SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2002
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 0-31049
TRADESTATION GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 65-0977576
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8700 WEST FLAGLER STREET, MIAMI, FLORIDA 33174
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(Address of principal executive offices) (Zip Code)
(305) 485-7000
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(Registrant's telephone number, including area code)
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 [ ]
AS OF APRIL 18, 2002, THERE WERE 44,547,816 SHARES OF THE REGISTRANT'S
COMMON STOCK OUTSTANDING.
TRADESTATION GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 2002 (unaudited) and December 31, 2001................ 3
Consolidated Statements of Operations
Three months ended March 31, 2002 and 2001 (unaudited).......... 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2002 and 2001 (unaudited).......... 5
Notes to Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..........................16
Item 6. Exhibits and Reports on Form 8-K...................................16
Signature ...................................................................17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS:
Cash and cash equivalents (Note 5) $ 18,009,338 $ 19,981,591
Receivables from clearing firms 1,032,275 255,146
Securities owned, at market value (Note 5) 415,928 415,928
Accounts receivable 246,607 330,300
Property and equipment, net 3,509,748 3,224,518
Intangible assets, net 1,592,324 1,748,096
Other assets 824,874 865,424
------------ ------------
Total assets $ 25,631,094 $ 26,821,003
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable $ 1,827,020 $ 1,596,244
Accrued expenses 6,654,522 6,013,038
Capital lease obligations 1,690,385 1,406,872
Deferred revenue 222,405 347,336
------------ ------------
Total liabilities 10,394,332 9,363,490
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 25,000,000
shares authorized, none issued and outstanding -- --
Common stock, $.01 par value; 200,000,000
shares authorized, 44,547,816 and 44,547,316
issued and outstanding at March 31, 2002 and
December 31, 2001, respectively 445,478 445,473
Additional paid-in capital 51,640,544 51,609,498
Accumulated deficit (36,849,260) (34,597,458)
------------ ------------
Total shareholders' equity 15,236,762 17,457,513
------------ ------------
Total liabilities and shareholders' equity $ 25,631,094 $ 26,821,003
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
------------ ------------
REVENUES:
Brokerage revenues $ 6,848,266 $ 5,081,966
Subscription fees 1,660,142 2,753,807
Other 1,170,780 4,271,379
------------ ------------
Total revenues 9,679,188 12,107,152
------------ ------------
OPERATING EXPENSES:
Clearing and execution costs 1,939,896 1,589,811
Data center costs 1,212,165 1,364,613
Technology development 2,347,119 2,441,894
Sales and marketing 3,239,507 3,038,066
General and administrative 2,923,748 4,035,565
Amortization of intangibles 255,772 1,518,212
------------ ------------
Total operating expenses 11,918,207 13,988,161
------------ ------------
Loss from operations (2,239,019) (1,881,009)
OTHER INCOME (EXPENSE), net (12,783) 221,634
------------ ------------
Loss before income taxes (2,251,802) (1,659,375)
INCOME TAX PROVISION -- 11,746
------------ ------------
Net loss $ (2,251,802) $ (1,671,121)
============ ============
LOSS PER SHARE:
Basic and diluted $ (0.05) $ (0.04)
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic and diluted 44,547,816 44,307,025
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,251,802) $ (1,671,121)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 715,944 1,887,157
Provision for bad debts -- 714,286
Compensation expense on stock option grants 30,386 37,590
(Increase) decrease in:
Receivables from clearing firms (777,129) (77,922)
Accounts receivable 83,693 (912,253)
Other assets 40,550 (775,382)
Increase (decrease) in:
Accounts payable 230,776 (832,725)
Accrued expenses 641,484 (577,009)
Income taxes payable -- (783,153)
Deferred revenue (124,931) 274,201
------------ ------------
Net cash used in operating activities (1,411,029) (2,716,331)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (192,959) (893,471)
Purchases of securities owned -- (98,580)
Acquisition of data rights and other intangibles (100,000) (125,000)
------------ ------------
Net cash used in investing activities (292,959) (1,117,051)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 665 411
Repayment of capital lease obligations (268,930) (21,450)
------------ ------------
Net cash used in financing activities (268,265) (21,039)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,972,253) (3,854,421)
CASH AND CASH EQUIVALENTS, beginning of period 19,981,591 18,394,996
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 18,009,338 $ 14,540,575
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 81,155 $ 10,125
============ ============
Cash paid for income taxes $ -- $ 794,899
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Equipment acquired under capital lease obligations $ 552,443 $ --
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
TRADESTATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL NOTES AND RELATED DISCLOSURES APPLICABLE
TO THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 ARE UNAUDITED)
TradeStation Group, Inc. ("TradeStation Group" or the "Company"), a Florida
corporation formed in 2000, is the successor company to Omega Research, Inc., a
Florida corporation that was formed in 1982. TradeStation Group is listed on The
Nasdaq National Market under the symbol "TRAD." TradeStation Securities, Inc.
