ (.01) $ .02 (.07) (.04) Diluted .02 (.01) .01 (.07) (.04) 1998 ---------------------------------------------------------------- FIRST SECOND THIRD FOURTH FULL QUARTER QUARTER QUARTER QUARTER YEAR ----------- ----------- ----------- ----------- ----------- NET REVENUES: Previously reported $ 7,030,794 $ 7,651,597 $ 6,469,473 $ 7,064,641 $28,216,505 Window On WallStreet 1,065,236 766,382 192,152 1,470,478 3,494,248 ----------- ----------- ----------- ----------- ----------- Restated $ 8,096,030 $ 8,417,979 $ 6,661,625 $ 8,535,119 $31,710,753 =========== =========== =========== =========== =========== GROSS PROFIT: * Previously reported $ 6,579,542 $ 7,132,764 $ 6,156,909 $ 6,549,212 $26,418,427 Window On WallStreet 875,186 667,944 108,439 1,146,312 2,797,881 ----------- ----------- ----------- ----------- ----------- Restated $ 7,454,728 $ 7,800,708 $ 6,265,348 $ 7,695,524 $29,216,308 =========== =========== =========== =========== =========== NET INCOME (LOSS): Previously reported $ 801,954 $ 817,018 $ 216,103 $ 120,472 $ 1,955,547 Window On WallStreet (359,842) (475,045) (870,110) (679,097) (2,384,094) ----------- ----------- ----------- ----------- ----------- Restated $ 442,112 $ 341,973 $ (654,007) $ (558,625) $ (428,547) =========== =========== =========== =========== =========== F-22 1998 ---------------------------------------------------------------- FIRST SECOND THIRD FOURTH FULL QUARTER QUARTER QUARTER QUARTER YEAR ----------- ----------- ----------- ----------- ----------- EARNINGS (LOSS) PER SHARE: Previously reported- Basic and diluted $ .04 $ .04 $ .01 $ .01 $ .09 Restated- Basic and diluted $ .02 $ .01 $ (.03) $ (.02) $ (.02) * Gross profit is defined as total net revenues less cost of licensing fees and services.
(13) SUBSEQUENT EVENTS (UNAUDITED) On January 19, 2000, the Company signed a definitive, 100% share-exchange merger agreement with OnlineTrading.com, an on-line broker. OnlineTrading.com provides order execution technology that directly accesses electronic communications networks ("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. Pursuant to an Agreement and Plan of Merger and Reorganization, as amended (the "Merger Agreement"), a newly-formed holding company named OnlineTrading.com Group, Inc. ("OnlineTrading.com Group") 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 OnlineTrading.com Group and each of Omega Research and OnlineTrading.com, and the listing of OnlineTrading.com Group shares, OnlineTrading.com Group will be the sole publicly-traded company in the group with its outstanding shares of common stock listed on The Nasdaq National Market. OnlineTrading.com Group, based upon the exchange ratio set forth in the Merger Agreement, would 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, 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-23 OMEGA RESEARCH, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE PAGE ---- 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 S-1 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 February 18, 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, February 18, 2000. S-2 OMEGA RESEARCH, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF OF PERIOD EXPENSES DEDUCTIONS PERIOD ------------ ------------ ------------ ------------ YEAR ENDED DECEMBER 31, 1999: Allowance for doubtful accounts $ 3,723,000 $ 5,721,857 $ (3,151,857) $ 6,293,000 Allowance for returns 7,546,525 60,635,821 (44,942,346) 23,240,000 ------------ ------------ ------------ ------------ $ 11,269,525 $ 66,357,678 $(48,094,203) $ 29,533,000 ============ ============ ============ ============ YEAR ENDED DECEMBER 31, 1998: Allowance for doubtful accounts $ 3,229,166 $ 2,222,834 $ (1,729,000) $ 3,723,000 Allowance for returns 4,196,838 26,638,651 (23,288,964) 7,546,525 ------------ ------------ ------------ ------------ $ 7,426,004 $ 28,861,485 $(25,017,964) $ 11,269,525 ============ ============ ============ ============ YEAR ENDED DECEMBER 31, 1997: Allowance for doubtful accounts $ 830,430 $ 2,450,736 $ (52,000) $ 3,229,166 Allowance for returns 1,797,000 16,200,633 (13,800,795) 4,196,838 ------------ ------------ ------------ ------------ $ 2,627,430 $ 18,651,369 $(13,852,795) $ 7,426,004 ============ ============ ============ ============
S-3
EXHIBIT INDEX EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NUMBER ------ ----------- ----------- 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. (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 (filed herewith) 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.+ 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. (filed herewith) 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 October 12, 1998, and as further amended by Addendum to Lease dated May 28, 1999 (filed herewith) 10.14 - Lease Agreement, dated November 16, 1999, between Fairfax Boca 92, L.P. and Omega Research, Inc. (filed herewith) 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.
EX-2.6 2 EXHIBIT 2.6 FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION This First Amendment ("Amendment") hereby amends effective March 7, 2000 the Agreement and Plan of Merger and Reorganization (the "Plan of Merger"), dated January 19, 2000, by and among Omega Research, Inc., a Florida corporation ("Omega"), onlinetradinginc.com corp., a Florida corporation ("Online"), Online Trading Group, Inc., a Florida corporation("Newco"), Omega Acquisition Corporation, a Florida corporation and wholly owned subsidiary of Newco ("Omega Merger Sub"), and Onlinetrading Acquisition Corporation, a Florida corporation and wholly owned subsidiary of Newco ("Online Merger Sub"). Capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Agreement. WHEREAS, the parties entered into the Agreement on January 19, 2000; and WHEREAS, the parties desire to amend the terms of the Agreement to incorporate the terms herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree that the Agreement shall be amended as follows: 1. Section 1.4 (a) shall be amended and restated in its entirety to read as follows: "(a) At the Effective Time, the Articles of Incorporation (the "Omega Articles of Incorporation") of Omega Merger Sub, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation of the Omega Surviving Corporation; provided, however, that Article I of the Omega Articles of Incorporation shall be amended to read as follows: "The name of the corporation is Omega Research, Inc." 2. Section 1.4 (c) shall be amended and restated in its entirety to read as follows: "(c) At the Effective Time, the Articles of Incorporation (the "Online Articles of Incorporation") of Online Merger Sub, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation of the Online Surviving Corporation; provided, however, that Article I of the Online Articles of Incorporation shall be amended to read as follows: "The name of the corporation is OnlineTrading.com, Inc." 3. The parties hereto hereby authorize and consent to the filing of an amendment to the Articles of Incorporation of Newco pursuant to which Article I of the Articles of Incorporation shall be amended to change the name of Newco to "OnlineTrading.com Group, Inc." and, upon such filing with the Secretary of State of the State of Florida, all references to "Online Trading Group, Inc." in the Agreement and any and all other agreements and instruments entered into between or among the parties hereto in connection therewith shall be modified to reflect the name change to "OnlineTrading.com Group, Inc." 4. Except as otherwise specifically set forth in this Amendment, the Agreement shall remain in full force and effect in accordance with the terms thereof. This Amendment shall be governed by and construed in accordance with the laws of the State of Florida. This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts and all said counterparts taken together, shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered effective as of the day and year first written above. ONLINETRADINGINC.COM CORP. OMEGA RESEARCH, INC. By: /s/ STEVEN ZUM TOBEL By: /s/ RALPH L. CRUZ ----------------------------- ---------------------- Name: Steven zum Tobel Name: Ralph L. Cruz Title: President Title: Co-Chief Executive Officer ONLINE TRADING GROUP, INC. OMEGA ACQUISITION CORPORATION By: /s/ RALPH L. CRUZ By: /s/ RALPH L. CRUZ ----------------------------- --------------------------- Name: Ralph L. Cruz Name: Ralph L. Cruz Title: Co-Chief Executive Officer Title: Co-Chief Executive Officer ONLINETRADING ACQUISITION CORPORATION By: /s/ RALPH L. CRUZ ----------------------------- Name: Ralph L. Cruz Title: Co-Chief Executive Officer 2 EX-10.12 3 EXHIBIT 10.12 SECOND MODIFICATION OF LEASE AGREEMENT This Second Modification of Lease Agreement, made and entered into as of the 31st day of January, 2000, by and between Nationwide Theaters West Flagler, L.L. C., a Delaware limited liability company, as successor in interest to 8700 West Flagler, Ltd., a Florida limited partnership, whose address for purposes hereof is 1000 Brickell Avenue, 12th Floor, Miami, Florida 33131, hereinafter called "Landlord" and Omega Research, Inc., a Florida corporation whose address for purposes herein is 8700 W. Flagler Street, Suite 250, Miami, Florida 33174, hereinafter called "Tenant". WITNESSETH: WHEREAS, Landlord has leased to Tenant approximately 17,289 square feet of Net Rentable Area on the Second (2nd) Floor of The 8700 Flagler Building under Lease Agreement dated August 8, 1996 (hereinafter referred to as the "Lease Agreement") commencing December 1, 1996 and terminating May 31, 2002; and WHEREAS, by Memorandum of Commencement Date dated February 4, 1997, the parties changed and amended the commencement date to February 17, 1997 and expiration date to August 16, 2002; and WHEREAS, by Modification of Lease Agreement dated February 22, 1999, Landlord let to Tenant an additional 34,725 square feet of Net Rentable Area located on the Fourth (4th) Floor for the period commencing May 1, 2000 and terminating August 16, 2002; an WHEREAS, Tenant desires to expand the Leased Premises and Landlord is willing to grant said expansion, NOW, THEREFORE, Landlord and Tenant do hereby agree to modify the foregoing Lease Agreement as follows: 1. All capitalized terms used herein shall have the same meaning as the capitalized terms in the Lease Agreement. In the event of any conflict between the terms of this Second Modification of Lease Agreement and the Lease Agreement, then the terms of this Second Modification of Lease Agreement shall control. 2. LEASED PREMISES: That commencing May 1, 2000, the Leased Premises shall be modified and amended to hereby incorporate an additional 8,496 square feet of Net Rentable Area on the Third (3rd) Floor of the Building (hereinafter referred to as "Expansion Space") (see Exhibit "A") for a total Net Rentable Area of 60,510 square feet. 3. BASE RENTAL FOR EXPANSION SPACE: That commencing May 1, 2000, Tenant agrees to pay Landlord the additional Base Rental of Three Hundred Eighty-Six Thousand Six Hundred Twenty-Five and 04/100 Dollars ($386,625.04) plus applicable sales tax for the Expansion space at the rates and amounts outlined below in accordance with the terms and conditions of the Lease Agreement herewith:
- ----------------------- ------------------------- ------------------------- ------------------------ ------------------------- PERIOD TERM BASE RENTAL RATES MONTHLY INSTALLMENTS ANNUAL BASE RENTAL - ----------------------- ------------------------- ------------------------- ------------------------ ------------------------- Year 1 05/01/00-04/30/01 $19.50 $13,806.00 $165,672.00 (12 months) - ----------------------- ------------------------- ------------------------- ------------------------ ------------------------- Year 2 05/01/01-04/30/02 $20.00 $14,160.00 $169,920.00 (12 months) - ----------------------- ------------------------- ------------------------- ------------------------ ------------------------- Year 3 05/01/02-08/16/02 $20.50 $14,514.00 $51,033.04 (3.5 months) - ----------------------- ------------------------- ------------------------- ------------------------ ------------------------- TOTAL BASE RENTAL: $386,625.04 - ----------------------- ------------------------- ------------------------- ------------------------ -------------------------
4. TENANT IMPROVEMENTS: Tenant shall complete improvements to the Expansion Space in accordance with plans and specifications to be approved by both Landlord and Tenant, Landlord's approval not to be unreasonably withheld or delayed. Landlord shall provide an allowance of $42,480.00 which is calculated based upon $5.00 per square foot of Net Rentable Area for improvements for finishing the Expansion Space. Said allowance shall be payable fifty (50%) percent on May 1, 2000 upon presentation of paid invoices and releases of liens equal to or greater than fifty (50%) percent of the total cost of the work, whichever is less. The remaining fifty (50%) percent shall be paid upon presentation of additional paid invoices and releases of liens which total of all paid invoices is equal to or greater than 100% of said allowance or 100% of the total cost of the work, whichever is less. 5. ADDITIONAL RENT: Effective May 1, 2000, for the purpose of calculating Operating Expenses and Impositions, the provisions of Paragraph 4 of the Lease Agreement shall apply; the Base Year for the Expansion Space shall be 2000, and the Tenant's Proportionate Share for the total Expansion space, which includes the 34,725 square feet of net Rentable Area on the Fourth (4th) Floor and the 8,496 square feet of Net Rentable Area on the Third (3rd) Floor, shall be .3291. The provisions of Paragraph 4 of the Lease Agreement shall remain the same for the original 17,289 square feet of Net Rentable Area on the Second (2nd) Floor. 7. PARKING SPACES: Effective May, 1, 2000, Landlord shall provide an additional 34 parking spaces to Tenant on a non-reserved basis for the Expansion Space. 8. WAIVER OF DEFENSES & CLAIMS: Tenant does hereby confirm and ratify that, as of the date hereof, the Lease Agreement is in good standing in full force and effect, and that Tenant has no defenses, setoffs, counterclaims or cross claims against Landlord. 10. APPLICATION OF LEASE AGREEMENT: All terms and conditions of the Lease Agreement shall remain in full force and effect and shall be equally applicable in all respects hereto, except as specifically modified or provided herein. IN WITHNESS WHEREOF, the undersigned have executed this Second Modification of Lease Agreement as of the date first above written. LANDLORD: Nationwide Theaters West Flagler, L.L.C., a Delaware limited liability company WITNESSES: ILLEGIBLE By: /s/ Paul L. White - -------------------------------- ----------------------------------- Paul L. White, President ILLEGIBLE Attest: /s/ Lorraine H. Monalet - -------------------------------- ------------------------------- Assistant Secretary TENANT: Omega Research, Inc., a Florida corporation WITNESSES: /s/ Salomon Sreani By: /s/ Marc J. Stone - -------------------------------- ----------------------------------- Salomon Sreani Marc J. Stone, Vice President & Company /s/ Jay Dev Attest: ILLEGIBLE - --------------------------------- ------------------------------- Jay Dev EXHIBIT "A" Attached to and made a part of the Second Modification of Lease Agreement dated January 31, 2000, by and between Nationwide Theatres West Flagler, L.L.C., a corporation, as Tenant, covering approximately 8,496 square feet of Net Rentable Area located on the Third (3rd) Floor in the building known as Flagler West Corporate Park, located at 8700 W. Flagler Street, Miami, FL 33174. [FLOOR PLAN] EX-10.13 4 EXHIBIT 10.13 OFFICE/SHOWROOM/WAREHOUSE LEASE AGREEMENT THE STATE OF TEXAS COUNTY OF DALLAS THIS LEASE AGREEMENT, made and entered into as of the ___ day of ______ , 19___, by and between the Landlord and Tenant hereinafter named. WITNESSETH: 1. DEFINITIONS AND BASIC PROVISIONS. The following definitions and basic provisions shall be used in conjunction with and limited by the reference thereto in the provisions of this lease: (a) "Landlord": SPRINGCREEK PLACE, LTD. --------------------------------------------------- (b) "Tenant": MARKETARTS INC., A TEXAS CORPORATION ----------------------------------------------------- (c) "Premises": 1800 NORTH GLENVILLE, SUITE 110 --------------------------------------------------- RICHARDSON,TX 75081 ----------------------------------------------------------------------- as generally outlined on the plan attached hereto as Exhibit "A", said premises consisting of 6,345 SQUARE FEET OF NET RENTABLE AREA. (In determining net rentable area, all measurements are from the outer surfaces of walls, whether exterior walls and/or hallway walls, except party walls where measurements are from centerline.) The net rentable area of the project is 76,280 square feet. (d) "LEASE TERM". A period of 36.5 months, commencing on JULY 15 , 1996 (the "commencement date") and ending on JULY 31, 1999. (e) "BASIC RENTAL": $ $4.097.81 per month. (f) "SECURITY DEPOSIT": $ 4,097.81 . (g) "PERMITTED USE": OFFICE AND STORAGE . (h) "COMMON AREA MAINTENANCE FEE": BASE YEAR 1996 . The Common Area Maintenance Fee is based on operating costs existing during the calendar year in which the Lease commences (the "Base Year"). In the event that the operating costs pertaining to the common area ever exceed, for the calendar year during the term hereof succeeding the Base Year, such operating costs incurred during the Base Year, then Tenant shall pay the Landlord, as additional rental, Tenant's proportionate share (as defined and set forth in Paragraph 4 of this Lease) of such increase. Tenant's proportionate share of any such increase shall be billed by Landlord, and paid by Tenant, at the time and in the manner provided for in the billing and payment of Rental Escalation as set forth in Paragraph 4 of this Lease. 2. LEASE GRANT. Landlord, in consideration of the rent to be paid and the other covenants and agreements to be performed by Tenant and upon the terms and conditions hereinafter stated, does hereby lease, demise and let unto Tenant the premises (as defined in paragraph 1(c) hereof) commencing on the commencement date (as defined in paragraph 1(d) hereof, or as adjusted as hereinafter provide) and ending on the last day of the lease term, unless sooner terminated as herein provided. If this lease is executed before the premises become vacant, or otherwise available and ready for occupancy, or if any present tenant or occupant of the premises holds over, and Landlord cannot acquire possession of the premises prior to the commencement date of this lease, Landlord shall not be deemed to be in default hereunder, and Tenant agrees to accept possession of the premises at such time as Landlord is able to tender the same and such date shall be deemed to be the commencement date and this lease shall continue for the lease term described in paragraph 1(d) hereof. Landlord hereby waives payment of rent covering any period prior to the rendering of possession of the premises to Tenant hereunder. Likewise, should Tenant occupy the premises prior to the commencement date specified in paragraph 1(d), the commencement date shall be altered to coincide with said occupancy with the ending date of the lease remaining unchanged before occupying the premises. Tenant shall be deemed to have accepted the same as suitable for the purpose herein amended and to have acknowledged that the same comply fully with Landlord's covenants and obligations. 3. RENT. In consideration of this lease, Tenant promises and agrees to pay Landlord the basic rental (as defined in paragraph 1(a) hereof) without deduction or set off, for each month of the entire lease term. One such monthly installment together with the security deposit (as defined in paragraph 1(f) hereof) shall be payable by Tenant to Landlord contemporaneously with the execution hereof, and a like monthly installment shall be due and payable without demand on or before the first day of each succeeding calendar month during the term hereof. Rent for any fractional month at the beginning or end of the lease term shall be prorated. The security deposit shall be held by Landlord without liability for interest and as security for the performance by Tenant of Tenant's covenants and obligations under this lease, it being expressly understood that such deposit shall not be considered an advance payment of 1 rental or a measure of Landlord's damages in case of default by Tenant. Upon the occurrence of any event of default by Tenant, Landlord may, from time to time, without prejudice to any such remedy, use such deposit to the extent necessary to make good any arrearages of rent and any other damage, injury, expenses or liability caused to Landlord by such event of default. Following any such application of the security deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the security deposit to its original amount. If Tenant is not then in default hereunder, any remaining balance of such deposit shall be returned by Landlord to Tenant upon termination of this lease. If Landlord transfers its interest in the premises during the lease term, Landlord may assign the security deposit to the transferee and thereafter shall have no further liability for the return of such security deposit. If the monthly rental installment is not received by the Landlord on or before the 10th day of the month for which said monthly rental installment is due, a service charge of 10% of the monthly rental installment owed shall become due and payable in addition to the monthly rental installment owed. Said service charge is for the purpose of reimbursing Landlord for the extra costs and expenses incurred in connection with the handling and processing of late monthly rental. 