("TradeStation Securities") and TradeStation Technologies, Inc. ("TradeStation
Technologies") are TradeStation Group's two operating subsidiaries. The
accompanying financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included in the Annual Report on Form 10-K of TradeStation Group for the year
ended December 31, 2001. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position as of March 31, 2002, the results of operations for the
three months ended March 31, 2002 and 2001, and cash flows for the three months
ended March 31, 2002 and 2001 have been made. The results of operations and cash
flows for an interim period are not necessarily indicative of the results of
operations or cash flows that may be reported for the year or for any subsequent
period. Certain prior period amounts have been reclassified to conform to the
current period presentation.
(1) LOSS PER SHARE
Weighted average shares outstanding for the three months ended March 31,
2002 and 2001 were 44,547,816 and 44,307,025, respectively. Basic and diluted
loss per share were the same for all periods presented as all common stock
equivalents, such as stock options and warrants, were antidilutive.
Options and warrants outstanding for the three months ended March 31, 2002
and 2001, none of which were included in the calculation of diluted loss per
share because their impact was antidilutive, are as follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
2002 2001
--------- ---------
Options 6,826,521 6,083,165
========= =========
Warrants 386,370 386,370
========= =========
In February 1998, a former officer of TradeStation Securities received
763,199 shares of common stock in connection with his employment, subject to
repurchase by TradeStation Securities in the event of his resignation or
termination for cause prior to February 28, 2001. The redemption provision with
respect to two-thirds of these shares expired on February 29, 2000, and the
remaining one-third expired on February 28, 2001. Prior to the expiration of the
relative redemption provisions, the shares remaining subject to redemption were
excluded from basic and diluted weighted average shares outstanding, as they
were antidilutive.
6
(2) ACCRUED EXPENSES
Accrued expenses consist of the following as of March 31, 2002 and December
31, 2001:
MARCH 31, DECEMBER 31,
2002 2001
---------- ----------
Payroll and related accruals $1,255,610 $1,216,440
Data and exchange fees 883,342 887,725
Estimated loss on sublease of facilities 820,000 380,000
Consulting and professional fees 782,350 620,751
Uninsured loss reserves 600,000 550,000
Returns 325,000 546,000
Other 1,988,220 1,812,122
---------- ----------
$6,654,522 $6,013,038
========== ==========
"Other" includes clearing deposits, event termination fees, commissions to
third parties, and other accrued expenses and reserves, none of which
individually exceeds 5% of total liabilities.
(3) COMPREHENSIVE LOSS
Comprehensive loss is defined as the change in a business enterprise's
equity during a period arising from transactions, events or circumstances
relating to non-owner sources, such as foreign currency translation adjustments
and unrealized gains or losses on available-for-sale securities. It includes all
changes in equity during a period except those resulting from investments by, or
distributions to, owners. Comprehensive loss is equal to net loss for all
periods presented.
(4) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, which addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets. SFAS
No. 142 also addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. With the adoption of SFAS No.
142, goodwill and intangible assets with indefinite useful lives will no longer
be subject to amortization, but will be subject to at least an annual assessment
for impairment by applying a fair value-based test. The impairment loss is the
amount, if any, by which the implied fair value of goodwill is less than the
carrying or book value. The January 1, 2002 adoption of SFAS No. 142 did not
have any impact on the Company's consolidated financial position, results of
operations or cash flows as the Company has no goodwill or intangible assets
with indefinite useful lives.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes SFAS No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF, and
APB No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF BUSINESS AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS. SFAS No. 144 establishes a single accounting
model for assets to be disposed of by sale whether previously held and used or
newly acquired. SFAS No. 144 retains the provisions of APB No. 30 for
presentation of discontinued operations in the statement of operations, but
broadens the presentation to include a component of an entity. The January 1,
2002 adoption of SFAS No. 144 did not have any impact on the Company's
consolidated financial position, results of operations or cash flows.
7
(5) COMMITMENTS AND CONTINGENCIES
RESTRICTED CASH AND MARKETABLE SECURITIES
As of March 31, 2002, the Company had $3.9 million of restricted cash and
securities, as follows: (i) $2.4 million of cash supporting a ten-year real
property lease agreement; (ii) $1.0 million of cash securing a letter of credit,
which secures equipment leases; (iii) $315,000 of securities securing a stand-by
letter of credit, which secures an equipment lease; and (iv) $200,000 of cash
securing a credit card clearing agreement.
PURCHASE OBLIGATION
As of March 31, 2002, the Company has an obligation to purchase
approximately $1.1 million of television advertising through the end of 2002.
LITIGATION
The Company is engaged in routine litigation incidental to, and part of the
ordinary course of, its business. The Company does not believe that the results
of any such pending litigation will have a material adverse effect on its
consolidated financial position, results of operations or cash flows.
(6) SEGMENT AND RELATED INFORMATION
For the three months ended March 31, 2002 and 2001, TradeStation Group
operated in two principal business segments: (i) brokerage services; and (ii)
software products and services. The Company evaluates the performance of its
segments based on revenue and operating income. The brokerage services segment
represents the operations of TradeStation Securities and the software products
and services segment represents the operations of TradeStation Technologies. All
intercompany transactions are eliminated in consolidation.
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------
2002 2001
------------ ------------
Revenues:
Brokerage services $ 6,848,266 $ 5,081,966
Software products and services 3,552,422 7,025,186
Eliminations (721,500) --
------------ ------------
$ 9,679,188 $ 12,107,152
============ ============
(Loss) income from operations:
Brokerage services $ (211,328) $ 583,478
Software products and services (2,027,691) (2,464,487)
------------ ------------
$ (2,239,019) $ (1,881,009)
============ ============
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
Identifiable assets:
Brokerage services $ 21,237,903 $ 20,144,278
Software products and services 4,393,191 6,676,725
------------ ------------
$ 25,631,094 $ 26,821,003
============ ============
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements of
TradeStation Group and its subsidiaries contained herein. The results of
operations for an interim period may not give a true indication of results for
the year, or for any subsequent period.
RESULTS OF OPERATIONS
TradeStation Group operated in two principal business segments: brokerage
services and software products and services. All intercompany transactions are
eliminated in consolidation. The following table presents, for the periods
indicated, certain items in our consolidated statements of operations broken
down by segment:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
--------------------------------------------- ------------------------------------------
SOFTWARE SOFTWARE
PRODUCTS PRODUCTS
BROKERAGE AND ELIMIN- BROKERAGE AND ELIMIN-
SERVICES SERVICES ATIONS TOTAL SERVICES SERVICES ATIONS TOTAL
--------- -------- -------- -------- -------- -------- -------- --------
(In thousands) (In thousands)
Revenues:
Brokerage revenues $ 6,848 $ -- $ -- $ 6,848 $ 5,082 $ -- $ -- $ 5,082
Subscription fees -- 2,381 (721) 1,660 -- 2,754 -- 2,754
Other -- 1,171 -- 1,171 -- 4,271 -- 4,271
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 6,848 3,552 (721) 9,679 5,082 7,025 -- 12,107
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Clearing and execution costs . 1,940 -- -- 1,940 1,590 -- -- 1,590
Data center costs 721 1,212 (721) 1,212 -- 1,365 -- 1,365
Technology development 107 2,240 -- 2,347 -- 2,442 -- 2,442
Sales and marketing 2,876 363 -- 3,239 1,709 1,329 -- 3,038
General and administrative 1,415 1,509 -- 2,924 1,048 2,987 -- 4,035
Amortization of intangibles -- 256 -- 256 152 1,366 -- 1,518
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 7,059 5,580 (721) 11,918 4,499 9,489 -- 13,988
-------- -------- -------- -------- -------- -------- -------- --------
(Loss) income from operations $ (211) $ (2,028) $ -- $ (2,239) $ 583 $ (2,464) $ -- $ (1,881)
======== ======== ======== ======== ======== ======== ======== ========
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 1 of Notes to
Consolidated Financial Statements included in the Annual Report on Form 10-K of
TradeStation Group for the year ended December 31, 2001 - DESCRIPTION OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ materially from those estimates.