4. RENTAL ESCALATION. The basic rental payable under paragraph 1(e) hereof is based on factors existing during the calendar year in which the lease commences ("base year") said factors including operating expenses which include general maintenance, maintenance of the common areas (including but not limited to landscape and irrigation maintenance, exterior lighting and utilities, and parking lot cleaning and repairs) water, sewer, and drainage charges, waste removal, building and roof repairs, real property taxes and assessments, fire, casualty and liability insurance and management for the project. In the event that during the lease term said operating expenses for 1997 or any succeeding calendar year exceed BASE YEAR 1996 EXPENSES ("base expense rate") for the net rentable area of the project (as defined in paragraph 1(c) hereof), Tenant, within thirty (30) days after written notification of the foregoing by Landlord, shall: (a) Pay to Landlord Tenant's proportionate share ( 8.32 %) of such increase for the year in question, said proportionate share being defined to mean a fraction, the numerator of which is the square footage of the premises set out in paragraph 1(c), and the denominator of which is the total net rentable area of the project also set out in paragraph 1(c). The product resulting from the application of such fraction to the increase shall constitute the amount of additional rent Tenant shall pay. Landlord may apply all or part of Tenant's security deposit to satisfy the additional rent called for hereunder, and following any such application, Tenant shall on demand pay to Landlord the amount so applied in order to restore the security deposit to the original amount. (b) Additionally, beginning January 1 of the calendar year next following any year in which Tenant is obligated to pay its proportionate increase set out in subparagraph 4(a) above, the basic rental per month set out in paragraph 1(e) shall be increased by an amount equal to the additional rent determined in accordance with subparagraph 4(a) above divided by twelve. Any such additional rent collected shall be applied to any increase over the base expense rate for the calendar year in which the additional rent is paid. After the end of every calendar year Landlord will deliver to Tenant a statement including (i) the previous calendar year's operating expenses (as defined in paragraph 4). (ii) Tenant's proportionate share of any increases. (iii) the adjustment, if any, reflecting the additional rent paid, and (iv) the net amount due Landlord or due to be reimbursed to tenant; provided, however, in no event shall the monthly rental ever be less than the basic rental specified in paragraph 1(a). Notwithstanding any expiration or termination of this lease prior to the lease expiration date (except in the case of a cancellation by mutual agreement) Tenant's obligation to pay any and all additional rent under this lease shall continue and shall cover all periods up to the lease expiration date. Tenant's obligation to pay any and all additional rent under this lease and Landlord's and Tenant's obligation to make the adjustments referred to in this paragraph 4 shall survive any expiration of termination of this lease. 5. SERVICES. (a) Landlord agrees to make available to the premises at Landlord's sole cost and expense (i) water; (ii) air conditioning and heating units in existing locations; (iii) electric service and outlets and; (iv) electrical lighting service for all common areas in the manner and to the extent deemed by Landlord to be standard. (b) Tenant shall pay for the electricity, gas, and water utilized in operating any and all facilities serving the leased premises. Tenant shall also pay for exterior trash and waste receptacles and removal and for janitorial services within the leased premises. (c) Failure to any extent to furnish or any stoppage or interruption of these defined services resulting from any cause shall not render Landlord liable in any respect for damages to either person, property or business, nor be construed as an eviction of Tenant, nor any abatement of rent, nor relieve Tenant from fulfillment of any covenant or agreement hereof. Tenant shall have no claim for abatement of rent or damages on account of any interruptions in service occasioned thereby or resulting therefrom. 6. LEASEHOLD IMPROVEMENTS. Landlord has made no representations as to the condition of the premises or the building or to remodel, repair or decorate, except as expressly set forth herein. Tenant acknowledges that it is accepting the premises in their "as is" condition. 2 7. USE. Tenant shall use the premises only for the permitted use (as defined in paragraph 1(g) hereof. Tenant will not occupy or use the premises, or permit any portion of the premises to be occupied or used for any business or purpose other than the permitted use or for any use or purpose which is unlawful in part or in whole or deemed to be disreputable in any manner or extra hazardous on account of fire, nor permit anything to be done which will in any way increase the rate of fire insurance on the building or contents; and in event that, by reason of acts of Tenant, there shall be any increase in rate of insurance on the building or contents created by Tenant's acts or conduct of business then such acts of Tenant shall be deemed to be an event of default hereunder and Tenant hereby agrees to pay to Landlord the amount of such increase on demand and acceptance of such payment shall not constitute a waiver of any of Landlord's other rights provided herein. Tenant will conduct its business and control its agents, employees and invitees in such a manner as not to create any nuisance, nor interfere with, annoy or disturb other tenants or the Landlord in management of the building. Tenant will maintain the premises in a clean, healthful and safe condition and will comply with all laws, ordinances, orders, rules and regulations (state, federal, municipal and other agencies or bodies having any jurisdiction thereof) with reference to use, condition or occupancy of premises. Tenant will not, without the prior written consent of the Landlord, paint, install lighting or decoration, or install any signs, window or door lettering or advertising media of any type on or about the premises or any part thereof. Should Landlord agree in writing to any of the foregoing items in the preceding sentence, Tenant will maintain such permitted items in good condition and repair at all times. 8. REPAIRS AND MAINTENANCE. (a) BY LANDLORD: Landlord shall at its expense maintain only the foundation, underground or otherwise concealed plumbing, and the structural soundness of the exterior walls (excluding all windows, window glass, plate glass, and all doors) of the building in good repair and condition, except for reasonable wear and tear. Landlord shall be responsible for termite eradication. Tenant shall give immediate written notice to Landlord of the need for repairs or corrections and Landlord shall proceed promptly to make such repairs or corrections. Landlord's liability hereunder shall be limited to the cost of such repairs or corrections. Landlord represents that at the beginning date of this lease agreement the plumbing and heating and air-conditioning equipment are in good operating condition. (b) BY TENANT: Tenant shall at its expense and risk maintain all other parts of the building and other improvements on the demised premises in good repair and condition, including but not limited to repairs (including all necessary replacements) to the interior plumbing, windows, window glass, plate glass, interior and exterior doors, heating systems, air-conditioning equipment, fire protection sprinkler system, and the interior of the demised premises in general. All warranties and guarantees in effect on any of the items mentioned above will be for Tenant's or Landlord's use as applicable. In event Tenant should neglect reasonably to maintain the demised premises, Landlord shall have the right (but not the obligation) to cause repairs or corrections to be made and any reasonable costs therefore shall be payable by Tenant to Landlord as additional rental on the next rental installment date. 9. ALTERATIONS AND IMPROVEMENTS. At the end or other termination of this lease, Tenant shall deliver up the premises with all improvements located thereon (except as otherwise herein provided) in good repair and condition, reasonable wear and tear excepted, and shall deliver to Landlord all keys to the premises. The cost and expense of any repair necessary to restore the condition of the leased premises to said condition in which they are to be delivered to Landlord shall be borne by Tenant. Tenant will not make or allow to be made any alterations or physical additions in or to the premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld as to non-structural alterations. All alterations, additions or improvements (whether temporary or permanent in character) made in or upon the premises either by Landlord or Tenant shall be Landlord's property on termination of this lease and shall remain on the premises without compensation to Tenant. All furniture, moveable trade fixtures and equipment installed by Tenant may be removed by Tenant at the termination of this lease if Tenant so elects and shall be so removed if required by Landlord, or if not so removed shall, at the option of the Landlord, become the property of Landlord. All such installations, removals and restoration shall be accomplished in a good workmanlike manner so as not to damage the premises or the primary structure or structural qualities of the building or the plumbing, electrical lines or other utilities. 10. COMMON AREAS. The use and occupation by Tenant of the leased premises shall include the use in common with others entitled thereto of the common areas, parking areas, service roads, loading facilities, sidewalks, and other facilities as may be designated from time to time by Landlord, subject however, to the terms and conditions of this agreement and to reasonable rules and regulations for the use thereof as prescribed from time to time by the Landlord. All commons areas described above shall at all times be subject to the exclusive control and management of Landlord and Landlord shall have the right from time to time to establish, modify and enforce reasonable rules and regulations with respect to all facilities and areas mentioned in this Article. Landlord shall have the right to construct, maintain, and operate lighting facilities on all said areas and improvements, to police same, from time to time change the area, level location and arrangement of parking areas and other facilities hereinabove referred to, and restrict parking by tenants, their officers, agents, and employees to employee parking areas. All common areas and facilities not within the leased premises, which Tenant may be permitted to use and occupy, are to be used and occupied under revocable license and if the amount of such areas be 3 diminished, Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such diminution of such areas be deemed constructive or actual eviction. 11. ASSIGNMENT AND SUBLETTING. Tenant shall not assign or in any manner transfer this lease or any estate or interest therein, or sublet the premises or any part thereof, or grant any license, concession or other right of occupancy of any portion of the premises without prior written consent of the Landlord. Consent by Landlord to one or more assignments or sublettings shall not operate as a waiver of Landlord's rights as to any subsequent assignments and sublettings. Notwithstanding any assignment or subletting, Tenant and any guarantor of Tenant's obligations under this lease shall at all times remain fully responsible and liable for the payment of the rent herein specified and for compliance with all of Tenant's other obligations under this lease. In the event of the transfer and assignment by Landlord of its interest in this lease and the Building containing the premises, Landlord shall thereby be released from any further obligations hereunder and Tenant agrees to look solely to such successor in interest of the Landlord for performance of such obligations. Tenant shall not mortgage, pledge or otherwise encumber its interest in this lease or in the premises. 12. INDEMNITY. Landlord shall not be liable for and Tenant will indemnify and save harmless Landlord of and from all fines, suits, claims, demands, losses and actions (including attorneys' fees) for any injury to person or damage to or loss of property on or about the premises caused by the negligence or misconduct or breach of this lease by Tenant, its employees, subtenants, invitees or by any other person entering the premises or the Building under express or implied invitation of Tenant, or arising out of Tenant's use of the premises. Landlord shall not be liable or responsible for any loss or damage to any property or death or injury to any person occasioned by theft, fire, Act of God, public enemy, injunction, riot, strike, insurrection, war, court order, requisition or other governmental body or authority, by other tenants of the Building or any other matter beyond control of Landlord, or for any injury or damage or inconvenience which may arise through repair or alteration of any part of the Building, or failure to make repairs, or from any cause whatever except Landlord's gross negligence. 13. MORTGAGES. Tenant accepts this lease subject to any deeds of trust, security interests or mortgages which might now or hereafter constitute a lien upon the Building or Improvements therein or on the premises and to zoning ordinances and other Building and fire ordinances and governmental regulations relating to the use of the property. Tenant shall at any time hereafter, on demand, execute any instruments, releases or other documents that may be required by any mortgages for the purpose of subjecting and subordinating this lease to the lien of any such deed of trust, security interest or mortgage. With respect to any deed of trust, security interest or mortgage hereafter constituting a lien on the Building or Improvements therein or the premises, Landlord, at its sole option, shall have the right to waive the applicability of this paragraph 13 so that this lease will not be subject and subordinate to any such deed of trust, security interest or mortgage. 14. CASUALTY INSURANCE. Landlord shall, at all times during the term of this lease maintain a policy or policies of Insurance with the premiums thereon fully paid in advance, issued by and binding upon some solvent insurance company, insuring the Building against loss or damage by fire, explosion, or other hazards and contingencies for the full insurable value thereof; provided that Landlord shall not be obligated to insure any furniture, equipment, machinery, goods or supplies not covered by this lease which Tenant may bring or obtain upon the leased premises, or any additional improvements which Tenant may construct thereon. Tenant shall procure and maintain throughout the term of this lease a policy or policies of insurance at its sole cost and expense, insuring Tenant and Landlord against any and all liability for injury to or death of a person or persons, occasioned by or arising out of or in connection with the use or occupancy of the Premises, the limits of such policy or policies to be in an amount not less than $1,000,000.00 with respect to injuries to or death of any one person and in an amount of not less than $1,000,000 with respect to any one accident or disaster, and shall furnish evidence satisfactory to Landlord of the maintenance of such insurance. Tenant shall obtain a written obligation on the part of each insurance company to notify Landlord at least ten (10) days prior to cancellation of such insurance. 15. INSPECTION. Landlord or representatives shall have the right to enter into and upon any and all parts of premises at reasonable hours to (i) inspect same or clean or make repairs or alterations or additions as Landlord may deem necessary (but without obligation to do so, except as expressly provided for herein). or (ii) show the premises to prospective tenants, purchasers or lenders; and Tenant shall not be entitled to any abatement or reduction of rent by reason thereof, nor shall such be deemed to be an actual or constructive eviction. 16. CONDEMNATION. If, during the term of this lease or any extension or renewal thereof, all of the premises should be taken for any public or quasi-public use under any governmental law, ordinance or regulation or by right of eminent domain or by private purchase in lieu thereof, this lease shall terminate and the rent shall be abated during the unexpired portion of this lease, effective on the date physical possession is taken by the condemning authority, and Tenant shall have no claim against Landlord for the value of any unexpired term of this lease. In the event a portion but not all of the premises shall be taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain, by private sale in lieu thereof and the partial taking or condemnation shall render the premises unsuitable for Tenant's business, then Landlord shall have the option, in its sole discretion, of terminating this lease or at Landlord's sole 4 risk and expense, restoring and reconstructing the premises to the extent necessary to make same reasonably tenantable. Should Landlord elect to restore, the lease shall continue in full force and effect with the rent payable during the unexpired portion of this lease being adjusted to such an extent as may be fair and reasonable under the circumstances, and Tenant shall have no claim against Landlord for the value of any interrupted portion of this lease. In the event of any condemnation or taking, total or partial, Tenant shall not be entitled to any part of the award or price paid in lieu thereof, and Landlord shall receive the full amount of such award or price. Tenant hereby expressly waiving any right or claim to any part thereof. 17. FIRE OR OTHER CASUALTY. In the event that the premises should be totally destroyed by fire, tornado or other casualty or in the event the premises or the Building should be so damaged that rebuilding or repairs cannot be completed within ninety (90) days after the date of such damage, either Landlord or Tenant may at its option terminate this lease in which event the rent shall be abated during the unexpired portion of this lease effective with the date of such damage. In the event the premises should be damaged by fire, tornado or other casualty covered by Landlord's insurance but only to such extent that rebuilding or repairs can be completed within ninety (90) days after the date of such damage, or if the damage should be more serious but neither Landlord nor Tenant elects to terminate this lease, in either such event Landlord shall within (30) days after the date of such damage commence to rebuild or repair the premises and shall proceed with reasonable diligence to restore the premises to substantially the same condition in which it was immediately prior to the happening of the casualty, except that Landlord shall not be required to rebuild, repair or replace any part of the furniture, equipment , fixtures and other improvements which may have been placed by Tenant or other Tenants within the project or the premises. Landlord shall allow Tenant a fair diminution of rent during the time the premises are unfit for occupancy. In the event any mortgages under a deed of trust, security agreement or mortgage on the premises should require that the insurance proceeds be used to retire the mortgage debt, Landlord shall have no obligation to rebuild and this lease shall terminate upon notice to Tenant. Any insurance which may be carried by Landlord or Tenant against loss or damage to the project or to the premises shall be for the sole benefit of the party carrying such insurance and under its sole control. 18. HOLDING OVER. Should Tenant, or any of its successors in interest, hold over the premises, or any part thereof, after the expiration of the term of this lease, unless otherwise agreed in writing, such holding over shall constitute and be construed as Tenancy from month to month only, at a rental equal to the rent payable for the last month of the term of this lease plus fifty percent (50%) of such amount. The inclusion of the preceding sentence shall not be construed as Landlord's consent for the Tenant to hold over. 19. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for all taxes levied or assessed against personal property, furniture or fixtures placed by Tenant in the premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and if Landlord elects to pay the same or if the assessed value of Landlord's property is increased by inclusion of personal property, furniture or fixtures placed by Tenant in the premises, and Landlord elects to pay the taxes based on such increase, Tenant shall pay to Landlord upon demand that part of such taxes for which Tenant is primarily liable hereunder. 