BROKERAGE REVENUES. Brokerage revenues are a key component of our results
of operations and are comprised mainly of transactional fee income for
securities and futures transactions. Brokerage revenues and related clearing
costs are recorded on a trade date basis as transactions occur.
INCOME TAXES. Management determines any valuation allowance recorded
against our net deferred tax assets, which includes the benefit from net
operating loss carryforwards. For all periods presented, a valuation allowance
was recorded to offset the tax benefit of all current period changes in deferred
taxes. During the 2001 fourth quarter, we recorded a $4.8 million charge
9
establishing a full valuation allowance against our previously recorded deferred
tax assets. As of March 31, 2002, we have approximately $13.3 million of
deferred tax assets that have been fully reserved, not reflected on the balance
sheet, and the benefit of which has not been recorded through the statement of
operations.
INSURANCE CLAIM. In June 2001, we made a claim of $2.7 million with our
insurance carrier relating to a trading error made with respect to a client's
account. In December 2001, the insurance company denied this claim and,
accordingly, the receivable recorded on our balance sheet has been fully
reserved. While no assurances can be given, the Company and its advisors
continue to believe the Company has a valid claim under its insurance policy.
The Company intends to vigorously pursue collection of this claim. Any
differences from our current estimate will be reflected in future operations.
SUBLEASE OF FACILITIES. After the December 2000 merger with TradeStation
Securities, we are consolidating our Florida operations to more effectively
operate our business. Based upon advice from our outside real estate advisors,
using current market factors, we estimated the potential losses relating to the
sublease of facilities that we will no longer occupy. During the 2002 first
quarter, we increased our estimated loss accrual by $440,000, to a total of
$820,000.
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
OVERALL
Total revenues were $9.7 million for the three months ended March 31, 2002,
as compared to $12.1 million for the three months ended March 31, 2001, a
decrease of $2.4 million, or 20%, due primarily to a decrease in other revenues
(which now include licensing fees), partially offset by an increase in brokerage
revenues.
Loss from operations was $2.2 million for the three months ended March 31,
2002, as compared to $1.9 million for the three months ended March 31, 2001, an
increase of $358,000, or 19%. This increase related primarily to lower revenues,
partially offset by lower amortization of intangibles (resulting from the 2001
fourth quarter impairment charge that reduced intangibles to their estimated
fair value) and lower general and administrative expenses.
Other income (expense), net consists primarily of interest expense related
to capital lease obligations offset by interest income earned on our cash and
marketable securities. Other income (expense), net was an expense of $13,000 for
the three months ended March 31, 2002, as compared to income of $222,000 for the
three months ended March 31, 2001, a decrease of $235,000, or 106%, due
primarily to a $167,000 decrease in interest income related to lower interest
rates and an increase of $68,000 in interest expense related to additional
obligations under capital leases.
BROKERAGE SERVICES SEGMENT
REVENUES
BROKERAGE REVENUES. Brokerage revenues are comprised primarily of fees
earned from brokerage transactions and interest earned from interest revenue
sharing arrangements with the brokerage's clearing firms. For the three months
ended March 31, 2002, brokerage revenues were $6.8 million, including $6.4
million of brokerage fees, as compared to $5.1 million, including $4.8 million
of brokerage fees, for the same period in 2001. This increase of $1.7 million,
or 35%, is primarily due to increased trading volume related to customer account
growth from our TRADESTATION 6 trading platform launched on June 27, 2001. On
March 27, 2002, we launched a new brokerage commission plan that charges active
traders fees based solely upon the share volume of their trades. Given this
recent change to our brokerage commission pricing structure, and the continued
uncertainties surrounding the online brokerage market generally, the impact of
this pricing change is not yet known.
10
OPERATING EXPENSES
CLEARING AND EXECUTION COSTS. Clearing and execution costs are the costs of
executing and clearing customer trades, including commissions paid to
third-party broker-dealers. Clearing and execution costs were $1.9 million for
the three months ended March 31, 2002, as compared to $1.6 million for the three
months ended March 31, 2001, an increase of $350,000, or 22%, primarily as a
result of increased trading volume. Clearing and execution costs as a percentage
of brokerage fees decreased to 30% for the three months ended March 31, 2002,
from 33% for the three months ended March 31, 2001, due to lower third-party
broker-dealer commissions during 2002.
DATA CENTER COSTS. Data center costs represent intercompany subscription
fees paid to the software products and services segment for providing streaming
real-time, Internet-based trading analysis software and data services to
brokerage clients. Data center costs for the three months ended March 31, 2002
were $721,000. There were no data center costs for the brokerage segment during
the three months ended March 31, 2001, as the data service platform developed by
the software products and services segment was not launched until June 27, 2001.
See "SOFTWARE PRODUCTS AND SERVICES SEGMENT - REVENUES - SUBSCRIPTION FEES" AND
"- OPERATING EXPENSES - DATA CENTER COSTS."
TECHNOLOGY DEVELOPMENT. Technology development expenses consist primarily
of personnel costs associated with product management of the brokerage products
and services TradeStation Securities offers to its online trading customers.
Technology development expenses for the three months ended March 31, 2002 were
$107,000. There were no technology development expenses for the brokerage
segment during the three months ended March 31, 2001. See "SOFTWARE PRODUCTS AND
SERVICES SEGMENT - TECHNOLOGY DEVELOPMENT."
SALES AND MARKETING. Sales and marketing expenses consist primarily of
employee-related costs for sales, customer support centers, marketing and order
desk, as well as brokers' commissions; marketing programs, including
advertising, brochures, direct mail programs and account opening kits; data and
information tools used by sales and brokerage personnel; and Web site
maintenance and administration costs. Sales and marketing expenses were $2.9
million for the three months ended March 31, 2002, as compared to $1.7 million
for the three months ended March 31, 2001, an increase of $1.2 million, or 68%.
This increase was due primarily to increased advertising and promotional costs
of $795,000 and increased personnel and related costs of $412,000. Sales and
marketing expenses, as a percentage of brokerage revenues, were 42% for the
three months ended March 31, 2002, as compared to 34% for the three months ended
March 31, 2001. We believe that, in the future, the absolute dollar amount of
sales and marketing expenses will increase as we continue to market the
TRADESTATION 6 brokerage platform. The level of such increase will depend upon
the extent to which such brokerage services are aggressively marketed and the
rate of customer account growth.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee-related costs for administrative personnel such as
executive, finance and information technology employees; professional fees;
telecommunications; rent; insurance; and other facility expenses. General and
administrative expenses were $1.4 million for the three months ended March 31,
2002, as compared to $1.0 million for the three months ended March 31, 2001, an
increase of $367,000, or 35%. This increase is due primarily to an increase in
facility costs of $450,000, mainly related to the estimated loss on the sublease
of facilities that as a result of our consolidation will no longer be occupied,
and an increase in personnel and related costs of $334,000, partially offset by
a decrease in uninsured loss provisions of $269,000, and, to a lesser extent,
decreases in insurance costs and consulting and professional fees.
11
AMORTIZATION OF INTANGIBLES. Historically, amortization of intangible
assets was related to the December 1999 acquisition of the customer accounts of
Newport Discount Brokerage, Inc. ("Newport"), which was accounted for under the
purchase method of accounting. In December 2001, based upon our decision to sell
the Newport accounts (as they do not meet the requirements of our active and
institutional trader business model), we determined that certain of these
intangible assets were impaired and, therefore, they were reduced to their
estimated fair value. Currently, the remaining Newport intangible assets are
held for sale and, accordingly, have not been amortized during 2002. Until sold,
the assets will be periodically tested for impairment. Amortization of
intangibles for the three months ended March 31, 2001 was $152,000.
SOFTWARE PRODUCTS AND SERVICES SEGMENT
REVENUES
TOTAL REVENUES. Total revenues were $3.6 million for the three months ended
March 31, 2002, as compared to $7.0 million for the same period in 2001, a
decrease of $3.4 million, or 49%, due primarily to a decrease in other revenues
(which now include licensing fees).
SUBSCRIPTION FEES. Subscription fees represent monthly fees earned for
providing streaming real-time, Internet-based trading analysis software and data
services. Subscription fees also include intercompany revenue for providing this
software to the brokerage customers of TradeStation Securities. Subscription
fees were $2.4 million, including $721,000 of intercompany revenue, for the
three months ended March 31, 2002, as compared to $2.8 million for the three
months ended March 31, 2001, a decrease of $373,000, or 14%. This decrease was
due primarily to our decision not to actively market subscription services since
December 2000, but rather focus on the growth of our brokerage business.