20. EVENTS OF DEFAULT. The following events shall be deemed to be events of default by Tenant under this lease: (a) Tenant shall fail to pay any installment of the rent hereby reserved and such failure shall continue for a period of ten (10) days. (b) Tenant shall fail to comply with any term, provision or covenant of this lease, other than the payment of rent, and shall not cure such failure within ten (10) days after written notice thereof to Tenant. (c) Tenant shall make an assignment for the benefit of creditors. (d) Tenant shall file a petition under any section or chapter of the National Bankruptcy Act, as amended, or under any similar law or statute of the United States or any state hereof; or Tenant shall be adjudged bankrupt or insolvent in proceeding filed against Tenant thereunder and such adjudication shall not be vacated or set aside within thirty (30) days. (e) A receiver or Trustee shall be appointed for all or substantially all of the assets of Tenant and such receivership shall not be terminated or stayed within thirty (30) days. (f) Tenant shall desert or vacate any substantial portion of the premises for a period of five (5) or more days. 21. REMEDIES. Upon the occurrence of any event of default specified in paragraph 20 hereof, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever: (a) Terminate this lease in which event Tenant shall immediately surrender the premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession and expel or remove Tenant and any other person who may be occupying said premises or any part thereof, by force if necessary, 5 without being liable for prosecution or any claim of damages thereof; and Tenant agrees to pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the premises on satisfactory terms or otherwise, including the loss of rental for the remainder of the lease term. (b) Enter upon and take possession of the premises and expel or remove Tenant and any other person who may be occupying the premises or any part thereof, by force if necessary, without being liable for prosecution or any claim for damages thereof, and if Landlord so elects, relet the premises on such terms as Landlord shall deem advisable and receive the rent thereof; and Tenant agrees to pay to Landlord on demand any deficiency that may arise by reason of such reletting for the remainder of the lease term. (c) Enter upon the premises by force if necessary, without being liable for prosecution or any claim for damages thereof, and do whatever Tenant is obligated to do under the terms of this lease; and tenant agrees to reimburse Landlord on demand for any expenses which landlord may incur in thus effecting compliance with Tenant's obligations under this lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to the Tenant from such action. No re-entry or taking possession of the premises by Landlord shall be construed as an election on its part to terminate this lease, unless a written notice of such intention be given to Tenant. Notwithstanding any such reletting or re-entry or taking possession, Landlord may at any time thereafter elect to terminate this lease for a previous default. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law, nor shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any rent due to Landlord hereunder or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants herein contained. Landlord's acceptance of rent following an event of default hereunder shall not be construed as Landlord's waiver of such event of default. No waiver by Landlord of any violation or breach of any of the terms, provisions, and covenants herein contained shall be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions, and covenants herein contained. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of any other violation or default. The loss or damage that Landlord may suffer by reason of termination of this lease or the deficiency from any reletting as provided for above shall include the expense of repossession and any repairs or remodeling undertaken by Landlord following possession. Should Landlord at any time terminate this lease for any default, in addition to any other remedy Landlord may have, Landlord may recover from Tenant all damages Landlord may incur by reason of such default including the cost of recovering the premises and the loss of rental for the remainder of the lease term. 22. SURRENDER OF PREMISES. No act or thing done by the Landlord or its agents during the term hereby granted shall be deemed an acceptance of a surrender of the premises, and no agreement to accept a surrender of the premises shall be valid unless the same be made in writing and subscribed by the Landlord. 23. ATTORNEY'S FEES. In case it should be necessary or proper for Landlord to bring any action under this lease or to consult or place said lease, or any amount payable by Tenant thereunder, with an attorney concerning or for the enforcement of any of Landlord's rights hereunder, then Tenant agrees in each and any such case to pay to Landlord a reasonable attorneys' fee. 24. LANDLORD'S LIEN. In addition to the statutory Landlord's lien, Landlord shall have, at all times, a valid security interest to secure payment of all rentals and other sums of money becoming due hereunder from Tenant, and to secure payment of any damages or loss which Landlord may suffer by reason of the breach by Tenant of any covenant, agreement or condition contained herein, upon all goods, wares, equipment, fixture, furniture, improvements and other personal property of Tenant presently or which may hereafter be situated on the premises, and all proceeds therefrom and such property shall not be removed therefrom without the consent of Landlord until all arrearages in rent as well as any and all other sums of money then due to Landlord hereunder shall first have been paid and discharged and all the covenants, agreements and conditions hereof have been fully complied with and performed by Tenant. Upon the occurrence of an event of default by Tenant, Landlord may, in addition to any other remedies provided herein, enter upon the premises and take possession of any and all goods, wares, equipment, fixtures, furniture, improvements and other personal property of Tenant situated on the premise, without liability for trespass or conversion, and sell the same at public or private sale, with or without having such property at the sale, after giving Tenant reasonable notice of the time and place of any public sale or of the time after which any private sale is to be made, at which sale the Landlord or its assigns may purchase unless otherwise prohibited by law. Unless otherwise provided by law, and without intending to exclude any other manner of giving Tenant reasonable notice, the requirement of reasonable notice shall be met if such notice is given in the manner prescribed in paragraph 27 of this lease at least five (5) days before the time of sale. The proceeds from any such disposition, less any and all expenses connected with the taking of possession, holding and selling of the property (including reasonable attorneys' fees and other expenses), shall be applied as a credit against the indebtedness secured by the security interest granted in this paragraph 24. Any surplus shall be paid to Tenant or as otherwise required by law; and the Tenant shall pay any deficiencies forthwith. Upon request by Landlord, Tenant agrees to execute and deliver to Landlord a financing statement in form sufficient to perfect the security interest of Landlord in the aforementioned property and proceeds thereof under the provisions of the Uniform Commercial Code in force in the State of Texas. The statutory lien for rent is not hereby waived, the security interest herein granted being in addition and supplementary thereto. 6 25. MECHANIC'S LIENS: Tenant will not permit any mechanic's lien or liens to be placed upon the premises or the Building or improvements thereon during the term hereof caused by or resulting from any work performed, materials furnished or obligation incurred by or at the request of Tenant, and in the case of the filing of any such lien Tenant will promptly pay same. If default in payment thereof shall continue for twenty (20) days after written notice thereof from Landlord to the Tenant, the Landlord shall have the right and privilege at Landlord's option of paying the same or any portion thereof without inquiry as to the validity thereof, and any amounts so paid, including expenses and interest, shall be so much additional indebtedness hereunder due from Tenant to Landlord and shall be repaid to Landlord immediately on rendition of bill therefor together with interest at ten percent (10%) per annum until repaid. 26. WAIVER OF SUBROGATION. Anything in this lease to the contrary notwithstanding, the parties hereto hereby waive any and all rights of recovery, claim, action or cause of action, against each other, their agents, offices, and employees, for any loss or damage that may occur to the premises hereby demised, or any improvement thereto, or said Building of which the premises are a part, or any improvements thereto, by reason of fire, the elements, or any other cause which could be insured against under the terms of standard fire and extended overage insurance policies, regardless of cause or origin, including negligence of the parties hereto, their agents, officers, and employees. 27. NOTICES. Each provision of this agreement, or of any applicable governmental laws, ordinances, regulations, and other requirements with reference to the sending, mailing or delivery of any notice, or with reference to the making of any payment by Tenant to Landlord, shall be deemed to be complied with when and if the following steps are taken: (a) All rent and other payment required to be made by Tenant to Landlord hereunder shall be payable to Landlord in Dallas County, Texas at the address hereinbelow set forth, or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith; (b) Any notice or document required to be delivered hereunder shall be deemed to be delivered if actually received and whether or not received when deposited in the United States mail, postage prepaid, certified or registered mail (with or without return receipt requested) addressed to the parties hereto at the respective addresses set out opposite their names below, or at such other address as they have theretofore specified by written notice delivered in accordance herewith: LANDLORD: Springcreek Place, Ltd., c/o John S. Dryden, P.O. Box 800068, Dallas, Texas 75380-0068 TENANT: MarketArts Inc., c/o Mr. John R. Jennings, Chief Executive Officer, 1820 North Glenville, Suite 100, Richardson, Texas 75081 28. FORCE MAJEURE. Whenever a period of time is herein prescribed for action to be taken by Landlord, the Landlord shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, riots, Acts of God, Shortages of labor or materials, war, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the control of Landlord. 29. SEPARABILITY. If any clause or provision of this lease is illegal, invalid or unenforceable under present or future laws effective during the term of this lease, then and in that event, it is the intention of the parties hereto that the remainder of this lease shall not be affected thereby, and it is also the intention of the parties to this lease that in lieu of each clause or provision of this lease that is illegal, invalid or unenforceable, there be added as a part of this lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. 30. ENTIRE AGREEMENT; AMENDMENTS; BINDING EFFECT. This lease contains the entire agreement between the parties and may not be altered, changed or amended, except by instrument in writing signed by both parties hereto. No provision of this lease shall be deemed to have been waived by Landlord unless such waiver be in writing signed by Landlord and addressed to Tenant, nor shall any custom or practice which may grow up between the parties in the administration of the terms hereof be construed to waive or lessen the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms hereof. The terms, provisions, covenants and conditions contained in this lease shall apply to inure to the benefit of, and be binding upon the parties hereto, and upon their respective successors in interest and legal representatives, except as otherwise herein expressly provided. 31. QUIET ENJOYMENT. Provided Tenant has performed all of the terms, covenants, agreements and conditions of this lease, including the payment of rent, to be performed by Tenant, Tenant shall peaceably and quietly hold and enjoy the premises for the term hereof, without hindrance from Landlord, subject to the terms and conditions of this lease. 32. RULES AND REGULATIONS. Tenant and Tenant's agents, employees, and invitees will comply fully with all requirements of the rules and regulations of the Building and related facilities which are attached hereto as "Exhibit "B", and made a part hereof as though fully set out herein. Landlord shall at all times have the right to change such rules and regulations or to promulgate other rules and regulations in such reasonable manner as may be deemed advisable for safety, care, or cleanliness of the Building 7 and related facilities or premise, and for preservation of good order therein, all of which rules and regulations, changes and amendments will be forwarded to Tenant in writing and shall be carried out and observed by Tenant. Tenant shall further be responsible for the compliance with such rules and regulations by the employees, servants, agents, visitors and invitees of Tenant. 33. BROKER'S OR AGENT'S COMMISSION. Tenant represents and warrants that there are no claims for brokerage commissions or finder's fees in connection with the execution of this lease, except as listed below, and Tenant agrees to indemnify and hold harmless Landlord against all liabilities and costs arising from such claims, including without limitation attorneys' fees in connection therewith. 34. GENDER. Words of any gender used in this lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. 35. JOINT AND SEVERAL LIABILITY. If there be more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several. If there be a guarantor of Tenant's obligations hereunder, the obligations imposed upon Tenant shall be the joint and several obligations of Tenant and such guarantor and Landlord need not first proceed against the Tenant hereunder before proceeding against such guarantor, nor shall any such guarantor be released from its guaranty for any reason whatsoever, including without limitation, in case of any amendments hereto, waivers hereof or failure to give such guarantor any notices hereunder. 36. CAPTIONS. The captions contained in this lease are for convenience of reference only, and in no way limit or enlarge the terms and conditions of this lease. 37. SPECIAL PROVISIONS: Tenant accepts the lease space on an "as is" basis except for the following: A. Landlord agrees to separate the utilities and hvac equipment. B. Landlord agrees to restore the party wall between suites 110 and 114. C. Landlord agrees to reinstall he hallway connecting suites 100 and 110. D. Landlord agrees to repaint and recarpet suite 110 and touchup the paint job in suite 100. E. Landlord agrees to allow the placement of antennas and/or the other electronic signal receiving and/or emitting devices on the roof and/or back sides of suites 100 and 110. EXECUTED AS OF THE DATE FIRST ABOVE WRITTEN. LANDLORD: Springcreek Place, Ltd. By: /s/ John S. Dryden -------------------------------------------------------- 46 Corp. General Partner John S. Dryden, President -------------------------------------------------------- Date: 6/12/96 -------------------------------------------------------- TENANT: MarketArts Inc., a Texas Corporation ATTEST: BY: /s/ John R. Jennings -------------------------------------------------------- John R. Jennings Chief Executive Officer - ------------- -------------------------------------------------------- (TITLE) -------------------------------------------------------- Date: 5/31/96 -------------------------------------------------------- 8 ADDENDUM TO LEASE AGREEMENT BETWEEN MARKETARTS, INC. (TENANT) AND SPRINGCREEK PLACE, LTD. (LANDLORD) DATED 6-12-96 Whereas the aforementioned parties agree to modify the referenced lease agrement to include the space located at 1820 N. Glenville, suite 100 comprised of 7,180 square feet. The terms and conditions set forth in the original lease agreement shall remain the same with the following modifications: I. The new space comprised of 7,180 square feet shall be leased at a rate of $12/sf. This equates to an additional $7,180.00/month. II. Expenses shall be computed with a base year 1998 on the new space. III. The commencement date shall be 11-1-98 and the expiration date shall be 7-31-99. If this is acceptable, then please indicate by executing this document on the designated line below. Once you have a fully executed document it will become a part of and should be attached to the original lease agreement. TENANT: /s/ John R. Jennings -------------------------------- MARKETARTS, INC. DATE: 9/29/98 -------------------------------- LANDLORD: /s/ John S. Dryden -------------------------------- SPRINGCREEK PLACE, LTD. DATE: 10/12/98 -------------------------------- ADDENDUM TO LEASE AGREEMENT BETWEEN MARKETARTS, INC. (TENANT) AND SPRINGCREEK PLACE, LTD. (LANDLORD) DATED JUNE 12, 1996 AND AMENDED ON 10-12-98 This document when fully executed should be attached to and will become a part of the two aforementioned documents. All the terms and conditions set forth in these two documents shall remain the same with the following exceptions: I. The expiration date shall be extended to 7-31-2002. II. The rate shall change to $11,270.83 per month ($10/sf). III. The base year shall be changed to 1999. IV. Tenant accepts the lease space on an "as is" basis. V. Landlord and Tenant agree that effective August 1, 1999, the first sentence of Paragraph 11 of the Lease Agreement dated June 12, 1996 shall be deleted in its entirety and replaced with the following: Tenant shall not assign or in any manner transfer this lease or any estate or interest therein, or sublet the premises or any part thereof, or grant any license, concession or other right of occupancy of any portion of the premises without the prior written consent of the Landlord, which consent shall not be unreasonably withheld or delayed. Landlord and Tenant agree that in the event Tenant is purchased or acquired by a larger company and the usage of the premises does not change, Landlord will not withhold its consent for the assignment of lease. VI. Operating Expense Cap. Notwithstanding anything to the contrary set forth in this Lease, when determining Tenant's pro rata share of excess operating expenses for lease years subsequent to the first lease year, operating expenses may not increase more than fifteen percent (15%) from the immediately preceding lease year. Provided, the foregoing cap on operating expenses shall not apply to taxes and insurance. Tenant's pro rata share of the excess of these expenses shall always be based on the actual amount of such expenses. VII. Renewal Option. If, at the end of this renewal term of this Lease, the Tenant is not in default in any of the terms, conditions or covenants of the Lease, Tenant, but not any assignee or subtenant of Tenant, is hereby granted an option to renew this Lease for one (1) additional term of thirty-six (36) months upon the same terms and conditions contained in this Lease with the following exceptions: A. The renewal option term will contain no further renewal options unless expressly granted by Landlord in writing; and B. The rental for the renewed term shall be based on the then prevailing rental rates for properties of equivalent quality, size, utility and location, with the length of the lease term and credit standing of the Tenant to be taken into account. If Tenant desires to renew this Lease, Tenant will notify the Landlord of its intention to renew no later than six (6) months prior to the expiration date of the Lease; Landlord shall, within the next fifteen (15) days notify Tenant in writing of the proposed rental rate and the Tenant shall, within the next fifteen (15) days following receipt of the proposed rate, notify the Landlord in writing of its acceptance or rejection of the proposed rental rate. Rejection of the proposed rental rate terminates any renewal option pursuant to this paragraph. Page 1 of 2 VIII. Option to Cancel. Landlord hereby grants to Tenant to the right and option to cancel this Lease at any time after the expiration of the twelfth (12th) month and prior to the expiration of the twenty-fifth (25th) month from the commencement of this Lease provided Tenant (i) gives Landlord at least sixty (60) days prior written notice of the exercise of this option specifying therein the effective date of the cancellation, and (ii) simultaneously with the giving of such notice pays to Landlord 40% of the aggregate of the remaining rent owed under the Lease Agreement as consideration for the cancellation of this Lease. If this is acceptable, then please indicate by executing this