OTHER REVENUES. Other revenues consist primarily of royalties and
commissions received from third parties whose customers use our legacy software
products, and licensing fees that are derived from sales of our legacy client
software products. Other revenues were $1.2 million for the three months ended
March 31, 2002, as compared to $4.3 million for the three months ended March 31,
2001, a decrease of $3.1 million, or 73%. This expected decrease was due
primarily to a decrease in royalties resulting from the expiration of a minimum
royalty arrangement with a third party, and decreased licensing fees resulting
from the May 2001 discontinuation of active marketing of client software
products. As a result of these factors, other revenues are expected to continue
to decrease in future quarters.
OPERATING EXPENSES
DATA CENTER COSTS. Data center costs represent expenses related to the
operation, maintenance and support of our data server farms. These expenses
consist primarily of rent for facilities, rent or depreciation for servers, and
data distribution and exchange fees. Data center costs for the three months
ended March 31, 2002 were $1.2 million, as compared to $1.4 million for the
three months ended March 31, 2001, a decrease of $153,000, or 11%. The decrease
is primarily due to lower data distribution and exchange fees resulting from a
lower subscriber base.
TECHNOLOGY DEVELOPMENT. Technology development expenses include expenses
associated with: the development of new products, services and technology;
enhancements to existing products, services and technology; testing of products
and services; and the creation of documentation and other training and
educational materials. Technology development expenses consist primarily of
personnel costs, depreciation of computer and related equipment, facility
expenses, and consulting fees. The TradeStation Technologies subsidiary owns all
intellectual property rights relating to our businesses, including, but not
limited to, all order execution technology. Technology development expenses were
$2.2 million for the three months ended March 31, 2002, as compared to $2.4
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million for the three months ended March 31, 2001, a decrease of $202,000, or
8%, due primarily to lower personnel and related costs of $161,000, and, to a
lesser extent, lower facility costs.
SALES AND MARKETING. Sales and marketing expenses consist primarily of:
marketing programs, including advertising, brochures, and direct mail programs;
sales commissions; personnel costs for marketing and customer support centers;
and Web site maintenance and administration costs. Sales and marketing expenses
were $363,000 for the three months ended March 31, 2002, as compared to $1.3
million for the three months ended March 31, 2001, a decrease of $1.0 million,
or 73%, due primarily to decreased personnel and related costs of $519,000 and
decreased advertising and promotional costs of $270,000. Sales and marketing
expenses as a percentage of total software products and services revenues
decreased to 10% for the three months ended March 31, 2002, as compared to 19%
for the three months ended March 31, 2001. Sales and marketing expenses are
expected to continue to decrease as most future marketing efforts will be
focused on the brokerage services segment. See "BROKERAGE SERVICES SEGMENT -
SALES AND MARKETING."
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee-related costs for administrative personnel such as
executive, human resources, finance and information technology employees;
professional fees; telecommunications; rent; other facility expenses; insurance;
and provision for bad debts. General and administrative expenses were $1.5
million for the three months ended March 31, 2002, as compared to $3.0 million
for the three months ended March 31, 2001, a decrease of $1.5 million, or
approximately 49%, due primarily to a 2001 first quarter provision for bad debts
of $714,000, and lower personnel and related costs of $639,000. The provision
for bad debts relates to the portion of TradeStation Technologies' 2001 royalty
receivable that was part of a "pre-petition" estate in a Chapter 11 bankruptcy
filed in February 2001, and was not paid as a result of the rejection of that
agreement in those bankruptcy proceedings.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles includes,
primarily, amortization related to the October 1999 acquisition of Window On
WallStreet accounted for under the purchase method of accounting and is being
amortized over the assets' estimated useful lives, which range from three to
four years, and also includes amortization of data rights and other intangibles.
Amortization of intangibles was $256,000 for the three months ended March 31,
2002, as compared to $1.4 million for the three months ended March 31, 2001, a
decrease of $1.1 million, or 81%. The decrease is due to the December 2001
adjustment that reduced the value of all of the goodwill and certain intangible
assets associated with the acquisition of Window On WallStreet to their current
fair value, resulting from our decision, made and implemented in the fourth
quarter of 2001, to upgrade all WINDOWONWALLSTREET.COM subscribers to
TRADESTATION 6.