agreement on the designated line below. ACCEPTED BY TENANT: /S/ KEITH BLACK ----------------------------------- DATE: 5/25/99 ------------- MarketArts, Inc. ACCEPTED BY LANDLORD: /S/ JOHN S. DRYDEN ---------------------------------- DATE: 5/28/99 ------------- Springcreek Place, Ltd. Page 2 of 2 EX-10.14 5 EXHIBIT 10.14 LEASE AGREEMENT BOCA RATON, FLORIDA THIS LEASE AGREEMENT (this "Lease") is made as of this 16th day of November, 1999, by and between FAIRFAX BOCA 92, L.P., a Georgia limited partnership ("Landlord"), and OMEGA RESEARCH, INC., a Florida corporation ("Tenant"); W I T N E S S E T H: 1. PREMISES. In consideration of the rents, terms and covenants of this Lease, Landlord hereby leases, lets and demises to Tenant those certain premises (the "Premises") containing approximately 5,996 rentable square feet (inclusive of a 15% common area factor) situated on the first (1st) floor of Pod D in Building 235, 901 Yamato Road, Boca Raton, Florida 33431 (the "Building"), as shown outlined on EXHIBIT A, attached hereto and made a part hereof. The land upon which the Building is located is more particularly described on EXHIBIT B, attached hereto and made a part hereof (the "Land"; the Building and the Land together with all improvements located thereon are collectively referred to herein as the "Project"). All of the windows and outside walls of the Premises, and any space in the Premises used for shafts, pipes, conduits, ducts, telephone ducts and equipment, electric or other utilities, or other Building facilities, and the use thereof and access thereto through the Premises for the purposes of operation, maintenance, inspection, display and repairs are hereby reserved to Landlord. The final calculation (the "Calculation") of the actual rentable square footage of the Premises shall be made by Landlord's architect, at Landlord's expense, utilizing the final working drawings of the Premises for purposes of making such calculations. The Calculation shall be inclusive of a common area factor of fifteen percent (15%) and shall be performed in accordance with applicable BOMA standards therefore. Until such Calculation is made, which Calculation shall take place no later than ten (10) days following the final execution date of the Lease. Tenant's Base Rent hereunder shall be based upon the assumption that the rentable square footage of the Premises shall be 5,996 square feet. 2. TERM. The Term (as hereinafter defined) of this Lease shall be for a term of five (5) years commencing on the later to occur of (i), January 1, 2000, or (ii) five (5) days after substantial completion of the Tenant Build-Out, subject only to Landlord's completion of minor "punch list items" which would not materially interfere with Tenant's use and enjoyment of the Premises (the "Commencement Date") and ending at 12:00 midnight on the date immediately preceding the fifth (5th) anniversary of the Commencement Date (the "Expiration Date") (such term, taking into account any sooner termination or renewal or extension, is hereinafter referred to as the "Term"). Tenant's occupancy of all or any portion of the Premises prior to the Commencement Date shall be subject to and Tenant agrees to comply with (as though the Term has commenced) all of the provisions of this Lease. For purposes of this Lease, the terms "substantial completion" and "substantially completed" respecting the Tenant Build-Out shall mean that all of the work detailed in the work letter (the "Work Letter") attached hereto as EXHIBIT E hereof shall have been substantially completed by Landlord in accordance with the terms and conditions of said Work Letter and the standards set forth therein, which substantial completion shall be evidenced by (a) Landlord's architect's certification of same, and (b) a certificate of occupancy for the Premises by the applicable governing authority having jurisdiction to issue same. All punch list items shall be completed by Landlord in a commercially reasonable manner and in any event no later than thirty (30) days subsequent to the date of substantial completion of the Tenant Build-Out. The term Tenant Build-Out shall mean, collectively, all of the Landlord's Work and the Base Building Work as defined in the Work Letter Agreement. Tenant shall have the option to extend the Term of this Lease for one (1) additional five (5) year period, at the rental rate for such renewal period set forth in Section 3 hereof, exercisable by written notice to Landlord given no less than one hundred eighty (180) days prior to the Expiration Date. In the event the Premises shall not have been substantially completed no later than ninety (90) days following the full execution of this Lease, then when the Commencement Date shall ultimately occur hereunder, Tenant shall receive an abatement of future Base Rent payments hereunder (in chronological order of due dates therefor), equal to two (2) days of Base Rent for each day of delay in Substantial Completion beyond such ninety (90) day period. In the event for any reason whatsoever (including any matters enumerated in Section 26 hereof) the Commencement date shall not have occurred hereunder prior to one hundred and fifty (150) days after full execution of this Lease, Tenant shall have the right, exercisable by written notice to Landlord given at any time thereafter prior to Substantial Completion of the Tenant Build-Out to terminate this Lease. Tenant has provided and Landlord has approved, a design space plan for the Premises in the form attached hereto as EXHIBIT F hereof, which Landlord shall use to prepare the construction documents in accordance with the terms of the Work Letter. 3. BASE RENT. (a) Tenant agrees to pay Base Rent in monthly installments on the first day of each month, during the Term of the Lease in an amount equal to the product of the number of rentable square feet contained in the Premises, multiplied by the annual rate per rentable square foot set forth below: The initial annual Base Rent shall be $11.50 per RSF and shall escalate by four percent (4%) per annum beginning on the first anniversary of the Commencement Date. If Tenant shall exercise its renewal option, the Base Rent and Additional Rent as provided in Section 4 hereof during the term of the renewal period shall continue to escalate at four percent (4%) per annum on each applicable anniversary of the Commencement Date during said renewal period. Each monthly installment of Base Rent shall be payable to Landlord at the address set forth in Section 32 below on the first day of each calendar month, in legal tender of the United States of America, without abatement, demand, reduction or offset whatsoever, except as may be expressly provided in this Lease. The monthly installment of Base Rent shall be due and payable on or before the first day of each calendar month following the Commencement Date during the Term; provided, that if the Commencement Date should be a date other than the first day of a calendar month, the monthly Base Rent shall be prorated to the end of that calendar month. Tenant shall pay, as Additional Rent, all other sums due from Tenant under this Lease, including, but not limited to, any rent tax or other tax imposed upon Landlord based upon rent payments (other than income taxes and impositions of like character)(the term "Rent" means all Base Rent, Additional Rent and all other amounts payable hereunder from Tenant to Landlord). (b) In addition to the Base Rent payable pursuant to Section 3(a) above, Tenant shall promptly pay to the applicable utility company the cost of electric power consumed in the Premises attributable to (i) the Supplemental Air Conditioning System (as hereinafter defined), and (ii) the UPS System (as hereinafter defined). Tenant shall, at Tenant's sole cost and expense, install a submeter or submeters to measure all such electric power consumed by the Supplemental Air Conditioning System and the UPS System and Tenant shall pay the cost of such electric power therefor directly to the applicable utility company, as determined by the submeter calculated at the rate structure then existing of the utility company supplying electrical energy to the Premises. If the Term shall begin on any day other than January 1 or shall end on a day other than December 31, the amount of any Base Rent (and any Additional Rent described in Section 4 hereof) payable by Tenant applicable to the year in which the Term begins or ends, respectively, shall be prorated on the ratio of the actual number of days of the Term and such year bears to 365. 4. OPERATING EXPENSES. Tenant shall pay to Landlord, as Additional Rent hereunder, in monthly installments, together with the Base Rent due hereunder, as Tenant's share of all operating expenses incurred by Landlord in connection with the maintenance, repair and operation of the Project and in lieu of any obligation on the part of Tenant to pay any pro rata share or other sum on account thereof, but subject nevertheless to Tenant's other obligations expressly set forth in this Lease regarding the payment of Additional Rent or other sums due from Tenant to Landlord hereunder, the sum of $7.05 per RSF per annum during the first year of the Term of this Lease, increasing at the rate of four (4%) percent per annum on each anniversary of the Commencement Date, including any renewal period. 5. LATE PAYMENT CHARGE. Other remedies for nonpayment of Rent notwithstanding, if any payment of Base Rent or Additional Rent is not received by Landlord on or before the fifth (5th) day of the month for which such payment of Rent is due, or if any other payment due Landlord by Tenant is not received by Landlord on or before the tenth (10th) day of the month next following the month in which Tenant is invoiced, a late payment charge of five percent (5%) of such amount for each and every thirty (30) day period that said amount remains unpaid (but in no event shall the amount of such late charge exceed an amount based upon the highest legally permissible rate chargeable at any time by Landlord under the circumstances) shall become due and payable in addition to such amounts owed under this Lease. Should Tenant make a partial payment of past due amounts, the amount of such partial payment shall be applied first to reduce all accrued and unpaid late charges, in inverse order of their maturity, and then to reduce all other past due amounts, in inverse order of their maturity. 6. TENANT ACCEPTANCE. Upon Landlord's substantial completion of the Tenant Build-Out (subject to Landlord's completion of any punch list items) and Tenant's acceptance of same, Tenant shall be deemed to have accepted the Premises from Landlord pursuant to this Lease on an "as-is" basis, and each party acknowledges that, except as specifically provided herein, Landlord has made, makes and shall make no representations or warranties with respect to the Premises, express or implied. Without limiting the generality of the foregoing, but subject to the obligations of Landlord respecting the Tenant Build-Out set forth in the Work Letter and Landlord's other obligations set forth in this Lease, Tenant acknowledges and agrees that Landlord, except as specifically provided herein, has made, makes and shall make (i) no representation or warranty of tenantability or habitability with respect to the Premises, (ii) no representation or warranty of fitness with respect to any personal property contained therein, and (iii) no representation or warranty with respect to the physical condition of the Premises or the operating order or condition of any fixtures, equipment or systems of the Premises, save and except that Landlord does represent and warrant to Tenant that all Building systems and equipment, including HVAC (excluding, however, the Supplemental Air-Conditioning System, as hereinafter defined) and all water and utility systems, and the roof and structure of the Building and its parking areas are now and will on the Commencement Date be in good working order and condition. Tenant agrees that, except for the representations specifically made herein, Tenant is not relying upon any representations or warranties of Landlord with respect to the tenantability, habitability, fitness, physical condition or operating order of the Premises or any of the personal property or fixtures, equipment or systems contained therein. 7. SECURITY DEPOSIT. [INTENTIONALLY OMITTED] 8. USAGE. Tenant warrants and represents to Landlord that the Premises shall be used and occupied only for the purpose of general offices (including conference and computer facilities, employee kitchen and related facilities) and for no other purpose. 9. BUILDING SERVICES. During the Term of this Lease, Landlord agrees to operate and maintain the Building in a manner similar to and in accordance with a standard of comparable buildings in the Boca Raton, Florida market area ("Comparable Buildings") and to provide to Tenant the following services, which include, but are not limited to: (a) General cleaning and janitorial service required as a result of normal, prudent use of the Premises in accordance with EXHIBIT C attached hereto and made a part hereof and only on Mondays through Fridays, inclusive, with New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (herein collectively called the "Holidays") excepted; (b) Heating, ventilating and air-conditioning service daily on Mondays through Fridays, inclusive, with Holidays excepted, from 8:00 A.M. to 6:00 P.M. and on Saturdays, if not a Holiday, from 8:00 A.M. to 1:00 P.M. The range of temperatures maintained in the Building shall be comparable to those maintained in other like-kind office buildings in the City of Boca Raton, Florida as the same may be regulated by governmental authority. Should Tenant desire either heating or air conditioning at times when such services are not furnished by Landlord under the terms of this Lease, such shall be provided upon not less than four (4) hours prior notice (which notice may be given by telephone) to Landlord during Landlord's normal business hours, and Tenant shall pay to Landlord $10.00 per hour. Tenant may, at its option, give such notices on a periodic basis covering multiple day/time periods, cancelable as to any particular day or time by Tenant on not less than four (4) hours prior notice (which cancellation notice may be given by telephone). Notices given by telephone pursuant to this Section 9(b) shall be effective only if given to a representative of Landlord actually answering the call and shall not be effective if left on an answering machine, or with a voice mail messengering service or with a third-party answering service. Tenant may, in accordance with Section 12 hereof, install supplemental air conditioning systems in the Premises at the sole cost and expense of Tenant, which systems shall be separately metered (the installation cost of such meter to be Tenant's expense) and all utility costs associated with such systems shall be Tenant's responsibility. (c) Electric current for lighting and reasonable facilities for furnishing usual and normal electric power for office space on a 24 hour a day, seven (7) day a week basis. Tenant shall not, without Landlord's prior written consent, use or install any equipment (i) which consumes more than 30 Amps and 208 volts or (ii) uses electric current in excess of the capacity of the feeders or lines to the Building or the risers or wiring installation of the Building or the Premises; (d) On-site property management services; (e) Installation of all replacement fluorescent lamps, light bulbs and ballasts as needed in the Premises (including any non-standard, special or upgraded lamps and ballasts within the Premises), provided Tenant shall pay to Landlord upon demand as Additional Rent the costs of all ballast replacements (whether standard or non-standard) and the replacement of all non-standard light bulbs and the incremental difference in the cost of non-standard fluorescent lamps. Tenant, however, shall not be charged any installation fee for any of the foregoing installations; and (f) Passenger and freight elevators serving each of the floors of the Premises in common with other tenants. Failure by Landlord to any extent to furnish these defined services or any other services not enumerated or any cessation thereof shall not, except as expressly set forth in the next succeeding paragraphs of this Section 9, give rise to any abatement of rent, shall not render Landlord liable in any respect for damages to either person or property except to the extent that such failure to provide services or the cessation thereof was caused by Landlord's gross negligence or willful misconduct, and shall not relieve Tenant from fulfillment of any covenant contained in this Lease. Should any of the equipment or machinery break down, or for any cause cease to function properly, Landlord shall use reasonable diligence to repair the same promptly, but Tenant shall have no claim for abatement on account of any interruption in service occasioned from the repairs, except as specifically provided below. Notwithstanding the foregoing, Tenant shall have the right to abate rent in the event of any failure to provide heating, ventilating and air conditioning service, water service or electric current contemplated in this Section 9 or any cessation thereof if same (i) shall continue uncured for five (5) consecutive days or more, and (ii) shall materially interfere with Tenant's use and enjoyment of the Premises as contemplated by this Lease. Subject to Section 26, if Landlord fails to provide any services contemplated in this Section 9, Tenant shall have the right (a) if no emergency exists (a condition which creates a risk of imminent danger to persons or substantial damage to property), to perform the same after giving thirty (30) days' notice to Landlord and to any party entitled to receive notices pursuant to Section 32 of this Lease, provided Landlord shall not commence to cure such default within such thirty (30) day period and thereafter proceed with due diligence to do so; and (b) in any emergency situation to perform the same immediately without notice or delay. Tenant agrees that if Tenant is entitled and elects to rectify any default as aforesaid, Tenant shall effect such cure in a reasonable manner and so as not to interfere unreasonably with the rights of third parties, including other tenants. Landlord shall on demand reimburse Tenant for the reasonable costs and expenses incurred by Tenant in rectifying defaults as aforesaid. Tenant shall provide Landlord with copies of the invoices or other written evidence of the costs incurred by Tenant for which Tenant claims reimbursement. Any act done by Tenant pursuant to this Section shall not constitute a waiver of any such default by Landlord or a waiver of any covenant, term or condition herein contained or the performance thereof. Tenant agrees that the cure or rectification by any party entitled to receive notice pursuant to Section 32 of the Lease hereof shall be deemed a cure or rectification by Landlord hereunder. Notwithstanding anything to the contrary contained in this Section, Tenant shall not have any right to perform any obligation of Landlord which affects the structure of the Building and, in the event such performance affects the mechanical, electrical or other Building systems, Tenant hereby indemnifies and agrees to hold Landlord harmless from and against any loss, claims, damages and liabilities suffered by Landlord as a result of Tenant's exercise of its self-help rights granted herein. If Tenant, in compliance with the provisions of this Section, incurs costs which Tenant believes are costs of Landlord and if Tenant is not in default under this Lease, Tenant, commencing thirty (30) days after notice to Landlord of the amount and evidence of the payment of such costs by Tenant, shall be entitled to set-off the agreed-upon amount of such costs against the payment of Base Rent and Additional Rent due under this Lease. The actual amount of set-off, if any, shall be determined by agreement of the parties or, failing such agreement, resolution by either party seeking a declaratory judgment in the Circuit Court of Palm Beach County, Florida; upon a final, non-appealable judgment, which shall be limited to a determination of the amount owed by Landlord or Tenant under this Section. 10. INTENTIONALLY OMITTED. 11. REPAIRS AND MAINTENANCE. (a) TENANT'S REPAIRS AND MAINTENANCE. Except as provided in Section 11(c) hereof, Tenant shall, at its own cost and expense, maintain the Premises in condition existing on the date of this Lease, including all necessary repairs and replacements, normal wear and tear excepted. Unless covered by the insurance required to be carried pursuant to Section 17 hereof, and subject nevertheless to the terms and conditions of Section 18 hereof, Tenant shall further, at its own cost and expense, repair or restore any damage or injury to all or any part of the Building caused by Tenant or Tenant's agents, employees, invitees, licensees, visitors or contractors, including but not limited to any repairs or replacements necessitated by (i) the construction or installation of improvements to the Premises by or on behalf of Tenant, (ii) the installation, use or operation of Tenant's property, or (iii) the moving of any property into or out of the Premises; provided, however, if Tenant fails to make the repairs or replacements promptly, Landlord may, at its option upon ten (10) business days written notice, make the repairs or replacements and the costs of such repairs or replacements shall be charged to Tenant as Additional Rent and shall become due and payable by Tenant with the monthly installment of Base Rent next due hereunder. (b) CONDITION AT END OF TERM. On the Expiration Date, Tenant shall surrender the Premises to Landlord in the condition in which Premises were originally received from Landlord, except for ordinary wear and tear and damage by casualty or taking not required to be repaired by Tenant hereunder. So long as Tenant is not in default hereunder, Tenant may remove from the Premises on or prior to the Expiration Date all property situated therein which is not owned by Landlord, and Tenant shall, on or prior to the Expiration Date, remove all of Tenant's office equipment, trade fixtures and moveable furnishings from the Premises, and the UPS power backup system, if any, installed by or on behalf of Tenant. Property not so removed shall become the property of Landlord, and Landlord may at Tenant's expense remove such property from the Premises and dispose thereof without any liability of Landlord to Tenant. (c) LANDLORD'S REPAIRS AND MAINTENANCE. Landlord shall during the Term maintain the Building in a manner comparable to other Comparable Buildings, including, but not limited to, public areas of the Building, landscaped areas of the Land and Building, elevators, stairs, common restrooms and main lobby area for the Building, heating, ventilating and air conditioning systems (exclusive of any Tenant supplemental air conditioning systems that Tenant shall install), other mechanical systems, plumbing, life safety systems, electrical systems and the roof and structure. 12. ALTERATIONS AND IMPROVEMENTS. (a) No alteration, addition, improvement or installation (hereinafter collectively "Alterations" or individually referred to as an "Alteration") to the Premises shall be made or permitted to be made by Tenant, except as provided in Section 12(b) below, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. As a condition of giving any consent under this Section 12, Landlord may require, among other things, that Tenant (a) deliver to Landlord and obtain Landlord's approval of final plans and specifications for the Alterations, (b) obtain Landlord's approval of all contractors and subcontractors performing Alterations, (c) obtain all permits, approvals and certificates required by governmental or quasi-governmental bodies, and upon completion, certificates of final approval and shall deliver promptly duplicates of all such governmental permits, approvals and certificates to Landlord, (d) carry and cause all contractors and subcontractors to carry, worker's compensation, general liability, personal and property damage insurance, and (e) if notice is given by Landlord to Tenant concurrently with the delivery of Landlord's approval of any Alteration that Landlord will require the removal of an Alteration at the expiration or earlier termination of the term, Landlord shall have the right to require Tenant, at its sole cost and expense, to remove any "Non-Standard" (hereinafter defined) Alteration, at the expiration or earlier termination of the Term. For purposes of this Section 12(a), a "Non-Standard" Alteration shall be any Alteration (y) that shall in Landlord's reasonable opinion require demolition costs on a per square foot basis materially greater than the costs on a per square foot basis to demolish the tenant improvements initially installed in the Premises and approved by Landlord and (z) that is of a nature not generally found in comparable office space at the time of the request for approval. Notwithstanding the foregoing provisions of this Section 12(a), Tenant shall have no right without Landlord's prior written consent, to make any Alterations which would (i) adversely affect the load bearing structural components and structural soundness of the Building, (ii) adversely affect the central environmental systems (excluding ventilation ducts, diffusers and returns), (iii) adversely affect the electrical, plumbing or other utility systems of the Building or (iv) adversely affect the roofing systems, window glass, window gaskets or glazing. Tenant shall have the right, without Landlord's consent, to install a supplemental air-conditioning system (the "Supplemental Air-Conditioning System") and a UPS power backup system (the "UPS System"), to service Tenant's use of and operations at the Premises. If such installation requires penetrating the roof, then Tenant shall remain responsible for repairs of such roof penetration. Such installations and the future maintenance thereof by Tenant shall be at Tenant's sole cost and expense and shall comply with all applicable governmental laws, rules and regulations respecting same. Said systems shall be hooked up to the Building's electrical system, however, separately metered and paid by Tenant directly to the utility company by separate billing from said utility company. The Supplemental Air-Conditioning System shall be a 2.5 ton split system. Landlord will advise as to location of such air-conditioning equipment which shall either be on the roof of the Building on the exterior of the Building located within ten (10) feet of the building facade abutting the Premises. The parties agree that the Tenant Improvement Allowance applicable to the Tenant Build-Out shall be as set forth in the Work Letter. (b) Notwithstanding the foregoing, Tenant may, without Landlord's consent, make Alterations that are non-structural in nature and do not adversely affect the Building mechanical, plumbing or electrical systems; provided (i) Tenant shall give Landlord fifteen (15) days advance notice of such Alterations which notice shall include a description of such Alterations; (ii) all such Alterations shall be installed or constructed in accordance with all laws; (iii) Tenant shall obtain all necessary permits required by governmental or quasi-governmental bodies; (iv) all contractors shall be approved by Landlord, such approval not to be unreasonably withheld or delayed; (v) Tenant shall deliver to Landlord upon completion thereof as-built plans therefor; (vi) if the Alteration is a Non-Standard Alteration and if notice is given by Landlord to Tenant within said fifteen (15) day period that Landlord requires the removal of such Non-Standard Alteration at the expiration or earlier termination of the Term, then Tenant shall, at its sole costs and expense, remove any Non-Standard Alteration at the expiration or earlier termination of the Term; and (vii) Tenant shall carry and cause its contractors to carry worker's compensation, general liability, personal and property damage insurance. (c) Notwithstanding any provision in this Section 12 or otherwise in this Lease to the contrary, Tenant shall not make any Alteration that shall affect the facade or exterior face of the Building or otherwise affect the appearance of the Building from the exterior of the Building in any respect. Landlord reserves the right to unreasonably withhold its consent to any such Alteration in Landlord's sole and absolute discretion. (d) Except as set forth in Section 11 (b) above, all Alterations which may be made to the Premises, shall become the property of Landlord and remain and be surrendered with the Premises. Tenant agrees to repair any damage to the Premises caused by or in connection with the removal of any articles of personal property, business or trade fixtures, including without limitation thereto, repairing the floor and patching and painting the walls where damaged. 13. STANDARDS FOR WORK. (a) Whenever in this Lease Landlord or Tenant is permitted or required to maintain and repair, or make additions, alterations, substitutions or replacements, or reconstruct or restore the Building or the Premises, such party shall cause such work (the "Work") to be done and completed in a good, substantial and workmanlike manner, free from faults and defects, and in compliance with all legal requirements, and shall utilize only new first-class materials and supplies. The party performing such Work shall be solely responsible for construction means, methods, techniques, sequences and procedures, and for coordinating all activities related to the Work, and the other party shall have no duty or obligation to inspect the Work, but shall have the right to do so. (b) Whenever Landlord or Tenant is required to perform any Work upon the Building or the Premises, such party shall promptly commence the Work and, once the Work is commenced, diligently and continually pursue the Work and complete the Work within a reasonable time. The party performing such Work shall supervise and direct the Work utilizing its best efforts and reasonable care, and shall assign such qualified personnel to the Work as may be necessary to cause the Work to be completed in an expeditious fashion. (c) The party performing such Work shall (i) provide and pay for all labor, materials, goods, supplies, equipment, appliances, tools, construction equipment and machinery and other facilities and services necessary for the proper execution and completion of the Work; (ii) promptly pay when due all costs and expenses incurred in connection with the Work; (iii) pay all sales, consumer, use and similar taxes required by law in connection with the Work; (iv) secure and pay for all permits, fees and licenses necessary for the performance of the Work; and (v) at all times maintain the Premises and the Project free and clear from any and all liens, claims, security interests and encumbrances arising from or in connection with the Work, including, without limitation, liens for materials delivered, supplied or furnished, or for services or labor performed or rendered. All materials, supplies, goods, appliances and equipment incorporated in the Work shall be free from any liens, security interests or title retention arrangements, other than the lien or security interest (if any) of the holder of any Mortgage placed upon the Premises by Landlord. However, nothing contained in this Section is intended to restrict or affect any right the party performing such Work may otherwise have under this Lease for reimbursement of any costs or expenses incurred in connection with such Work. (d) The party performing such Work shall (i) be responsible for the acts and omissions of all of its employees and all other persons performing any of the Work; (ii) be responsible for initiating, maintaining and supervising all necessary safety precautions and programs in connection with the Work; (iii) take all reasonable precautions for the safety of, and provide all reasonable protection to prevent damage, injury or loss to, the Work, all persons performing the Work, all other persons who may be involved in or affected by the Work, all materials and equipment to be incorporated in the Work and all other property in the Building or on the land or adjacent thereto; (iv) purchase and maintain in full force and effect, and cause its contractors and subcontractors to purchase and maintain in full force and effect, such insurance (if any) in addition to that otherwise required of such party under this Lease as may be necessary to protect such party from claims under worker's compensation acts and other employee benefit acts, from claims for damages because of bodily injury, including death, and from claims for damage to property which arise out of performance of the Work. Such additional insurance policies, if any, shall meet the requirements set forth elsewhere herein with respect to the insurance policies otherwise required to be obtained and maintained by such party under this Lease. The party performing such Work shall pay and shall indemnify and save the other party and its officers, employees and agents harmless from all liabilities, damages, losses, costs, expenses, causes of action, suits, claims, demands and judgments of any nature arising out of, by reason of or in connection with the Work. 14. COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Tenant, at Tenant's expense, shall comply with all laws, ordinances, orders, rules and regulations of state, federal, county, municipal or other agencies or bodies having jurisdiction relating to the Premises (excluding, however, compliance with above-ceiling fire safety regulations which shall be borne by Landlord). Tenant will comply with the Rules and Regulations adopted by Landlord which are set forth on EXHIBIT D, attached hereto and hereby made a part hereof. Landlord shall have the right at all times to change the Rules and Regulations in any reasonable manner as Landlord may deem necessary or advisable, provided same shall not materially interfere with Tenant's use of and operations at the Premises. All changes and amendments in the Rules and Regulations will be sent by Landlord to Tenant in writing and shall thereafter be carried out and observed by Tenant. Landlord shall not enforce the Rules and Regulations in a discriminatory manner against Tenant. Landlord shall comply with all laws, ordinances, orders, rules and regulations of state, federal, county, municipal or other agencies or bodies having jurisdiction relating to the Building other than the Premises and portions of the Project leased to other tenants. 15. CONDEMNATION. (a) SUBSTANTIAL TAKING. If, during the Term, all or a substantial part of the Premises or the Building, including, without limitation, its common areas and parking areas, is permanently taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by purchase or exchange in lieu thereof, and the taking would prevent or materially interfere with the use of the Premises for the purpose for which they are then being used, the Term shall terminate and the Rent shall be abated during the otherwise unexpired portion of the Term effective on the date physical possession of the condemned property is taken by the condemning authority. The determination of whether such taking would prevent or materially interfere with the use of the Premises shall be made by Landlord, however Landlord shall act reasonably in making such determination. (b) LESS THAN SUBSTANTIAL TAKING. In the event a portion of the Premises or the Building, including, without limitation, its common areas and parking areas, shall be taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by purchase or exchange in lieu thereof, and the Term is not terminated as provided in subsection (a) above, Landlord may, at Landlord's option and at Landlord's expense, restore and reconstruct the Building and other improvements of which the Premises are a part to the extent necessary to make them reasonably tenantable, and the Rent for the remainder of the Term shall be abated to such extent as may be fair and reasonable considering all the circumstances. 16. FIRE AND CASUALTY. (a) SUBSTANTIAL DAMAGE. If the Premises or the Building, including, without limitation, its common areas and parking areas, should be totally destroyed by fire or other casualty, or if the Premises or the Building, including without limitation, its common areas and parking areas, should be so damaged such that the rebuilding cannot reasonably be completed within one hundred and eighty (180) days after the date of written notification by Tenant to Landlord of the destruction, either Landlord or Tenant may terminate this Lease and the Rent shall be abated for the otherwise unexpired portion of the Term, effective as of the date of such casualty. The determination of whether such rebuilding can reasonably be completed within such period shall be made by Landlord, however, Landlord shall act reasonably in making such determination. (b) LESS THAN SUBSTANTIAL DAMAGE. If the Premises or the Building, including, without limitation, its parking areas or common areas, should be partially damaged by fire or other casualty, and the rebuilding or repairs can reasonably be completed within one hundred and eighty (180) days after written notification by Tenant to Landlord of the damage, or if Landlord or Tenant does not elect to terminate the Lease as set forth in Section 16(a) above, Landlord shall proceed with reasonable diligence to rebuild or repair the Building or other improvements of which the Premises are a part to substantially the same condition as existed prior to the damage. If the Premises are to be so rebuilt or repaired and are untenantable in whole or in part following the damage, the Rent payable hereunder during the period for which the Premises are untenantable shall be adjusted to such an extent as may be fair and reasonable under the circumstances. In the event that Landlord fails to complete the necessary repairs or rebuilding within one hundred eighty (180) days from the date of written notification by Tenant to Landlord of the damage, with due allowance for any force majeure, Tenant may at its option terminate this Lease effective as of the end of such period for repair or rebuilding, by delivering written notice of such termination to Landlord. 17. INSURANCE. (a) LANDLORD'S INSURANCE. Landlord agrees to maintain during the Term the following insurance (the cost of which is to be borne by Landlord): (i) "all risk" coverage insurance on the Building and the other improvements on the Property, exclusive of any improvements constructed within the Premises by or on behalf of Tenant, in an amount equal to the full replacement cost thereof; and (ii) a policy or policies of worker's compensation and comprehensive general liability insurance, including personal injury and property damage in the amount of One Million and No/100 Dollars ($1,000,000.00) for property damage and One Million and No/100 Dollars ($1,000,000.00) per occurrence for personal injuries or deaths of persons occurring in or about the Property. Tenant shall not permit the Premises to be used in any way which would, in the opinion of Landlord, be extra hazardous on account of fire or other hazard or casualty or which would otherwise and in other ways increase the premiums for or render void any insurance relating to the Building or the contents thereof or any liability of Landlord. If Tenant's specific use and occupancy of the Premises causes any increase in any insurance premiums paid by Landlord with respect to the Building, or if Tenant abandons the Premises and thereby causes an increase in such premiums, then Tenant shall pay the Landlord upon demand as Additional Rent the amount of such increase. Landlord shall not be obligated in any way or manner to insure any personal property (including but not limited to any furniture, machinery, equipment, goods or supplies) of Tenant or which Tenant may have upon or within the Premises or any fixtures installed by or paid for by Tenant upon or within the Premises or any additional improvements which Tenant may construct on the Premises. (b) TENANT'S INSURANCE. Tenant shall, at its sole expense, at all times during the Term of this Lease maintain in effect a policy or policies of insurance (i) covering its personal property located in the Premises and tenant improvements to the Premises paid for and installed by Tenant and Landlord other than as set forth in (a) above, providing protection against any peril included under insurance practices within the classification "all risk" and to the full insurable value of such personal property and tenant improvements and (ii) comprehensive public liability insurance with respect to the Premises and the conduct or operation of Tenant's business therein, with limits of not less than One Million and No/100 Dollars ($1,000,000.00) for death or bodily injury to any one or more persons in a single occurrence and One Million and No/100 Dollars ($1,000,000.00) for property damage. Tenant hereby waives any and all rights of recovery against Landlord for any insured loss or liability occurring to Tenant's personal property and tenant improvements and the aforesaid policy or policies shall contain appropriate provisions recognizing this release by Tenant and waiving all rights of subrogation by the insurance carrier. Except for Landlord's or Landlord's agents', employees', invitees', licensees' or contractors' negligence or willful misconduct, Tenant hereby indemnifies and holds Landlord harmless from all claims, demands, actions, damages, loss, liabilities, judgments, costs and expenses, including, without limitation, attorneys' fees and costs which are suffered by, recovered from or asserted against Landlord and arise from or in connection with the use or occupancy of the Premises and/or any accident, injury or damage occurring in the Premises. Tenant shall maintain a policy or policies of insurance with the premiums paid in advance issued by and binding upon a solvent insurance company, authorized to transact business in Florida, insuring all personal property of Tenant upon or within the Premises in an amount equal to the full replacement cost of such property. Tenant shall deliver certificates of such insurance to Landlord on or before the Commencement Date, and thereafter from time to time upon request. 