INCOME TAXES
For the three months ended March 31, 2001, taxes totaling $12,000 were only
provided for certain state and local income taxes where our net operating loss
carryforwards could not be utilized. A valuation allowance was recorded to
offset the tax benefit of all other net operating losses generated during the
three months ended March 31, 2002 and 2001.
VARIABILITY OF RESULTS
The operating results for any quarter are not necessarily indicative of
results for any future period or for the full year, particularly given that we
have recently completed a transition to a new business model and to our recent
decision to restructure our commission pricing for brokerage customers. Our
quarterly revenues and operating results have varied in the past, and are likely
to vary even more in the future due to that transition to the new business
model. Such fluctuations may result in volatility in the price of our common
stock. As budgeted expenses are based upon expected revenues, if actual
quarterly revenues are below management's expectations, then results of
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operations are likely to be adversely affected because a large amount of our
expenses do not vary with 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, fluctuations in the
share volume of exchange transactions, conditions in the economy and securities
markets, fluctuations in number and share volume of client trades, additional
pricing changes, increased competition, variations in the revenue mix, and
announcements of new products and services and/or enhancements by us or our
competitors, and other factors. Such fluctuations may result in volatility in
the price of our common stock.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, we had cash and cash equivalents of approximately
$18.0 million and securities owned of $416,000. Of these amounts, $3.9 million
is restricted, held to support a facility lease, two stand-by letters of credit
securing equipment leases and a credit card clearing agreement. See Note 5 of
Notes to Consolidated Financial Statements - COMMITMENTS AND CONTINGENCIES --
RESTRICTED CASH AND MARKETABLE SECURITIES.
During the first quarter of 2002, equipment valued at $552,000 was acquired
under a capital lease obligation for use at our data server farms. This lease
replaced certain operating leases. A summary of our capital and operating leases
as well as our purchase obligations as of March 31, 2002 is as follows:
CAPITAL
LEASE OPERATING PURCHASE
YEAR OBLIGATIONS LEASES OBLIGATIONS TOTAL
----- ------------ ------------- ------------- ------------
2002 $ 905,630 $ 2,098,563 $ 1,126,694 $ 4,130,887
2003 784,755 2,319,886 -- 3,104,641
2004 -- 2,058,356 -- 2,058,356
2005 -- 1,955,643 -- 1,955,643
2006 -- 1,987,142 -- 1,987,142
Thereafter -- 9,742,567 -- 9,742,567
----------- ----------- ----------- -----------
Total $ 1,690,385 $20,162,157 $ 1,126,694 $22,979,236
=========== =========== =========== ===========
The purchase obligation relates to television advertising. In addition, in
connection with the relocation of our three Florida offices to one, new Florida
location, we have signed an agreement to acquire approximately $450,000 of
furniture under another capital lease obligation. The acquisition of this
furniture is expected to take place during the second quarter of 2002. Also, in
connection with the expected growth of our brokerage business and the relocation
of our Florida offices, we anticipate acquiring in the form of capital and/or
operating leases an additional $500,000 to $800,000 of equipment.
We anticipate that our available cash resources and cash flows from
operations will be sufficient to meet our presently anticipated working capital
and capital expenditure requirements through at least the next twelve months.
Cash used in operating activities during the three months ended March 31,
2002 totaled $1.4 million, compared to $2.7 million in the comparable period of
2001. Net cash used in operating activities during the three months ended March
31, 2002 was primarily due to operating losses. Net cash used in operating
activities during the three months ended March 31, 2001 was primarily due to
increases in accounts receivable and other assets and significant decreases in
merger and non-recurring accounts payable and accrued expenses and income taxes
payable.
Investing activities used cash of $293,000 and $1.1 million during the
three months ended March 31, 2002 and 2001, respectively. The decrease in cash
used in investing activities was due primarily to lower payments for capital
expenditures in 2002.