18. WAIVER OF SUBROGATION. Any other term or condition of this Lease to the contrary notwithstanding, Landlord and Tenant, to the fullest extent permitted by law, each hereby waive all claims, causes of action and rights of recovery against the other for and hereby release the other from liability for, loss or damage to the extent such loss or damage is insured by valid and collectible insurance in effect at the time of such loss or damage. To the extent commercially available on a reasonable basis, Landlord's and Tenant's insurance coverage required to be carried pursuant to Section 17 hereof shall contain appropriate waiver of subrogation provisions consistent with this Section 18. 19. LIABILITY AND INDEMNIFICATION. Landlord shall not be liable to Tenant's employees, agents, invitees, licensees, contractors or visitors, or to any other person, for any injury to person or damage to property on or about the Premises caused by the negligence or misconduct of Tenant, its agents, servants, or employees or of any other person entering upon the Premises under express or implied invitation by Tenant. Except for Landlord's negligence or willful misconduct, Tenant agrees to indemnify and hold harmless Landlord of and from any loss, attorneys' fees, expenses or claims arising out of (i) any such damage or injury, (ii) any and all defaults by Tenant hereunder, or otherwise by reason of or resulting from the use or occupancy of the Premises. Except for Tenant's negligence or willful misconduct, Landlord agrees to indemnify and hold harmless Tenant from any loss, attorneys' fees, expenses or claims arising out of Landlord's negligence or willful misconduct. 20. QUIET ENJOYMENT. Landlord warrants that it has full right to execute and to perform this Lease and that Tenant, upon payment in full of the required Rent and full performance of the terms, conditions, covenants and agreements contained in this Lease, shall peaceably and quietly have, hold and enjoy the Premises during the Term, subject only to the matters set forth in Section 21 below. Landlord shall not be responsible for the acts or omissions of any other Tenant, lessee or third party that may interfere with Tenant's use and enjoyment of the Premises. 21. LANDLORD'S RIGHT OF ENTRY. With reasonable notice (except in the case of an emergency), Landlord or its authorized agent shall at any and all reasonable times have the right to enter the Premises to inspect the same, to supply janitorial service or any other service to be provided by Landlord, to show the Premises to perspective purchasers or tenants (only during the last twelve (12) months of the Term with respect to prospective tenants), and to alter, improve or repair the Premises or any other portion of the Building. Tenant shall make available a representative of Tenant during all reasonable time periods (except in an emergency) during which Landlord shall access the Premises. Except for Landlord's negligence or willful misconduct, Tenant hereby waives any claim for damages for injury or inconvenience to or interference with Tenant's business, any loss of occupancy or use of the Premises, and any other loss occasioned thereby. Landlord agrees to use good faith efforts to minimize disruption to Tenant's business during any periods when Landlord requires access to the Premises. Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, provided, however, that Tenant shall not be obligated to provide Landlord with keys to the computer room as shown on attached floor plan. Tenant shall not change Landlord's lock system or in any other manner prohibit Landlord from entering the Premises. Landlord shall have the right to use any and all means which Landlord may deem proper to open any door in an emergency without liability therefore. 22. ASSIGNMENT OR SUBLET. (a) Tenant shall not assign, in whole or in part, this Lease, or allow it to be assigned, in whole or in part, by operation of law or otherwise (including without limitation by transfer of a majority interest in a partnership or a majority interest of stock, merger or dissolution, which transfer of majority interest, merger or dissolution shall be deemed an assignment) or mortgage or pledge the same, or sublet the Premises in whole or in part, without the prior written consent of Landlord (which consent shall not be unreasonably withheld or delayed) and in no event shall any such assignment or sublease release Tenant or any guarantor from any obligation or liability hereunder. The foregoing provision of this Section 22 shall not apply to restrict any transfer of stock whenever Tenant is a corporation the outstanding stock of which is listed on a recognized national stock exchange or the National Association of Securities Dealers National Market System or in connection with an initial public offering or a private placement of stock pursuant to Section 3(a)(11), (4)(2) or Regulations D and S of the Securities Act of 1933, as amended. No assignee or sublessee of the Premises or any portion thereof may assign or sublet the Premises or any portion thereof. (b) Any assignment or sublease made by Tenant without Landlord's consent when Landlord's consent is required pursuant to the terms of this Lease shall be void, and, at Landlord's option, constitute a default under the terms and conditions of this Lease. (c) Consent by Landlord to any assignment, transfer or subletting to any party, shall not be construed as a waiver or a release of Tenant from the terms of any covenant or obligation under this Lease, nor shall its consent to one assignment, transfer or subletting to another person, partnership, firm or corporation be deemed to be a consent to any subsequent assignment, transfer or subletting to another person, partnership, firm or corporation. (d) In the case of an approved subletting, Landlord shall have the right to any and all sums or economic consideration in excess of the Base Rent and Additional Rent payable hereunder from such subletting reasonably attributable to the sublet portion of the Premises, as and when received (net of the reasonable costs of obtaining such sublessees, including, without limitation, any tenant improvement allowance or buildout costs borne by Tenant in connection with any such subletting and any brokerage commission due with respect to any such subletting). In the case of an assignment of this Lease, Landlord shall have the right to any and all sums or other economic consideration in excess of the Base Rent and Additional Rent reasonably attributable to such assignment of this Lease, as and when received (net of the reasonable costs of obtaining such assignees, including, without limitation, any tenant improvement allowance or buildout costs borne by Tenant in connection with any such assignment and any brokerage commission due with respect to any such assignment). (e) Notwithstanding the above provisions of this Section 22, Tenant shall have the right to sublet or assign all or part of the Premises without the prior consent of Landlord to: (i) any person, corporation, partnership or other entity which shall control, be under the control of, or be under common control with, Tenant and/or (ii) any corporation, partnership or other business entity resulting from the merger, consolidation or other business combination with Tenant to any person or entity that acquires all or substantially all of Tenant's assets as a going concern of the business that is being conducted in the Premises, as long as the assignee or sublessee assumes in full the obligations of Tenant under this Lease, provided, however, that (1) such assignee or subtenant must be a bona fide entity, (2) such assignee's or subtenant's proposed use of the Premises must be consistent with the uses permitted under this Lease, (3) the character, reputation, and business of the proposed assignee or sublessee is consistent with the tenants then in the Building, including Tenant and (4) Tenant shall nonetheless be required to provide Landlord with at least fifteen (15) business days advance written notice of any such assignment or subletting including with such notice the following information, documentation and notice: (aa) the identity of such sublessee or assignee, (bb) the planned use of the Premises and the business to be conducted therefrom, and (cc) reasonable documentation to evidence that the proposed sublessee or assignee shall in fact be an affiliate meeting the qualifications of this Section 22(e). Further, if requested by Landlord, Tenant shall provide to Landlord such other information as may be reasonably requested by Landlord during such fifteen (15) business day period to substantiate Tenant's right to consummate said subleases or assignments as contemplated by this Section 22(e). For purposes of this Section 22, the term "control" shall mean possession, direct or indirect, of the power to direct, or cause the direction of, the management and policies of any person or entity, if through the ownership of at least twenty percent (20%) of the voting securities, partnership interests or similar ownership rights. Landlord acknowledges that such information is confidential information and may not be used, disclosed or acted upon for the purpose of insider trading or otherwise in contravention of the Securities Act of 1933, as amended, or the Exchange Act of 1934. 23. EVENTS OF DEFAULT. Each of the following shall be deemed to be an Event of Default by Tenant under this Lease: (a) Tenant shall fail to pay any installment of Base Rent and Additional Rent when due or any other amount required pursuant to this Lease within five (5) days after written notice by Landlord to Tenant that such sum is due and unpaid; provided, however, that notwithstanding the foregoing, Landlord shall have no obligation to notify Tenant of the failure to pay any sum due from Tenant under this Lease on more than two (2) occasions during any twelve (12) month period; (b) Tenant shall fail to comply with any term, provision or covenant of this Lease, other than payment of Base Rent, Additional Rent, or any other required amount, and the failure is not cured within thirty (30) days after written notice to Tenant (or if such failure to comply on the part of Tenant would reasonably require more than thirty (30) days to rectify, unless Tenant commences rectification within the thirty (30) day notice period and thereafter promptly, effectively and continuously proceeds with the rectification of the failure to comply on the part of Tenant and, in all events, cures such failure to comply on the part of Tenant no later than the time period reasonably required to effectuate such cure; (c) Tenant shall file a petition for relief or be adjudged bankrupt or insolvent under the Federal Bankruptcy Act, as amended, U.S.C.A. Title 11 (entitled "Bankruptcy") Section 101 ET SEQ. as amended, or any similar law or statute of the United States or any state; or a receiver or trustee shall be appointed for all or substantially all of the assets of Tenant; or Tenant shall make a transfer in fraud of creditors or shall make an assignment for the benefit of creditors and fails to have such receiver or trustee dismissed within ninety (90) days from the date of such appointment; or (d) Tenant shall do or permit to be done any act which results in a lien being filed against the Premises or the Building and fails to remove such lien by payment, bond or otherwise within twenty (20) business days from receipt of Landlord's notice to remove. 24. REMEDIES FOR TENANT'S DEFAULT. Upon the occurrence of any Event of Default, Landlord may at its option pursue any one or more of the following remedies, and any and all other rights or remedies accruing to Landlord by law or otherwise, without any notice or demand: (a) commence dispossessory proceedings with or without the termination of this Lease; (b) declare the entire amount of Rent calculated on the current rate being paid by Tenant, and other sums which in Landlord's reasonable determination would become due and payable during the remainder of the Term (including, but not limited to, increases in Rent pursuant to the terms hereof), discounted to present value by using a reasonable discount rate selected by Landlord, and reduced by the reasonable rental value of the Premises for the remainder of the Term thereof (taking into account in such calculation the reasonable costs of obtaining substitute tenants (including, without limitation, any reasonably anticipated tenant improvement allowance, or any reasonably anticipated tenant build-out expense, and any brokerage commissions reasonably anticipated to be incurred in connection with same) and the reasonable time period under the circumstances of anticipated vacancy prior to reletting), to be due and payable immediately. Upon such acceleration of such amounts, Tenant agrees to pay the same at once, together with all Rent and other amounts theretofore due, at Landlord's address as provided herein; provided however, that such payment shall not constitute a penalty or forfeiture but shall constitute liquidated damages for Tenant's failure to comply with the terms and provisions of this Lease (Landlord and Tenant agreeing that Landlord's actual damages in such an event are impossible to ascertain and that the amount set forth above is a reasonable estimate thereof). The acceptance of such payment by Landlord shall not constitute a waiver of rights or remedies to Landlord for any failure of Tenant thereafter occurring to comply with any term, provision, condition or covenant of this Lease; (c) commence proceedings against Tenant for all amounts owed by Tenant to Landlord, whether as Base Rent, Additional Rent, damages or otherwise; (d) terminate the Term, in which event Tenant shall immediately surrender the Premises to Landlord and Tenant agrees to pay on demand the amount of all loss and damage which Landlord may suffer by reason of the termination of the Term under this subsection or otherwise (the remedy set forth in this clause (d) is an alternative remedy to that set forth in clause (a) above but may not be exercised together with the remedy described in clause (a) above; (e) as an alternative remedy to the remedy set forth in clause (a) above, with or without terminating this Lease, relet the Premises on behalf of Tenant and receive directly the rent by reason of the reletting in which event Tenant agrees to pay Landlord on demand any deficiency that may arise by reason of any reletting of the Premises and to reimburse Landlord upon demand for any expenditures made by it for remodeling or repairing in order to relet the Premises and for all other expenses incurred in connection with such reletting; Landlord shall not be liable for any failure to relet the Premises, in whole or in part, nor for any failure to collect any rent due from any such reletting; rather, Tenant shall remain liable for all Rent and for all such expenses; (f) enter upon and take possession of the Premises, without being liable for prosecution of any claim for damages or for trespass or other tort; (g) do or caused to be done whatever Tenant is obligated to do under the terms of this Lease, in which case Tenant agrees to reimburse Landlord on demand for any and all costs or expenses which Landlord may thereby incur and Tenant agrees that Landlord shall not be liable for any damages resulting to Tenant from effecting compliance with Tenant's obligations under this subsection, whether caused by the negligence of Landlord or otherwise; or (h) enforce the performance of Tenant's obligations hereunder by injunction or other equitable relief (which remedy may be exercised upon any breach or default or any threatened breach or default of Tenant's obligations hereunder). 25. WAIVER OF DEFAULT OR REMEDY. Tenant understands and acknowledges that no assent, express or implied, by Landlord to any breach of any one or more of the terms, covenants or conditions hereof shall be deemed or taken to be a waiver of any succeeding or other breach, whether of the same or any other term, covenant or condition hereof. 26. FORCE MAJEURE. Landlord and Tenant (except with respect to the payment of Base Rent, Additional Rent or any other monetary obligation under this Lease and except as provided in Section 2 hereof) shall be excused for the period of any delay and shall not be deemed in default with respect to the performance of any of the terms, covenants and conditions of this Lease when prevented from so doing by a cause or causes beyond the Landlord's or Tenant's (as the case may be) control, which shall include, without limitation, all labor disputes, governmental regulations or controls, fire or other casualty, inability to obtain any material or services, acts of God, or any other cause not within the reasonable control of Landlord or Tenant (as the case may be). 27. ATTORNEY'S FEES. In the event of any lawsuit or court action between Landlord and Tenant arising out of or under this Lease or the terms and conditions stated herein, the prevailing party in such lawsuit or court action shall be entitled to and shall collect from the non-prevailing party the reasonable attorney's fees and court costs actually incurred by the prevailing party with respect to said lawsuit or court action. The prevailing party shall be deemed to be that party who obtains substantially the same relief sought whether by compromise, settlement or judgment. 28. HOLDING OVER. Tenant will, at the termination of this Lease by lapse of time or otherwise, yield up immediate possession of the Premises to Landlord. If Tenant retains possession of the Premises or any part thereof after such termination, then such holding over shall create a tenancy at sufferance upon the terms and conditions set forth in this Lease; provided however that the Base Rent shall, in addition to all other sums which are to be paid by Tenant hereunder, whether or not as Additional Rent, be equal to one hundred fifty percent (150%) of the Base Rent being paid to Landlord under this Lease immediately prior to such termination (prorated for each day Tenant remains in possession); provided, however, that in the event Landlord has provided Tenant notice of termination and Tenant retains possession the Base Rent shall be two hundred percent (200%) of the Base Rent being paid to Landlord under this Lease immediately prior to such termination (prorated for each day Tenant remains in possession); and there shall be no renewal of this Lease by operation of law. The provisions of this Section 28 shall not constitute a waiver of any right of re-entry as herein set forth or as provided by law; nor shall receipt of any rent or other act in apparent affirmance of the tenancy operate as a waiver of the right to terminate this Lease for a breach of any of the terms, covenants or obligations herein on Tenant's part to be performed. 29. RIGHTS OF MORTGAGEES AND OTHERS. Tenant accepts this Lease subject and subordinate to the lien or security title of any recorded mortgage, deed of trust or deed to secure debt presently existing or hereafter created upon the Premises and to all existing recorded restrictions, covenants, easements and agreements with respect to the Building or any part thereof, and all amendments, modifications and restatements thereof and all replacements and substitutions therefor; provided, however, that nothing contained in any of the foregoing enumerated instruments (whether now existing or hereafter entered into) prevents or shall prevent or materially interferes with or shall materially interfere with Tenant's rights and privileges under this Lease, Landlord's consents herein granted to Tenant or Tenant's intended use or occupancy of the Premises as set forth in this Lease (save and except for any mortgagee's right to foreclose out Tenant's subordinated leasehold estate in the Premises as a consequence of said mortgagee's foreclosure of Landlord's interest therein). Any provisions of this Lease requiring the future approval or consent of Landlord shall not be deemed to have been unreasonably withheld if any mortgagee (which shall include the holder of any mortgage, deed of trust or deed to secure debt) of the Premises or Building or any portion thereof shall refuse or withhold its approval or consent thereto (provided such holder of any mortgage or deed to secure debt shall act with the same standard of reasonableness as imposed upon Landlord hereunder). Any requirement of Landlord pursuant to this Lease which is imposed pursuant to the direction of any such mortgagee shall be deemed to have been reasonably imposed by Landlord if made in good faith, provided same shall not unreasonably interfere with Tenant's use and enjoyment of the Premises and Tenant's rights under this Lease. 30. ESTOPPEL CERTIFICATES. Within ten (10) business days following any written request which a party may make from time to time (but not more often than four (4) times in any calendar year), the other party shall execute, acknowledge and deliver to the requesting party a certificate stating that this Lease is unmodified and in full effect (or, if there have been modifications, that this Lease is in full effect as modified, and setting forth such modifications); the amounts and dates to which Base Rent, Additional Rent and other sums payable hereunder have been paid; such other reasonable information pertaining to the Lease as may be requested by Landlord or Tenant, as the case may be; and either that to the knowledge of the signer of such certificate no default exists hereunder or specifying each such default of which the signer has knowledge. Landlord and Tenant intend that any statement delivered pursuant to this Section 30 may be relied upon by the requesting party and any individual or entity named by the requesting party in the request therefor. 31. SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, representatives and assigns, subject, however, to the provisions of Section 23 above. It is hereby covenanted and agreed that should Landlord's interest in the Premises cease to exist for any reason during the Term, then notwithstanding the happening of such event this Lease nevertheless shall remain unimpaired and in full force and effect and Tenant hereby agrees to be bound and obligated hereunder to the then owner of the Premises as landlord provided the new owner accepts the obligations of landlord hereunder. 32. NOTICE. (a) Except for legal process, which may also be served as by law provided or as provided below, all notices required or desired so be given with respect to this Lease shall be in writing and shall be deemed to be given to and received by the party intended to receive such notice when delivered by overnight courier, hand delivered or three (3) days after such notice shall have been deposited, postage prepaid, in the United States mail, certified, return receipt requested, properly addressed to the addresses specified below. In the event of a change of address by either party, such party shall give written notice thereof n accordance with the foregoing. LANDLORD'S ADDRESS FOR NOTICES: TENANT'S ADDRESS FOR NOTICES: ------------------------------ ---------------------------- Fairfax Boca 92, L.P. Omega Research, Inc. c/o Flagship Group, Inc. 8700 West Flagler Street, Suite 250 2300 Windy Ridge Parkway, Suite 50 Miami, Florida 33174 Atlanta, GA 30339-5671 Attention: Marc J. Stone, Esq. Attention: T. Gordy Germany 33. BROKERAGE CLAIMS. Tenant and Landlord hereby warrant and represent to the other that Tenant or Landlord, as the case may be, has not dealt with any broker, agent or finder in connection with this Agreement other than Larkin, Schmidt, Weidenbaum Commercial Real Estate. Both Landlord and Tenant covenant and agree to hold each other harmless from and against any and all loss, liability, damage, claim, judgment, cost or expense (including but not limited to attorneys' fees and expenses and court costs) that may be incurred or suffered by the other party because of any claim for any fee, commission or similar compensation with respect to this Agreement, made by any other broker, agent or finder claiming to have dealt with such party, whether or not such claim is meritorious. Landlord agrees to pay Larkin, Schmidt, Weidenbaum Commercial Real Estate pursuant to a separate agreement. 34. SIGNS. Tenant shall not install, paint, display, inscribe, place or affix any sign, picture, advertisement, notice, lettering, or direction (hereinafter collectively called "Signs") on the exterior of the Premises, the common areas of the Building, the interior surface of glass or any other location which could be visible from outside of the Premises without first securing written consent from Landlord therefore. Any Sign permitted by Landlord shall at all times conform with all municipal ordinances or other laws, regulations, deed restrictions and protective covenants applicable thereto. Tenant shall remove all Signs at the expiration or other termination of this Lease, at Tenant's sole risk and expense, and shall in a good and workmanlike manner properly repair any damage caused by the installation, existence, or removal of Tenant's Signs. Notwithstanding the foregoing, Tenant shall have the right, without Landlord's consent, to place its firm name on the door of the Premises. Additionally, if during the term of the Lease the Building shall contain a directory of tenants, Tenant shall have the right during the Term of the Lease to have its firm name displayed thereon. 35. ENTIRE AGREEMENT, AMENDMENT AND LIMITATION OF WARRANTIES. IT IS EXPRESSLY AGREED BY TENANT, AS A MATERIAL CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF THE PARTIES; THAT THERE ARE, AND WERE NO VERBAL REPRESENTATIONS, WARRANTIES, UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE OR THE EXPRESSLY MENTIONED EXTRINSIC DOCUMENTS NOT INCORPORATED IN WRITING IN THIS LEASE. LANDLORD AND TENANT EXPRESSLY AGREE THAT, EXCEPT AS EXPRESSLY SET FORTH IN THIS LEASE, THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR USE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE AND THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS LEASE. IT IS LIKEWISE AGREED THAT THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY BOTH LANDLORD AND TENANT. 36. LIMITATION OF LIABILITY. Landlord's obligations and liability with respect to this Lease shall be limited solely to Landlord's interest in the Building, as such interest is constituted from time to time, and neither Landlord nor any officer, director, shareholder or partner of Landlord, or of any partner of Landlord, shall have any personal liability whatsoever with respect to this Lease. 37. SUBMISSION OF AGREEMENT. Submission of this Lease to Tenant for signature does not constitute a reservation of space or an option to acquire a right of entry. This Lease is not binding or effective until execution by and delivery to both Landlord and Tenant. 38. CORPORATE AUTHORITY. (a) If Tenant executes this Lease as a corporation, each of the persons executing this Lease on behalf of Tenant does hereby represent and warrant that Tenant is a duly organized and validly existing corporation, that Tenant is qualified to do business in the State in which the Building is located, that Tenant has full right, power and authority to enter into this Lease, and that each person signing on behalf of Tenant is authorized to do so and Tenant shall provide Landlord evidence reasonably acceptable to Landlord of such authority. Upon Landlord's request, Tenant shall provide Landlord with evidence reasonably satisfactory to Tenant confirming the foregoing representations and warranties. (b) If Landlord executes this Lease as a corporation, each of the persons executing this Lease on behalf of Landlord does hereby represent and warrant that Landlord is a duly organized and validly existing corporation, that Landlord is qualified to do business in the State in which the Building is located, that Landlord has full right, power and authority to enter into this Lease, and that each person signing on behalf of Landlord is authorized to do so and Landlord shall provide Tenant evidence reasonably acceptable to Tenant of such authority. Upon Tenant's request, Landlord shall provide Tenant with evidence reasonably satisfactory to Tenant confirming the foregoing representations and warranties. 39. MISCELLANEOUS. The captions appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of any provision hereof. If any provision of this Lease shall ever be held to be invalid or unenforceable in any circumstance or as to any person, such invalidity or unenforceability shall not affect such provision in any other circumstance or as to any other person or any other provision of this Lease. This Lease, or any portion hereof, shall not be recorded unless both parties hereto agreed to the recording. 40. GOVERNING LAW. This Lease shall be governed and construed in accordance with the laws of the State in which the Building is located. 41. COUNTERPARTS. This Lease may be executed in multiple counterparts, each of which shall be deemed an original and all of which shall constitute one agreement, and the signatures of any party to any counterpart shall be deemed to be a signature to, and may be appended to, any other counterpart. 42. RADON DISCLOSURE. Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over a time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from the County Public Health Unit 43. RIGHT OF REFUSAL. Landlord will provide to Tenant a second right of refusal to lease additional contiguous space on the same floor, subject to the existing right of refusal respecting same heretofore given by Landlord to Associated Industries Insurance Services ("AIIS"). Such notice shall be provided to Tenant simultaneously, along with the notice to said tenant that has the existing first right of refusal. Tenant shall have fifteen (15) days in which to notify Landlord of its intent to exercise this right (subject, however, to the first right of refusal). If AIIS declines to exercise the first right of refusal and Tenant exercises the second right of refusal, such additional space shall be provided to Tenant within thirty (30) days, on an "as-is" basis, and at the same rental rate which tenant is paying for the original premises. If Tenant shall decline to exercise such right to let said space, Landlord may at any time with six (6) months after such notice is given to Tenant so let such space to third parties, failing which the right of refusal shall be deemed reinstated as to such space. 44. PARKING. Tenant, its agents, invitees, employees and contractors shall have the right throughout the Term, on a non-exclusive and unreserved twenty-four (24) hours a day, seven (7) days a week, free of charge basis, to utilize up to 3.75 parking spaces for each 1,000 square feet of Premises demised hereunder, rounded up to the nearest whole number of parking spaces, in the parking areas located adjacent to the Building. Landlord represents to Tenant that there currently exists, and will throughout the Term of the Lease exist, adequate parking spaces under applicable codes to allow for the foregoing allocation to Tenant. The parties agree that the Tenant shall be allocated twenty-four (24) parking spaces during the Term of the Lease to be increased as aforesaid only if Tenant exercises its right of refusal under Section 43 hereof. 45. SATELLITE DISHES. At Tenant's sole cost and expense, and subject to Tenant complying with any and all rules, regulations, laws, ordinances, safety standards and statutes of any municipal, county, state or federal governmental or quasi-governmental agency or authority, Tenant may install, and once installed, modify, remove and replace from time to time, up to ten (10) satellite or microwave dishes or antenna (four of which shall not exceed eighteen (18) inches in diameter and six (6) of which shall not exceed six (6) feet in diameter) (the "Rooftop Communication System") on the roof of the Building. The Rooftop Communication System shall be located on the roof area immediately above the Premises. No dish shall exceed 100 pounds in weight (inclusive of anchoring weights). The Rooftop Communication System shall be installed, at Tenant's expense, by Tenant's in-house engineering staff, or by a contractor approved by Landlord, which contractor approval shall not be unreasonably withheld or delayed. There shall be no penetrations of the roof membrane, and Tenant shall take no action which may void Landlord's roof warranty. The Rooftop Communication System shall include the use of any Building shafts required to bring Tenant's data cables from the roof area to the Premises. Tenant shall have access to the roof and Tenant's equipment relating to such Rooftop Communications System at all reasonable times throughout the Term. Tenant shall be responsible for procuring and shall provide Landlord with copies of whatever licenses, certifications or permits may be required for the use of such Rooftop Communication System or operation of any equipment served thereby, and shall fully indemnify and hold Landlord harmless from any and all causes of action resulting from Tenant's installation, maintenance, removal, use and operation of the Rooftop Communication System. Landlord makes no warranties whatsoever as to the permissibility of such Rooftop Communication System under applicable laws of fitness for use for a particular purpose or merchantability. Tenant shall not be obligated to pay rent or otherwise compensate Landlord with respect to the Rooftop Communication System. Notwithstanding the foregoing, in the event that at any time during the Term of the Lease Tenant's use and operation of the Rooftop Communication System shall result in any material interference with or disruption of the use and operation of the satellite communications systems or other operations of either or both of two other tenants at the Project - Bell South and/or Associated Industries - then, in such event, Tenant shall, at Tenant's expense, cause the Rooftop Communication System to be relocated elsewhere on the roof of the Building, or, if such relocation elsewhere on the roof of the Building shall not correct the interference and/or disruption problem, to another Project building's rooftop or elsewhere at the Project. The determination of any such relocation area shall be made by Landlord and Tenant jointly, each agreeing to act reasonably. In the event that the City of Boca Raton or any other applicable governmental authority shall at any time during the term of the Lease require the installation of any screening device respecting the Rooftop Communication System to shield its visibility, the design and aesthetics of same shall be subject to Landlord's consent, not to be unreasonably withheld or delayed. Tenant shall maintain, at Tenant's sole cost and expense, the Rooftop Communication System in good order and repair at all times. Tenant may remove the Rooftop Communication System, at any time during the Term of the Lease, upon fifteen (15) days' prior written notice to Landlord. Tenant covenants and agrees that, if requested by Landlord, Tenant shall, at Tenant's sole cost and expense, remove any such Rooftop Communication System (a) at or prior to the expiration or earlier termination of this Lease, or (b) in the event Tenant violates the covenants contained in this Section beyond any applicable curative period. In the event the Rooftop Communication System is removed by Tenant, Tenant shall surrender the roof area to Landlord in good condition, except for ordinary wear and tear and damage by fire, casualty and other elements, and the negligence or willful misconduct of Landlord, its agents, employees and/or contractors. IN WITNESS WHEREOF, the undersigned have executed and delivered this Lease under seal as of the day and year first above written. LANDLORD: FAIRFAX BOCA 92, L.P., a Georgia limited partnership By: Fairfax Properties, Inc. Its duly authorized general partner ILLEGIBLE By: /s/ T. Gordon Germany --------------------------------- Witness: ILLEGIBLE --------------------------- Its: Pres -------------------------------- TENANT: OMEGA RESEARCH, INC. /s/ Mikki E. Blyskal By: /s/ Gregg Stewart --------------------------------- Witness: /s/ Loren Constantino --------------------------- Its: Chief Financial Officer -------------------------------- [CORPORATE SEAL] EXHIBIT "A" [OUTLINE OF PREMISES] EXHIBIT "B" [LEGAL DESCRIPTION OF LAND] PROPERTY LOCATED IN FLOOD ZONE A6, ELEV. 11 (2/1/79) PER FLOOD RATE INSURANCE MAP, PLAM BEACH COUNTY, FLORIDA, COMMUNITY PANEL NUMBER 120192 0220 B, AS REVISED OCTOBER 15, 1962 DESCRIPTION: Parcel "B" of North Forty A parcel of land lying and being in Sections 1 and 12, Township 47 South, Range 42 East and Sections 6 and 7, Township 47 South, Rage 43 East, Palm Beach County, Florida, described as follows: Commence at the Northeast corner of said Section 12; thence South 00/degree/29'15" West, along the East line of said Section 12, a distance of 80.01 feet to the North right-of-way line of N.W. 51st Street and the Point of Beginning of this description; thence North 88/degree/35'00" West, along a line 80.00 feet South of, and parallel with, as measured at right angles to the North line of said Section 12, a distance of 453.93 feet; thence North 00/degree/24'40" East, a distance of 149.73 feet; thence North 89/degree/35'20" West, a distance of 4.27 feet; thence North 00/degree/24'40" East, a distance of 69.93 feet; thence North 89/degree/35'20" West, a distance of 2.46 feet; thence North 00/degree/24'40" East, a distance of 578.59 feet; thence South 89/degree/35'20" East, a distance of 14.51 feet; thence North 00/degree/24'40" West, a distance of 13.99 feet; thence South 88/degree/35'00" East, a distance of 504.73 feet to the East line said Section 1; thence continue South 88/degree/35'00" East, a distance of 57.50 feet; thence South 00/degree/29'15" West, parallel with the East line of said Section 1, a distance of 250.00 feet; thence South 88/degree/35'00" East, a distance of 20.00 feet; thence South 00/degree/29'15" West, a distance of 435.82 feet to a line 45.00 feet North of an parallel with the South line of said Section 6; thence South 89/degree/42"30" East, along said parallel line, a distance of 40.00 feet; thence South 00/degree/29'15" West, a distance of 45.00 feet to the South line of said Section 6; thence continue South 00/degree/29'15" West, a distance 80.00 feet to a line 80.00 feet South of an parallel with the South line of said Section 6, said point being further described as being the North right-of-way line of N.W. 51st Street; thence North 89/degree/42'30" West, along said parallel line, a distance of 117.50 feet to the said Point of Beginning of this description. Said lands situate, lying and being in Palm Beach County, Florida. Containing 10.03 acres, more or less. EXHIBIT "C" CLEANING AND JANITORIAL SERVICES CLEANING SERVICE FOR THE NORTH 40 INCLUDES: DAILY OPERATIONS LOBBY - 1. Dust mop floors. Damp mop hard surface floors. 2. Spot clean interior glass partitions, doors, frames, light switches. Baseboards, etc. Wash entrance glass on both sides. 3. Dust all partitions, doors, door frame surfaces and all horizontal surfaces. 4. Wash exterior surfaces of all trash containers. 5. Empty and damp wipe ashtrays. CORRIDORS, ELEVATORS AND STAIRWELLS - 1. Empty and damp wipe ashtrays. 2. Dust to hand height all horizontal surfaces of ledges, sills, ventilating louvers, frames, etc. 3. Clean and sanitize all drinking fountains. 4. Empty waste containers. 5. Vacuum all carpeted areas. 6. Spot wash walls and exterior surfaces of elevator doors. 7. Sweep and remove leaves from atrium floors. 8. Dust grab rails. 9. Sweep and wash steps and landings, as necessary. GENERAL OFFICE AREA - 1. Empty all waste baskets in offices and replace basket liners as required. 2. Dust and spot clean all countertops. 3. Dust all horizontal surfaces of desks, chairs, tables and office equipment. 4. Dust all exposed filing cabinets, bookcases and shelves. 5. Dust to hand height all horizontal surfaces of equipment, ledges, sills, shelves, frames, partitions, etc. 6. Dust all telephones. 7. Vacuum clean all exposed carpeting. 8. Dust mop or sweep all non-carpeted floors. 9. Spot wash walls, glass surfaces, doors, frames, light switches, baseboards, desk tops, and countertops. REST ROOMS - 1. Clean and disinfect all fixtures, toilets, urinals and partitions. Mop floors and clean mirrors. Stock all dispensers. 2. Empty and damp wipe ashtrays. WORK HOURS - All cleaning shall be performed on a five (5) day week, Monday through Friday, between 6:30 P.M. and 11:00 P.M. ADDITIONAL WORK REQUESTED BY TENANT - Any additional work requested by tenants can be per an agreed additional charge and can be paid for by management or the requesting tenant. INSURANCE - Any company performing janitorial services in The North 40 will maintain worker's compensation and contractor's liability insurance. QUARTERLY OR AS REQUIRED: - - Wash windows interior and exterior - - Clean all mechanical, equipment rooms, plumbing pipes in stairwells - - Dust blinds and clean any finger prints - - Clean all light fixtures, fire equipment boxes and exit lights - - Spot clean all carpet, including traffic areas EXHIBIT "D" RULES AND REGULATIONS To ensure minimizing of inconvenience to tenants and to maintain the interior space in a condition comparable to other first class office space in the Boca Raton, Florida market area, the following Building regulations are provided and are applicable to Tenant, except as otherwise specifically addressed in the Lease: 1. The sidewalks, entry passages, corridors, halls, elevators and stairways shall not be obstructed by Tenant, or used by Tenant for any purpose other than those of ingress and egress. The floors, skylights and windows that reflect or admit light into any place in said Building shall not be covered or obstructed by Tenant subject to Tenant's right to install window coverings such as blinds. The water closes and other water apparatus shall not be used for any other purpose than those for which they were constructed, and no sweepings, rubbish, or other obstructing substances shall be thrown therein. 2. No advertisement, sign or other notice shall be inscribed, painted or affixed on any party of the outside or inside of said Building, except upon the interior doors and windows permitted by Landlord, which signs, etc. shall be of such order, size and style and at such places as shall be designated by Landlord. Exterior signs on doors will be provided for Tenant by Landlord, the cost of such signage to be charged to and paid for by Tenant. 