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Financing activities used cash of $268,000 and $21,000 during the three
months ended March 31, 2002 and 2001, respectively, due primarily to repayment
of capital lease obligations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS, which addresses financial accounting and reporting for intangible assets
acquired individually or with a group of other assets. SFAS No. 142 also
addresses financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. With the adoption of SFAS No. 142,
goodwill and intangible assets with indefinite useful lives will no longer be
subject to amortization, but will be subject to at least an annual assessment
for impairment by applying a fair value-based test. The impairment loss is the
amount, if any, by which the implied fair value of goodwill is less than the
carrying or book value. The January 1, 2002 adoption of SFAS No. 142 did not
have any impact on our consolidated financial position, results of operations or
cash flows as we have no goodwill or intangible assets with indefinite useful
lives.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED Assets, which supersedes SFAS No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF, and
APB No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF BUSINESS AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS. SFAS No. 144 establishes a single accounting
model for assets to be disposed of by sale whether previously held and used or
newly acquired. SFAS No. 144 retains the provisions of APB No. 30 for
presentation of discontinued operations in the statement of operations, but
broadens the presentation to include a component of an entity. The January 1,
2002 adoption of SFAS No. 144 did not have any impact on our consolidated
financial position, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
This report contains statements that are forward-looking within the meaning
of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These 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," "shall," "assuming," "prospect," "should," "could," "would,"
"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 in this report. Factors that may cause or contribute to
such differences, and our business risks generally, include, but are not limited
to, the items described in our Annual Report on Form 10-K for the year ended
December 31, 2001, as well as in other sections of this report and in our other
public filings and press releases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) SALES OF UNREGISTERED SECURITIES
During the three months ended March 31, 2002, we issued to 216 employees
(including 3 executive officers) options to purchase an aggregate of
approximately 1.1 million shares of common stock. Such options vest ratably in
annual increments over a five-year period and are exercisable at a price of
$1.47 per share, which was the fair market value (as defined in our Incentive
Stock Plan) of our common stock on the date the options were granted. All of the
options were granted under our Incentive Stock Plan in the ordinary course, and
expire, if they remain unexercised, on the tenth anniversary of the date on
which they were granted.
During the three months ended March 31, 2002, we also issued to one
non-employee director options to purchase an aggregate of 25,000 shares of
common stock. Such options vest ratably in annual increments over a three-year
period and are exercisable at a price of $1.17 per share, which was the fair
market value (as defined in our Nonemployee Director Stock Option Plan) of our
common stock on the date the options were granted. The options were granted
under our Nonemployee Director Stock Option Plan, and expire, if they remain
unexercised, on the fifth anniversary of the date on which they were granted.
During the three months ended March 31, 2002, we also issued to one
non-employee consultant options to purchase an aggregate of 40,000 shares of
common stock. Such options vested 100% on the grant date and are exercisable at
a price of $1.47 per share, which was the fair market value (as defined in our
Incentive Stock Plan) of our common stock on the date the options were granted.
These were granted as nonqualified options under our Incentive Stock Plan, and
expire, if they remain unexercised, on the fifth anniversary of the date on
which they were granted.
All the foregoing options were issued by us in reliance upon the exemption
from registration available under Section 4(2) of the Securities Act. Other than
as described above, we did not issue or sell any unregistered securities during
the first quarter of 2002.
(d) USE OF PROCEEDS
TradeStation Securities (then known as onlinetradinginc.com corp.) effected
an initial public offering pursuant to a Registration Statement on Form SB-2
(File No. 333-75119), which was declared effective by the Securities and
Exchange Commission on June 11, 1999. For a description of the use of proceeds
from such offering, see Item 2 in Part II of onlinetradinginc.com corp.'s
Quarterly Report on Form 10-QSB for the fiscal quarter ended October 31, 2000.
In addition, since October 31, 2000, approximately $4.0 million was used for
working capital, $2.0 million was used to pay merger costs, $1.0 million was
used for capital expenditures and acquisition of data rights and other
intangible assets, and approximately $700,000 was used to pay capital lease
obligations. The balance of approximately $2.1 million continues to be invested
in money market funds.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) REPORTS ON FORM 8-K
On January 17, 2002, we filed a Current Report on Form 8-K, for an event on
January 17, 2002, reporting in Item 9 thereof our 2002 Business Outlook and that
our fourth quarter 2001 financial results included (a) a $5.3 million, non-cash
charge relating to the impairment of goodwill and certain intangible assets and
(b) a $4.8 million, non-cash charge to provide a full valuation allowance
against deferred tax assets.
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SIGNATURE
Pursuant to the requirements 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.
TradeStation Group, Inc.
Registrant
APRIL 22, 2002 /s/ DAVID H. FLEISCHMAN
-------------- ----------------------------------------------
Date David H. Fleischman
Chief Financial Officer, Vice President of
Finance and Treasurer
(Signing both in his capacity as an authorized
officer and as Principal Financial and
Accounting Officer of the Registrant)
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