3. Nothing shall be thrown by Tenant, its clerks or servants out of the windows or doors or down the passages or skylights of the Building. No rooms shall be occupied or used as a sleeping or lodging apartments at any time. 4. Tenant shall not employ any persons other than the janitors of Landlord or others reasonably approved by Landlord (who will be provided with pass keys into the offices) for the purpose of cleaning or taking charge of said Premises. It is understood and agreed that the Landlord shall not be responsible to Tenant for any loss of property from the Premises, however occurring, or for any damage done to the furniture or other effects of Tenant by the janitor or any of its employees, provided, however, that Landlord shall use its good faith reasonable efforts to employ service companies for providing such janitorial services which maintain quality controls for personnel employed. 5. No animals (except service animals), birds, bicycles or other vehicles shall be allowed in the offices, halls, corridors, elevators or elsewhere in the Building. 6. No painting shall be done, nor shall any alterations be made to any part of the Building by putting up or changing any partitions, doors or windows, nor shall there be any nailing, boring, or screwing into the woodwork or plastering, nor shall any connection be made to the electric wires or electric fixtures without the consent in writing on each occasion of Landlord or its Agent. All glass, locks and trimmings in or upon the doors and windows of the Building shall be kept whole and, when any part thereof shall be broken, the same shall be immediately replaced ore repaired and put in order under the direction and to the satisfaction of Landlord, or its Agent, and shall be left whole and in good repair. Tenant shall not injure, overload or deface the Building, the woodwork or the walls of the Premises, nor carry on upon the Premises any noisome, noxious, noisy or offensive business. 7. Tenant shall not (without Landlord's prior written consent) put up or operate any steam engine, boiler, machinery or stove upon the Premises, or carry on any mechanical business thereof, or do any cooking thereon, or use or allow to be used upon the Premises oil, burning fluids, camphene, gasoline or kerosene for heating, warming or lighting. No article deemed extra hazardous on account of fire and no explosives shall be brought into the Premises. No offensive gases or liquids will be permitted. 8. Landlord will post on the directory of its Building, if any, at no charge to Tenant, names of the executives of Tenant, such executives to be designated by Tenant. All additional names which Tenant shall desire put upon said directory must be first consented to by Landlord, and if so approved, a chare will be made for such additional listing as prescribed by Landlord to be paid to Landlord by Tenant. 9. The Landlord, and its agents, shall have the right to enter the Premises at all reasonable hours for the purpose of making any repairs, alterations or additions which it shall deem necessary for the safety , preservation or improvement of said Building, and the Landlord shall be allowed to take all material into and upon such Premises that may be required to make such repairs, improvements and additions, or any alterations for the benefit of the Tenant without in any way being deemed or held guilty or an eviction of the Tenant, and the rent reserved shall in no wise abate while said repairs, alterations or additions are being made; and Tenant shall not be entitled to maintain a set-off or counterclaim for damage against Landlord by reason or loss or interruption to the business of Tenant because of the prosecution of any such work. All such repairs, decorations, additions and improvements shall be done during ordinary business hours or, if any such work is not the request of the Tenant to be done during any other hours, Tenant shall pay for all overtime costs. 10. Tenant shall instruct its mover to contact the Building Manager two (2) working days prior to truck arrival for coordination of move-in and/or large furniture/equipment deliveries. Such moves will normally be made after 6:00 p.m. Friday and prior to 8:00 a.m. Monday. Tenant shall be responsible for any damage to Building interior including, but not limited to, floors and carpet. A Landlord representative will be present for all such moves. 11. Landlord reserves the right to make such other and reasonable rules and regulations as, in its judgment, may from time to time be needed for the safety, care and cleanliness of the Premises and for the preservation of good order therein. EXHIBIT "E" WORK LETTER AGREEMENT The following provisions shall govern (A) the construction of the building shell which Landlord shall perform in accordance with the terms of this EXHIBIT E, and (B) the buildout of the Premises, which Landlord shall perform in accordance with the terms of this EXHIBIT E. A. CONSTRUCTION. Tenant has submitted to Landlord a space plan for the buildout of the Premises (the "SPACE PLANS") prepared by Tenant's architect showing the interior layout of the Premises and attached hereto as EXHIBIT A-1 and by this reference made a part hereof. The Space Plans have been supplemented and elaborated upon by the construction drawings prepared and modified by Landlord's and Tenant's architects (said Space Plans as so modified and supplemented by the construction drawings being herein collectively referred to as the "Plans"). Landlord agrees to build out the Premises substantially in accordance with the Plans ("LANDLORD'S Work") at Tenant's sole cost and expense except as set forth below (Landlord's architect has submitted the Plans to the City of Boca Raton, Florida for permitting. The Plans also provide the finishes that Tenant desires as well as specific electrical requirements. Landlord will engage Islandia Construction Company ("CONTRACTOR") to perform the Landlord's Work and the Base Building Work (as hereinafter defined). Upon obtaining the applicable permits required therefor, Contractor will promptly commence with construction of Landlord's Work and the Base Building Work pursuant to a fixed price construction contract (utilizing the standard AIA Fixed Price Construction Contract Form and the Standard AIA Form General Conditions) (the "Construction Contract"), having a fixed construction price of $204,854.00, of which a maximum amount of $139,009.00 shall be applicable to the Landlord's Work and a maximum amount of $65,845.00 shall be applicable to the Base Building Work, which fixed construction price (and Landlord's Work and Base Building Work components thereof) shall be subject only to (i) increases on account of change orders requested or approved in writing by Tenant, and (ii) pricing modifications reasonably required (calculated at Contractor's actual cost therefor) to comply with any additional requirements imposed by any applicable governmental permitting authorities, and which fixed construction price shall be categorized and priced on a "line-item" basis as set forth on EXHIBIT B hereof. Landlord and Landlord's architect and Contractor will cooperate with Tenant and Tenant's architect to accommodate modifications to the Plans as requested by Tenant and will advise of the effect that any changes may have on pricing or schedules. No material changes shall be made to the Construction Contract without Tenant's prior written consent if such changes would materially alter the Landlord's Work or the Base Building Work, including the materials and specifications enumerated in the Plans applicable thereto, or if such changes would increase in any respect the fixed construction price applicable to the Landlord's Work set forth therein or if such changes would delay in any material respect the timely completion of Landlord's Work or the Base Building Work. B. BASE BUILDING WORK. In addition to Landlord's Work, Landlord shall, at Landlord's cost, complete the base building work (the "BASE BUILDING WORK") which shall include HVAC work with corresponding low pressure duct work, diffusers and thermostats, VAVs at a ratio of 1/2000 square feet, fire sprinklers and fire proofing per code, ceiling tile (minimum requirement Armstrong 2X2 Cortege regular), and lighting (3-lamp parabolic fixtures T-8 with electronic ballast) at a ratio of 1 fixture per 80 rentable square feet. Any additional light fixtures shown on Tenant's Architect's Reflected Ceiling Plan shall be installed as part of the Construction Contract but shall not constitute Base Building Work.. C. TENANT ALLOWANCE. Landlord agrees to provide to Tenant an allowance with respect to the Premises of $20.00 per rentable square foot (calculated as provided in the Lease) (the "TENANT IMPROVEMENT ALLOWANCE"). The Tenant Improvement Allowance may be applied to the cost of all (i) tenant improvements, (ii) space planning, (iii) design and construction documents and (iv) general contractor fees, including, without limitation, the Landlord's Work (but excluding the Base Building Work which shall be paid for solely by Landlord). In the event the Tenant Improvement Allowance shall exceed the amount of Landlord's Work or any of the other expenses enumerated in items (i) through (iv) above, all of which shall be funded out of the Tenant Improvement Allowance, to the extent there remains undisbursed portions thereof, upon presentation of invoices or other reasonable documentation respecting same. Any unused portion of the Tenant Improvement Allowance shall be converted to an equivalent amount of Base Rent abatement in direct chronological order of due dates; provided, however, that Landlord shall have no obligation to provide any Base Rent abatement at any time that Tenant shall be in default under the Lease or at any time that the remainder of the Tenant Improvement Allowance shall be less than the remaining costs of Landlord's Work. To the extent that the costs of Landlord's Work exceed the Tenant Improvement Allowance (the "Deficiency Amount"), Tenant shall remit its pro rata percentage share of each such installment due under the Construction Contract, calculated by utilizing a fraction, the numerator of which is the Deficiency Amount and the denominator of which is the sum of (i) the cost of Landlord's Work and (ii) the cost of the Base Building Work, to Contractor, as and when periodic payments are due under the Construction Contract. D. CHANGES TO PLANS. Tenant shall have the right to request changes in the Plans and any such change shall be initialed by Tenant and reviewed and approved by Landlord, Landlord's architect and the Contractor. No change shall be permitted without the consent of Landlord which, as to non-structural changes that do not affect building systems, shall not be unreasonably withheld. Further, if changes are made by Tenant to the Plans after Landlord's approval, and should these changes to Tenant's Plans require Landlord to postpone substantial completion of the space or delay the Commencement Date, then Landlord shall have the right to refuse to permit the making of such changes unless and until Tenant shall have committed in writing, in a manner reasonably satisfactory to Landlord, to pay to Landlord, on the date Rent would have commenced hereunder in the absence of such delay, a sum of money equivalent to the Base Rent for the Premises for the period during which Tenant would have been obligated to pay Base Rent to Landlord had not the Commencement Date been so delayed. E. TENANT'S WORK. Notwithstanding anything to the contrary in this EXHIBIT E, Tenant shall be responsible for all work, construction and installation in the Premises which is not designated as Landlord's Work (including but not limited to all fixtures, furniture, equipment and other office installations) or part of the Base Building Work. More specifically, the satellite dish- related work and the installation of fixtures, furnishing and Tenant's business equipment shall be considered Tenant's Work. Such work shall be referred to as "Tenant's Work" and shall be at Tenant's sole cost and expense. F. PERMITS, CERTIFICATE OF OCCUPANCY. Except as provided below, Landlord shall obtain all necessary permits in connection with Landlord's Work and the Base Building Work. On or before the date Landlord tenders delivery of the Premises to Tenant, Landlord agrees to obtain all final inspection approvals which are required for Landlord to deliver the Premises to Tenant with Landlord's Work and the Base Building Work completed, including, without limitation, the certificate of occupancy which Landlord is required to deliver under Section 2 of the Lease as part of the evidence of "substantial completion" of the Tenant Build-Out (as defined in the Lease) and that can be obtained by Landlord prior to Tenant installing its fixtures, furniture and equipment. Tenant shall be responsible for applying for and obtaining all permits required for Tenant to perform Tenant's Work, or to operate within the Premises, and for obtaining the final fire inspection approval after installation of its fixtures, furniture and equipment. G. NOTICE. Tenant shall, by notice to Landlord, designate an individual who Tenant agrees shall be available to meet and consult with Landlord and Landlord's architect at the Premises as Tenant's representative respecting the matters which are the subject of this Exhibit and who, as between Landlord and Tenant, shall have the power to legally bind Tenant, in making requests for changes, giving approval of plans or work, giving directions to Landlord or the like, under this Exhibit. H. SUBSTANTIAL COMPLETION. For purposes of this Work Letter "substantially complete" and "substantial completion" shall have the meanings assigned to such terms in Section 2 of the Lease. I. NO LIABILITY. Notwithstanding the review and approval by Landlord of Tenant's Space Plans, Landlord shall have no responsibility or liability in regard to the safety, sufficiency, adequacy or legality thereof and Tenant shall be solely responsible for the compliance of such plans and specifications (and improvement constructed as a result thereof) with all applicable laws and regulations, the architectural completeness and sufficiency thereof and other matters relating thereto. J. TENANT DELAY. Should Tenant or its agents fail to timely comply in all material respects with all of the provisions of this EXHIBIT E imposed upon Tenant and same shall cause a delay in substantial completion of the Landlord's Work and/or Base Building Work (collectively, a "TENANT DELAY"), then Tenant shall pay to Landlord, on the date Rent would have commenced hereunder in the absence of such delay, a sum of money equivalent to the Rent for the Premises for the period during which Tenant would have been obligated to pay Rent to Landlord had the Commencement Date not been so delayed. In addition, in the event of any Tenant Delay, the date on which any penalties would accrue under Section 2 of the Lease shall be extended on a day-for-day basis for each day of Tenant Delay. K. WARRANTY. Landlord shall obtain from Contractor a warranty that the Tenant Improvements shall be free from defects in workmanship and materials and Landlord shall cause the Contractor, at no cost and expense to Tenant, to remedy or cause to be remedied any defect in such work, provided Tenant gives the Contractor written notice thereof no later than one (1) year after the later to occur of (i) the date of Substantial Completion or (ii) the date on which Tenant takes occupancy of the Premises. EXHIBIT A-1 TO WORK LETTER SPACE PLANS See Exhibit "F" to Lease Agreement. EXHIBIT B TO WORK LETTER ISLANDIA BUILDING CORP. A PROFESSIONAL FLORIDA BUILDER CCC4156975 530 Ibis Drive, Delray Beach, Florida 33444 Office 561-279-4033 - Fax 561-279-4574 - Mobile 561-702-1010 CONSTRUCTION COST BREAKDOWN OWNER: Flagship Group - Omega suite PHONE: 800-875-9796 SUITE: First Floor 901 Yamato Road FAX: 770-952-2440 DATE: 11/1/99 BUDGET SQ. FT. A/C Proposed/Actual 5996 TOTAL JOB SUMMARY PROPOSED ITEM PROPOSED FINAL SF ACTUAL ---- -------- ----- --------- 1 CABINETRY $ 8,400 X $ 1.07 2 FINISH CARPENTRY MATERIAL $ 8,861 X $ 1.48 3 CARPETING $ 9,375 X $ 1.56 4 VINYL TILE $ 1,400 X $ 0.23 5 CERAMIC TILE ENTRY $ 1,275 X $ 0.21 6 VINYL BASE 1000LF $ 800 X $ 0.13 7 DEBRIS/DUMPSTER $ 1,000 X $ 0.17 8 DEMOLITION $ 5,250 X $ 0.88 9 DRYWALL $ 31,990 X $ 5.33 10 ELECTRICAL $ 41,700 X $ 6.95 11 HVAC $ 30,900 X $ 5.15 12 ACOUSTICAL CEILINGS $ 9,995 X $ 1.87 13 PLUMBING $ 625 X $ 0.10 14 BUILDING PERMIT $ 2,652 X $ 0.44 15 PAINTING INT/EXT $ 5,395 X $ 0.90 16 FIRE ALARM CONTROL - equipment $ 2,909 X $ 0.50 17 FIRE SPRINKLER $ 8,200 X $ 1.37 19 FIRE EXTINGUISHER W/CABINET $ 445 X $ 0.07 20 TEMPORARY LABOR $ 1,184 X $ 0.20 21 FIRE EQUIPMENT - WSA $ 1,000 X $ 0.17 22 BLUE PRINTS $ 225 X $ 0.04 23 CLEANING $ 875 X $ 0.15 24 FIRE CAULKING $ 350 X $ 0.06 25 OVERHEAD & FEE @ 14% $ 24,202 $ 4.04 26 DESIGN FEE ART KAMM $ 7,776 $ 1.30 TOTAL COST $204,854 $ 34.17 Options: Electrical fixtures specified with Alternate Lightenia or Metaluz 2x4 three bulb T-B electronic balast parabole. General Notes 1. Price includes R11 batt insulation in lieu of sound batt as specified. 2. If panic hardware is required at exits add $922 3. Price includes comments from Rick Mora 10/20/99 memo w/exception of door hardware. 4. Best cylinders for locks supplied and installed by others. 5. If fire rating existing steel deck becomes necessary add $14,500 for spray and $1,500 to drop main a/c 6. electrical demo and reconnecting existing communication lines for existing tenants not included. 7. Price subject to final review by the city of Boca Raton Building Department. Flagship omega 3 CONSTRUCTION COST BREAKDOWN OWNER: Flagship Group - Omega suite PHONE: 800-875-9796 SUITE: First Floor 901 Yamato Road FAX: 770-952-2440 DATE: 11/1/99 Revised: 11/10/99 Actual Square Footage 5996 OMEGA ITEM PROPOSED TOTAL ACTUAL ---- -------- ----- --------- 1 CABINETRY $ 8,400 X $ 1.07 2 FINISH CARPENTRY MATERIAL $ 8,861 X $ 1.48 3 CARPETING $ 9,375 X $ 1.56 4 VINYL TILE $ 1,400 X $ 0.23 5 CERAMIC TILE ENTRY $ 1,275 X $ 0.21 6 VINYL BASE 1000LF $ 800 X $ 0.13 7 DEBRIS/DUMPSTER $ 1,000 X $ 0.17 8 DRYWALL $ 31,980 X $ 5.33 9 PLUMBING $ 626 X $ 0.10 10 BUILDING PERMIT $ 2,652 X $ 0.44 11 PAINTING INT/EXT $ 5,395 X $ 0.90 12 TEMPORARY LABOR $ 1,184 X $ 0.20 13 CLEANING $ 875 X $ 0.15 14 BLUE PRINTS $ 225 X $ 0.04 22 FIRE EXTINGUISHER W/CABINET $ 445 X $ 0.07 16 DEMOLITION $ 2,500 X $ 0.42 17 DESIGN AND ENGINEERING Islandia fee Not Incl. $7,776 $ 1.30 15 ELECTRICAL - including below listed its $ 30,825 X $ 5.14 A. Wiring for air handler and condenser $ 1,680.00 B. Wiring for 16KVA UPS $ 400.00 C. Wiring for Shunt Trip $ 150.00 D. Additional 10 2x4 fixtures $ 1,450.00 E. Flourecent Hi-Hats $ 2,200.00 16 HVAC - Mechanical $ 9,300 $ 1.55 A. Additional air handlet + Condenser for computer room $ 4,800.00 B. Additonal VAV Box #3 with Drops $ 3,000.00 C. Fire dampers computer room $ 1,500.00 17 Overhead and Fee @ 14% $ 16,116 $ 2.69 18 Subtotal $131,233 $139,009 $ 23.18 Flagship omega 3 CONSTRUCTION COST BREAKDOWN OWNER: Flagship Group - Omega suite PHONE: 800-875-9796 SUITE: First Floor 901 Yamato Road FAX: 770-952-2440 DATE: 11/1/99 Revised: 11/10/99 Actual Square Footage 5996 OMEGA - CONTINUED Options: Electrical fixtures specified with Alternate Lightenia or Metalux 2x4 three bulb T-B electronic balast parabole. General Notes 1. Price includes R11 batt insulation in lieu of sound batt as specified. 2. If panic hardware is required at exits add $922 3. Price includes comments from Rick Mora 10/20/99 memo w/exception of door hardware, which cannot be fitted with Best Look Cylinders. 4. Best cylinders for locks supplied and installed by others. 5. Price subject to final review by the city of Boca Raton Building Department. Flagship omega 3 CONSTRUCTION COST BREAKDOWN OWNER: Flagship Group - Omega suite PHONE: 800-875-9796 SUITE: First Floor 901 Yamato Road FAX: 770-952-2440 DATE: 11/1/99 Revised: 11/10/99 Actual Square Footage 5996 ABOVE CEILING FLAGSHIP GR0UP, INC. ITEM PROPOSED TOTAL ACTUAL ---- -------- ----- --------- 17 ACOUSTICAL CEILINGS $ 9,995 X $ 1.67 18 ELECTRICAL $ 10,875 $ 1.81 2x4 electronic ballest Lithonia $ 10,875.00 18 HVAC $ 21,600 X $ 3.60 Supply and install 3 New VAV Systems 19 FIRE ALARM CONTROL - equipment $ 2,989 X $ 0.50 20 FIRE SPRINKLER $ 8,200 X $ 1.37 23 FIRE EQUIPMENT - WSA $ 1,000 X $ 0.17 24 FIRE CAULKING $ 350 X $ 0.06 25 DEMOLITION $ 2,749 25 OVERHEAD & FEE @ 14% $ 8,087 X $ 1.35 26 Subtotal $ 65,845 $ 65,845 $ 10.98 TOTAL Omega + Flagship $204,854.00 $ 34.17 GENERAL NOTES: 1. Best cylinders for locks supplied and installed by others. 2. If fire rating existing steel deck becomes necessary add $14,500 for spray and $1,500 to drop main a/c 3. electrical demo and reconnecting existing communication lines for existing tenants not included. 4. Price subject to final review by the city of Boca Raton Building Department. EXHIBIT "F" [APPROVED SPACE PLAN] EX-23.1 6 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the Company's previously filed Form S-8 Registration Statement File No. 333-40881. /s/ ARTHUR ANDERSEN LLP Miami, Florida, March 17, 2000. EX-27 7
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 0001042814 OMEGA RESEARCH, INC. AND SUBSIDIARIES 1 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 2,175,852 1,695,304 43,228,059 29,533,000 67,371 28,294,969 5,357,041 2,745,587 31,379,767 5,904,884 0 0 0 244,751 25,230,132 31,379,767 33,767,832 42,869,969 2,985,409 32,037,662 (445,535) 5,721,857 1,691,185 879,391 1,846,000 (966,609) 0 0 0 (966,609) (.04) (.04)
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